This isn't a sales pitch; it's some straight talk about the reverse mortgage market.  If you're considering a reverse mortgage, you ought to do it now.  Not tomorrow, not next year,

....now.

The reverse mortgage market has a ticking time-bomb in it much like the sub-prime market did; it's priced all wrong.  Sub-prime loans used to be a very healthy product when the risk they carried was priced appropriately.  In 2005, secondary market investors bought too many of these loans, causing a "price war".  The darned loans were so cheap that good credit borrowers used them to buy homes bigger than they could afford.  The result was increased risk upon a system that was priced for lower risk.

We all know what happened to the sub-prime market.  It crashed and disappeared.

Two factors have increased risk on the reverse mortgage market:

1- A national price decline eroded home equity.  That's pretty easy to mitigate because the loan-to-value can be cut to reflect that decline. People look at their home equity differently now.  Five years ago, Americans felt "wealthy" because home equity kept growing.  Today, the reduced home equity makes people realize that it could disappear tomorrow.  Home equity harvesting is what's driving the current reverse mortgage boom.

2- Like the sub-prime market, reverse mortgages haven't appropriately priced in the increased risk.  Follow me on this.  In the reverse mortgage market, borrowers who live past the actuarial age start costing the lender money.  Simply put, if the borrowers don't die on time, the system could crash.

Look at this actuarial table and pay close attention to the life expectancies for the years 1940 and 1950.  Males born in 1950 are expected to live 4 years longer than their older brothers, born in 1940.  1950-born females are expected to live a full six years longer than their older sisters.

Here are the problems with the current reverse mortgage pricing model:

• The underwriters haven't adjusted for these actuarial differences. 
• There are a lot more people turning 62, in the next 10 years.  In 1940, there were 2.6 million births in America.  In 1950, there were 3.6 million births.  In 1954, the birth number broke 4 million.
  
• Scientific advances could skew the life expectancy data even worse (or better if living is your plan).

Like sub-prime, this mortgage product is going to be a victim of its own success.  As the product gains popularity, more market participants will join the reverse mortgage boom and margin pressures will exist.  You know how that story goes, the first thing compromised when margin pressures contract is the loan pricing model.  We could start pricing this product cheaper when we should be pricing it more expensively.

I'd like to think we can learn from our past mistakes.  If that happens, the reverse mortgage product will get much more expensive, really soon. Get the reverse mortgage money while you can; it might not be around tomorrow