Reverse mortgage loans have become very popular in recent years as a way for seniors to convert home equity into cash.  But the number of reverse mortgages in default has risen steeply and many of those elderly homeonwers are faced with the prospect of foreclosure and even evictions in some cases.

The percentage of reverse mortgages in default s is relatively small at 6%, but it has risen dramatically in the past two years.  With a reverse mortgage, borrowers are not required to make monthly mortgage payments, but are required to maintain payments for their property taxes and homeowners insurance.  A failure to make these payments is a default under the terms of the reverse mortgage and can lead to a foreclosure and ultimately eviction.

More than 90 percent of reverse mortgages are insured by the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgage (HECM) program.  The program began in 1989 and there have been approximately 660,000 loans made under the program with about half a million still outstanding.  About three quarters of the loans have been made in the last five years as the program has become popular.  In a 2006 survey by AARP of seniors who went through the required HECM counseling and then decided not to take out a reverse mortgage, the most often cited reason for not going forward with the loan was high costs associate with the loan.

Mortgage Meltdown Drives Rising Costs

Before the mortgage meltdown led to problems at Fannie Mae, the quasi government agency purchased nearly all HECM loans. During that time, Fannie Mae set the interest rates and required that all loans have adjustable rates.  When the mortgage market collapsed Fannie Mae allowed interest rates to float leading to higher interest rates.  As Fannie Mae struggled with financial problems, in 2010, it pulled completely out of the HECM market and announced that it would no longer purchase such mortgages.

After Fannie Mae’s departure from the market, Ginnie Mae stepped in and became the primary means for funding HECM loans.  The majority of Ginnie Mae loans have been fixed rate loans in which the borrower is required to withdraw the full loan limit at closing. The number of fixed rate loans is now upwards of 70 percent of all HECMs.  Traditionally, HECMs were used by borrowers as a supplement to their social security or other retirement income where they would withdraw a small amount each month to supplement what they received from other sources.  The full withdrawal loans are more expensive for seniors who don’t need the full withdrawal because interest rates are higher and interest runs on the full amount of the loan from the day of closing.  These loans do however typically have lower or no upfront origination fees and often no ongoing servicing fees.
The HECM “Saver”, introduced in October 2010, essentially eliminates the upfront Mortgage Insurance Premium of 2% of the home value in exchange for loan limits that are 10 to 18 percent lower than standard HECM loans.  The Saver can be less expensive for those who need relatively small loans, but interest rates are .25 to .5 percent higher than standard HECM loans and origination and other fees may be higher as well.  FHA is hoping that premiums generated from these low risk loans will offset anticipated losses on other types of reverse mortgages.

Is a Reverse Mortgage a Good Idea for Me?

Unfortunately as is often the case with a complicated subject, I have to say, that depends.  Whether a reverse mortgage is a good idea for you depends on the specific circumstances of your situation.  It can be a lifeline that will enable you to maintain your independence.  The fact is that as a result of the decline in home values and the mortgage meltdown, the costs of these loans has increased and the choices have become more complex.

Before you decide to commit to a reverse mortgage, it would be a good idea to sit down with your team of advisors, your tax advisor, your financial advisor and your elder law attorney to consider what other options there are to help you maintain your independence.