It might surprise you, given the bombardment of reverse mortgage advertisements and tales of unheralded growth, that reverse mortgage volume is actually down in 2010: “The volume of reverse mortgages is off nearly 40 percent so far this year, and is on an annual pace to record only 70,000 transactions nationally for the entire year. The number of lenders active in the reverse mortgage market has plunged by more than half in the past year to roughly 600, according to Reverse Mortgage Insight, which tracks industry trends.”

It’s difficult to ascertain what’s behind the decline. After all, lenders are fighting to outdo each other in cutting fees. Interest rates are near all-time lows. Decimated stock portfolios, high unemployment, and the beginning of retirement for the baby boom generation should spur at least modest growth in demand. What gives?

First of all, the decline in home prices means that it’s a comparatively unattractive time to take out a reverse mortgage. Those that missed (what was in hindsight) the boom may have decided that they will be better served waiting for a recovery. In addition, the FHA is cutting loan maximums in an effort to remain solvent, rendering an entire class of borrowers (those that wish to obtain a reverse mortgage to pay off an existing primary mortgage) ineligible. The FHA is also raising insurance premiums, which will completely offset any declines in interest rates. Speaking of low rates, such also makes it attractive to refinance a primary mortgage in lieu of obtaining a reverse mortgage.

Finally, it appears the reverse mortgage industry is still suffering from an image problem. A flurry of critical reports in 2010, namely from the National Consumer Law Center, Consumer Reports, US News & World Report, and even the Comptroller of the Currency, who famously compared reverse mortgages to subprime mortgages. Personally, I wonder if the pendulum hasn’t swung too far in the opposite direction – from complacent acceptance to paranoid rejection – and won’t at some point swing back.

In fact, July witnessed the first monthly increase in volume since 2009, which means that it’s possible that the market has hit bottom. If interest rates remain low and home prices recover, demographic trends would seem to engender an inevitable pickup in demand. Ultimately, 2010 was a dose of realism for the industry. For all the hype, reverse mortgages remain a niche product, and it will likely be many years before they are considered truly mainstream.