Reverse-mortgage bondholders are waiting for you to die...

There is nothing unethical about an instrument that allows seniors to access the equity in their homes without having to sell or move out. Morbid and creepy, meanwhile, are two adjectives I am willing to use liberally.

A reverse mortgage basically allows you and the bank to switch places. Depending on the arrangements you choose, you can get a line of credit, a lump sum payout or regular equal installments that will add up to approximately 80% of the home's value.

The instrument caters specifically to seniors. You have to be over 62 to apply for a Home Equity Conversion Mortgage (HECM), and if the house is in two names then both parties must be over that age limit. The proportion of the population that can qualify for HECMs will continue to increase as the baby boomer generation gets older.

If you are already over 62, you enjoy better borrowing terms. This includes lower interest and access to a higher percentage of the equity, both of which translate into larger monthly payments.

Here is where it gets creepy. The mortgage gets repaid when the property is no longer your primary residence. This might happen when you sell the house, move to an assisted care facility, or when you DIE.

So the bank is waiting for you to die before it can cash in. Banks, however, are not the end repository in this case.

On November 9, Ginnie Mae rolled out its first HMBS: a HECM backed security that will function like an accrual coupon bond. Read more here.

The holder of a standard bond or MBS receives regular interest payments and recoups the face value at maturity. By contrast, a Ginnie Mae HMBS begins paying out coupons only as the underlying mortgages start to mature.

HMBS holders get paid out only when the borrowers of the underlying reverse mortgages die... or move out. So the onus on the creep factor is carefully passed on to HMBS holders, leaving me to question: would you put your money in a bond that matures only if somebody's Nana has a stroke?

To be fair, only 15% of HECM payoffs are due to mortality in the 62 to 65 year old age group, according to the Mortgage Brokers Association. For 80 to 85 year olds the payoff rate increases to 36% of borrowers. So, it all depends on how old the Nana in question happens to be.

You can see the table here on page 17.

It is the clinical efficiency of finance that I find so chilling about this instrument. The economic reasoning is logical, and thus hard to argue against. Older people with no additional source of income should not be prevented from enjoying their later years. Nor should they be forced to give up their primary residence in order to do so.

HMBS brings face to face an aspect of escapism and wish fulfillment with that of sobering mortality. It says: renovate, go on that trip to Egypt, because it will be too late when you’re dead.

And in the meantime, a host of bond holders will be counting down your days.