Mortgage Services for Massachusetts and Rhode Island

How to Protect Home Equity Against the Next Housing Market Downturn

The COVID-19 crisis has produced uncertainty about everything – including the outlook for home values.
Investment risk and uncertainty in the real estate housing market

We’ve been there before.  In the early 1990s, it was the savings and loan banking crisis and real estate recession that devastated home values.  In 2008, it was the subprime foreclosure crisis that threatened the banking industry and decreased home values across the nation.  In both cases, government officials and the Federal Reserve intervened and bailed out the banks, eventually stabilizing the economy and real estate markets.

Now, we have the coronavirus pandemic crisis, a global calamity without precedence. The fix, if there is going to be one, is unknown. All we know today is uncertainty.  And, uncertainty is the enemy of the unprepared, especially the elderly.

It’s rare to have a chance to get ahead of the problem.  But, as the economic fallout from the pandemic continues to unfold, it seems obvious that real estate values, sooner or later, will be affected. The advantage goes to those savvy homeowners that recognize the problem, research the options, and take early action to mitigate the risks.

Senior Homeowners at Greatest Risk

Home equity (housing wealth), is the largest single asset in most households.  Fortunately, home values, especially in Massachusetts in recent years, have rocketed to record highs.  However, these values are fragile and subject to change at any time. 

If property values decline, the risk to senior homeowners is significant as financial security in retirement is reliant on established retirement resources, savings and housing wealth.

Reverse Mortgages – A Solution for Some, Not for All

Clearly, no one can be protected from declining real estate values.  However, the unique terms of a reverse mortgage come close.  At origination, the appraised market value is locked-in for the duration of the loan. That value in combination with the age of the youngest borrower (minimum age 62), and current interest rates determine the maximum loan amount. 

Subsequently, the loan terms and funding obligations are guaranteed, which remains in effect for the duration of the loan as long as the loan remains in good standing.  The guarantee is unaffected by any future decreases in property values, interest rate increases, economic declines, or potential lender failure. 

Reverse Mortgage Overview

The dominant program is the HUD/FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage. Basic features include:

  • No monthly payment obligations – prepayments are permitted without penalty but not required. Monthly charges are deferred and accrue.
  • Growing line of credit – the undrawn balance of the credit line grows (compounding monthly) at the same rate charged on funds borrowed.
  • No maturity date – repayment not required until no borrower resides in the property.
  • Non-Recourse loan – neither borrower(s) nor heirs incur personal liability.  Repayment of loan balance can never exceed the property value at the time of repayment. 
    • If loan balance exceeds property value at time of repayment, the lender and borrower(s) are protected by FHA insurance.
    • If the property value exceeds the loan balance at maturity, all surplus funds go to the borrowers or their heirs.
  • Access to funds and loan terms are guaranteed – cannot be frozen or cancelled as long as the loan remains in good standing.
  • Borrower obligations (to keep loan in good standing) are limited to:
    • Keeping real estate taxes, liability insurance, and property charges current
    • Providing basic home maintenance
    • Living in the property as primary residence

Know the facts – Learn more.

If we have learned anything, so as not to be doomed to repeat the mistakes of the past, now is the time to learn the facts and how they may apply to you. 

It does not take a crystal ball to look ahead and see an impending real estate downturn. 

If you are age-eligible, own a single-family home, multi-family (one to four units) home, or a condominium, you should learn more. Reverse mortgages are not a good fit for everyone, but they can be for many.  The challenge is to learn more and know if, or how, one could be right for you.

George Downey (NMLS 10239) is the founder of Harbor Mortgage Solutions, Inc., Braintree, MA, a mortgage broker licensed in Massachusetts (MB 2846), Rhode Island (20041821LB), NMLS #2846.  Questions and comments are welcome.  Mr. Downey can be reached at (781) 843-5553, or email: GDowney@HarborMortgage.com