I came across an article in several newspapers today referencing a report from the Center for Responsible Lending. The report, dated November 13, 2007, talks about the “spillover” effect from the subprime mortgage meltdown.
While the direct effects of the subprime mortgage crisis is that millions of homeowners will lose their homes to foreclosure, the indirect, or spillover, effect of the subprime crisis is what will happen to property values as a result of all of these foreclosures.
The key findings of the report were as follows:
a) 44.5 million neighboring homes will experience devaluation because of subprime foreclosures that take place nearby.
b) The total decline in house values and tax base from nearby foreclosures will be $223 billion.
c) Homeowners living near foreclosed properties will see their property values decrease $5,000 on average.
The report goes on to note, that while they cannot make definitive conclusions, communities with high African-American and Latino populations, are more vulnerable to the price declines than other communities – because “these communities receive a disproportionate share of subprime home loans.”
While the 2 headline numbers are staggering, 44.5 million homes will see their values affected and $223 billion in values and tax base will be lost, it’s important to consider that even by their own estimation, their numbers are based on conservative values. In other words, the problems in the industry might be much worse than they are stating.
That said, I’m not sure the CRL report can adequately address the overall impact that subprime has had on the entire industry, including: a) the reluctance of people to buy homes; b) the inability of others to qualify to for mortgages (as a result of the contraction in underwriting guidelines). Both of these issues put downward pressure on prices. On a median priced home, $5,000 is roughly 2.3% in value. The S&P/Case-Shiller Index was already down 4.4% for the year ended August 31, 2007.
How does all of this impact the reverse mortgage applicant? Well, depending on where you live and what the value of your home is, it could impact you tremendously. If you live in cities like Phoenix, Tampa, Detroit, Miami, or Las Vegas, you are seeing price declines well over the 2.3% that the CRL report shows. Basically, in most metro areas, values are dropping.
Since, reverse mortgage eligibility is based on home value (as well as the age of the youngest borrower and current interest rates) the equity available to seniors is taking a hit – especially in areas where market values are at or around the maximum FHA limit for that market. For example, the maximum FHA loan limit in Mercer County, NJ is $334,058. That would be the maximum value used for FHA purposes to determine the max benefit on a reverse mortgage.
If you live in an area of Mercer County where the average home price is $600,000 then your eligibility for an FHA reverse mortgage would not be impacted by a 5, 10 or even 15% decline in property values. However, if you lived in an area where the average price is $335,000 a 10% decline in market value could cost you big. On average, depending on age and rates, the loan eligibility would be lowered by $20,000.
On the bright side, rates are extremely low right now for FHA HECM loans, which increases the available loan amount for borrowers. However, with housing prices expected to continue their decline well into 2008 – perhaps even into 2009, and rates being volatile, the time may be right to get that reverse mortgage. Rates can’t stay this low forever, and it may take quite some time for property values to rebound.
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