Reverse mortgages are loans that allow seniors to take equity out of their homes to help pay for living expenses or other costs
Executive Summary
Reverse mortgages are loans that allow seniors to take equity out of their homes to help pay for living expenses or other costs. As the equity in their home decreases, the amount of the loan increases. Unlike a traditional mortgage, seniors do not make monthly payments. The loan becomes due when the borrower dies, moves out of the house, or fails to maintain the property and pay homeowner’s insurance and property taxes. This type of loan is almost always insured by the Federal Housing Administration.
As financial pressures on seniors have increased, the numbers of reverse mortgages have grown, and so have the opportunities for unscrupulous lenders to take advantage of seniors. These loans are complex, expensive, and drain equity from the property, leaving seniors with very few options later in life.
Reverse mortgages are loans that allow seniors to take equity out of their homes to help pay for living expenses or other costs. As the equity in their home decreases, the amount of the loan increases. Unlike a traditional mortgage, seniors do not make monthly payments. The loan becomes due when the borrower dies, moves out of the house, or fails to maintain the property and pay homeowner’s insurance and property taxes. This type of loan is almost always insured by the Federal Housing Administration.
As financial pressures on seniors have increased, the numbers of reverse mortgages have grown, and so have the opportunities for unscrupulous lenders to take advantage of seniors. These loans are complex, expensive, and drain equity from the property, leaving seniors with very few options later in life.
- One out of every ten reverse mortgage is in default and could face foreclosure.
- Reverse mortgages are expensive. After ten years, interest and ongoing fees on a lump sum reverse mortgage can add up to more than $100,000, after twenty years interest can reach more than $300,000 on top of the original loan amount.
- As defaults and foreclosures have increased, FHA’s reverse mortgages lowered the value of the Mutual Mortgage Insurance Fund by $5.2 billion in Fiscal Year 2012. Forcing the Treasury Department to transfer $1.7 billion to the MMI Fund for the first time in the Fund’s history in the fall of 2013.
- The decline in pensions, the economic recession, cost-of-living adjustments that don’t keep pace with the rising cost of health care, and increasing life expectancy have encouraged seniors to seek alternative ways to supplement their retirement income. In 1983, 62 percent of private sector workers were covered by a defined benefit pension plan. By 2010, that number dropped to just 19 percent.
- In the 1990s, less than 10,000 reverse mortgages were issued a year. In 2009, the number of reverse mortgages peaked at 114,412 loans, in fiscal year 2013 the Federal Housing Administration (FHA) backed 61,296 loans.
- Misleading advertisements that feature trusted celebrity spokespeople, like former-Senator Fred Thompson, Henry Winkler, Robert Wagner, and Pat Boone, often falsely imply that reverse mortgages are a government benefit, not a loan, and that there is not a risk that seniors will lose their home.
- If a homeowner passes away without also having the reverse mortgage in their spouse’s name, the surviving spouse could lose the home. After her husband passed away, a local woman from San Bernardino received a letter from her a reverse mortgage lender, informing her that unless she paid $293,000, she would lose her home.
- It’s time for the federal government to reconsider its involvement with reverse mortgages and make crucial changes to the program to protect seniors and taxpayers.
I. Background
Reverse mortgages are loans that allow seniors to take equity out of their homes to help pay for living expenses or other costs. As the equity in their home decreases, the amount of the loan increases. Unlike a traditional mortgage, seniors do not make monthly payments. The loan becomes due when the borrower dies, moves out of the house, or fails to maintain the property and pay homeowner’s insurance and property taxes. If borrowers are not able to meet these requirements the loan becomes delinquent and the home can eventually go into foreclosure.
Nearly all reverse mortgages are insured by the Federal Housing Administration (FHA) through its Home Equity Conversion Mortgage (HECM) program. FHA insurance guarantees that borrowers will be able to access their authorized loan funds in the future even if the loan balance exceeds the value of the home or if the lender experiences financial difficulty. Lenders are guaranteed that they will be repaid in full when the home is sold, regardless of the loan balance or home value at repayment. Borrowers or their estates are not liable for loan balances that exceed the value of the home at repayment. The amount a senior can borrow is based on their age, the current interest rate, the appraised value of the home, the amount the senior owes on the home, the amount of fees charged and the federal loan limit, which is currently $625,000.[i]
Who is eligible?
- Borrower Requirements:
- 62 years of age or older
- Own the property outright, or almost entirely
- Occupy the property as a principal residence
- Not be delinquent on federal debt
- Have financial resources to continue to make timely payment of ongoing property taxes, insurance and Homeowner Association fees, etc.
- Participate in a housing counseling session (typically by phone)
- Property Requirements:
- Meet all FHA property standards and flood requirements
- Single family home, or 2-4 unit home with one unit occupied by owner
- HUD approved condominium project
- Manufactured home that meets FHA requirements
- Financial Requirements
Seniors can select between several different payment options. They can choose an equal monthly payment over a fixed period of time or as long as the borrower lives and continues to occupy the home. Seniors can also use a reverse mortgage to take out a line of credit to receive unscheduled payments or installments at the times and in the amount of their choosing, or a combination of the two.
Another option allows seniors to receive all of their funds in one lump sum payment. In recent years, lump sum payments had grown to account for 70% of HECMs.[iii] These types of reverse mortgages were most likely to become delinquent on taxes and insurance payments resulting in foreclosure, because borrowers are not always able to properly plan how to spend the money, and once it runs out they are left with little to no equity in their home and no other options for income. Since 2008, the vast majority of borrowers have started to take out 80 percent or more of the maximum they’re eligible for in a lump sum. HECM loans with such high up-front draws are twice as likely to have a tax-and-insurance default as are loans with initial draws of 60 percent, and four times as high as those with initial draws of 40 percent of the maximum allowed.[iv] In December 2012, the FHA placed a moratorium on fixed-rate lump sum reverse mortgages under the HECM Standard program due to the high foreclosure rates.[v] The following year, the FHA announced additional restrictions, requiring borrowers to pay a higher mortgage insurance premium if they take out more 60% of their principal loan limit at the time of closing.[vi]
The Role of the Federal Government
Reverse mortgages were developed as a way for seniors who are “cash poor” to tap the equity in their homes to help pay for living expenses. Historically, these loans were viewed as a last resort and only taken out by older Americans who had depleted all other retirement resources. [vii] The FHA insures reverse mortgages both to protect lenders and borrowers. Borrowers are guaranteed their payments even if the lender undergoes financial difficulty. Lenders are repaid for their losses if the loan winds up exceeding the value of the house.
Why Seniors Take Out Reverse Mortgages
As economic pressures have increased, more seniors began to turn to reverse mortgages at an earlier age. By 2011, more than half of the borrowers taking out reverse mortgages were under age 70. The earlier a borrower takes out a reverse mortgage, the greater the risk they will deplete their home equity and run out of financial options as they age. [viii]
The decline in pensions, the economic recession, cost-of-living adjustments that don’t keep pace with the rising cost of health care, and increasing life expectancy have encouraged seniors to seek alternative ways to supplement their retirement income. In 2002, Social Security wage replacement rate was 41 percent for the average retiree at age 65. By 2015, it’s expected to drop to 38 percent, and by 2030 to just 36 percent, 33 percent when adjusted for Medicare Part B premiums.[ix] In 1983, 62 percent of private sector workers were covered by a defined benefit pension plan. By 2010, that number dropped to just 19 percent. [x] All of these economic pressures have encouraged seniors to take out reverse mortgages. In the 1990s there were less than 10,000 reverse mortgages a year. In 2009, the number of reverse mortgages peaked at 114,412 loans, and in fiscal year 2013 the Federal Housing Administration (FHA) backed 61,296 loans.[xi]
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