Those in the process of applying for conventional mortgages couldn’t have picked a better time; housing prices are low, and interest rates are lower. The same, however, cannot be said for reverse mortgage borrowers, who benefit from low interest rates, but not from low housing prices.

The main factor in determining the maximum reverse mortgage for a given borrower is the quality of his collateral (i.e. the house being mortgaged). Further, the value of the house is determined via an appraisal, which is non-negotiable, and afterward, a percentage is applied, based on the borrower’s age and prevailing interest rates, and the size of the mortgage is computed.

In other words, the appraisal is arguably the most important step in the reverse mortgage application process. Significant changes to the way that appraisals are conducted, however, have resulted in lower appraisals. In the wake of the housing crisis, legislation was enacted, seeking to limit pressure on appraisers to confirm overstated home values. The new system hands the reins to the lenders, which are in charge of appointing appraisers and signing off on their work. Moreover, lenders have a vested interest in keeping appraisals low (especially after the housing bubble burst), and anecdotal reports suggest that this has become the norm.

Tough luck for potential reverse mortgagers, most of whom seek to borrow the maximum allowable amounts. Their situations arn’t helped by the housing market, which remains weak, and is projected to remain weak for the foreseeable future. A reasonable option, then, is to simply wait until the housing market improves. After which point, many borrowers will presumably be entitled to larger loans, due both to home-price appreciation and having aged by a few years. The downside is that interest rates could increase, making the loan relatively more costly.

Of course, reverse mortgages are designed to appeal to those whose financial situations are somewhat dire, so many applicants might not have the luxury of being able to wait. For this category of borrowers, you can always refinance (though incurring more fees in the process). In addition, you can still reap the benefit of home-price appreciation- not in the form of a larger loan, but in a greater equity position, the gains from which which will be realized when the home is sold and the mortgage is repaid.

The FHA, which insures most reverse mortgages and is generally regarded as the industry watchdog, has responded to this issue in contradictory ways. On the one hand, its new Reverse Mortgage for Purchase loan (the subject of my last post) is calculated from the appraised value of the home, even if it’s higher than the sale value. On the other hand, it recently moved to curtail loan amounts by 10% on conventional reverse mortgages, due to concerns of depressed housing prices and a consequent increase in defaults. Given the FHA’s increasingly precarious financial position, unfortunately, it seems the latter approach is set to become the norm.