Even though reverse mortgages are currently still a small part of the U.S. mortgage market, they are expected to dramatically increase in the coming years.

In a recent report, UBS analysts said they expect reverse mortgages to rise considerably going forward as a growing percentage of the baby boomers turn 62. They explained that to take out a reverse mortgage, a borrower must be at least 62 years old, adding that 2008 brings the oldest of the baby boomers to that age.

UBS states there are three basic types of reverse mortgage programs currently: (1) Home Equity Conversion (HECM) mortgages that are offered by the Federal Housing Authority; (2) Fannie Mae Home Keeper (FMHK) mortgages; and (3) propriety products offered by several lenders. UBS analysts said that traditional MBS investors would be well rewarded for taking the time to understand this new sector. "Reverse mortgage products have become much more popular over the past few years, and will continue to grow in importance," analysts stated.

Meanwhile, Standard & Poor's last week came out with a report titled For Seniors, Equity Begins At Home, which is about people over 65 and on the brink of retirement who are looking towards reverse mortgages to secure their financial future. Although there have only been a small number of these transactions to date, the time is right for the market to rapidly increase, reiterates the report.

Through this product, the borrower receives money rather than sending mortgage payments, allowing senior citizens to use the equity from their homes to balance the instability of other sources of income while remaining in the homes. This is extremely important at the current time for various reasons, including employers cutting back on pension benefits, the U.S. consumer's negative savings rate, rising health-care costs, and the volatile investment environment. Yet, S&P explained that reverse mortgages do pose risks for borrowers, lenders and investors. Obtaining one means that homeowners accumulate debt and, as interest accrues, the borrower's equity position declines, which then reduces the potential inheritance for their heirs. For lenders, the risk is that the principle outstanding, when added to accrued interest, could exceed the value of the home.

But analysts still expect the tide to turn in favor of these mortgages. "As this product continues to evolve, investors will become more comfortable with reverse mortgage securitizations," said Waqas Shaikh, a director in S&P's residential mortgage group.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

http://www.asreport.com http://www.sourcemedia.com

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.