OSFI Proposes Tweak to Reverse-Mortgage Capital Charges

There is an issue with Reverse Mortgages, to wit:

Reverse mortgages more closely resemble investments in real estate than they do residential mortgages as defined in the Basel Framework. Reverse mortgages are limited recourse loans – the lender looks solely to the residential property securing the loan for repayment of principal, accrued interest and costs. Assuming there is no event of default, the amount recovered on a reverse mortgage is capped at the fair market value of the home at the time it is sold and the lender has no recourse to the borrower for any shortfalls.

In contrast, a residential mortgage is, first of all, an exposure to an individual person secured by recourse to a residential property. The lender has recourse to the borrower for any shortfalls or deficiencies in property value.

Nevertheless, under appropriately conservative conditions, a large number of reverse mortgages should be able to qualify for the 35% qualifying residential mortgage risk weight under the Standardized Approach. We are proposing that only the Standardized Approach be made available for this type of lending, as this is consistent with the treatment observed in other Basel member countries.

OSFI has proposed the following table of capital charges is (LTV = Loan-to-Value):

Proposed Reverse Mortgage
Capital Charges
March 2009
Initial LTV   Current LTV Risk Weight
<= 40% and <= 60% 35%
>40% and <= 60% 50%
    >60% and <= 75% 75%
    >75% and <= 85% 100%
    >85% Partial Deduction

The treatment of “sub-prime reverse mortgages” (current LTV > 85%) is:

Where a reverse mortgage exposure has a current LTV greater than 85%, the exposure amount that exceeds 85% LTV is deducted from capital. The remaining amount is riskweighted at 100%.

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