Changes in Reverse Mortgages

Over the years, reverse mortgages have grown in popularity among senior Americans. A reverse mortgage allows a homeowner age 62 or older to tap the equity in the home without having to make payments for as long as he or she lives in the home. The federal government guarantees most reverse mortgages that are made up to a ceiling amount.

Defaults have increased on reverse mortgages, so the FHA is making a change. The lump sum reverse mortgage, known as a Home Equity Conversion Loan (HECM), no longer will be available with a fixed interest rate in the federal insured loans. Only variable rate loans will be available. This change will reduce the amount that can be borrowed against the home, which the FHA hopes will reduce defaults.

I’ve always considered reverse mortgages to be a last resort for those who need cash, want to stay in their homes, and don’t put a high priority on having heirs inherit a portion of the home equity. Most reverse mortgage borrowers are in their late 70s or older and tend to be female.

“The standard HECM loans have proven to have an unusual number of defaults,” said Delores Conway, associate dean and professor of real estate at the University of Rochester.

“By taking so much cash up front, homeowners have less money in later years to keep up with property taxes and other housing expenses they have to pay even with a reverse mortgage,” Conway added. “That, and falling property values, have increased defaults.”

The FHA insures some 90 percent of reverse mortgages purchased from private lenders. It says about 58,000 loans — or nearly ten percent of its reverse mortgages — were in default in 2012. That’s up from 2 percent ten years ago.

The FHA says it faces some $2.8 billion in losses from the defaults, which could force it to seek a bailout from the federal government next year.