Forward mortgages and reverse mortgages are both FHA insured. In either case FHA plays a role throughout the marketplace.



There exists an irony in that people perceive FHA mortgages to be mainly for first time home buyers and reverse mortgages for last time home buyers.

Borrowers want to know why they are required to pay the up front insurance premium on these loans. The premium is expensive and needs explanation.

When most people think of insurance they think of something they own that is actually covered against loss.

So, we expect FHA insurance to act accordingly. Well, FHA insurance really isn't for the homeowner. The home owner pays for it, but the lender gets the benefit.

The prime objective of FHA insurance is the protection of the lender.

Foreclosure is the big problem for forward mortgages. FHA insurance protects lenders in this event.

I should give a real scenario: in this scenario we should assume the mortgage to be $110,000 at foreclosure and the home value to be $100,000. Not extraordinarily unlikely.

If the sale price at foreclosure is 90k the lender loses at least 20k (110k mortgage minus 90k sale price). FHA insurance financially protects the lender in this case.

The reverse mortgage is protected by FHA in the event the value of the mortgage is actually greater than the value of the home. This is not foreclosure protection but it works about the same for the lender.

The problem for the lender in the reverse mortgage industry is the constant accrual of interest on the mortgages. If market conditions are drastic or the borrower lives to 100 the lender could have a problem.

At the same time the FHA mortgage insurance allows the reverse mortgage lender to be more aggressive with its lending practices than perhaps a non-FHA insured reverse mortgage.

Yes, the mortgage insurance helps the lender against financial loss, but the borrower receives benefits in terms of very low down mortgages or high LTV reverse mortgages and very liberal credit requirements.