While most of the mortgage marketplace is in a funk, reverse mortgages are a significant bright spot. HUD says it originated more than 107,000 reverse mortgages in fiscal 2007 -- a figure up more than 40 percent from a year earlier.

The HUD numbers are important because the FHA is generally said to insure about 90 percent of all reverse mortgages, or what HUD calls "HECMs" -- Home Equity Conversion Mortgages.

HUD's insurance pays off borrowers if a lender cannot come up with promised dollars and it also protects lenders if a property sale results in a loss. The cost for such insurance, says HUD, is 2 percent of the home's value up-front plus one-half percent on the loan balance each year. Notice that fee is 2 percent of the home's value, not 2 percent of the loan amount, a sum that could be much smaller than the value of the property.

In an interview with Realty Times, Meg Burns, director of the Federal Housing Administration's Single Family Program Development, said that roughly 375,000 reverse mortgages have been issued since the program began. In that time there have been between 5,000 to 6,000 "assignment claims" from lenders. Under HUD's plan, lenders can make a claim when a loan has reached 98 percent of its maximum claim amount but is not yet due and payable. Of these assignment claims, only 109 resulted in losses to the FHA. Another 1,500 reverse loans simply went sour. Burns says there have been no "demand claims" from borrowers as a result of lenders who have not fulfilled reverse mortgage obligations.

In total then, HUD had 1,609 claims within a program that has insured some 375,000 loans at the time we spoke with Burns The typical claim, she said, we about $18,000.

That sure sounds like a lot of insurance and relatively few claims. In comparison, the Government Accountability Office reports that "property-casualty insurers' losses and loss adjustment expenses accounted for approximately 73 percent of written premiums in 2005."

So is HUD milking a cash cow from senior insurance premiums?

The reverse mortgage program has only seen significant growth in the past few years. This means most potential claims lie ahead. Pay-outs to date have come from a relatively small number of loans, loans made while home values have generally been rising. In effect, insurance claims to date may not resemble claim rates in the future.

HUD has been smart to maximize premiums until real loss levels are better understood. That said, once HUD has more experience with reverse mortgages it will then be appropriate to re-visit premium levels to see if borrower costs can be reduced.

Published: January 23, 2008

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .