Reverse Mortgages

Background

A reverse mortgage is a loan secured by the value of a home and does not require payments during the life of the loan. Borrowers can choose to receive their loan proceeds as a monthly payment over time, a payment for a set period of years, a line of credit to be used as needed, or a combination of these. A reverse mortgage becomes due when the last borrower dies, sells the home, or moves out permanently. The federally insured reverse mortgage program, known as the Home Equity Conversion Mortgage (HECM) Program, is administered by the Department of Housing and Urban Development (HUD). Private lenders issue HECM loans, which carry insurance from the Federal Housing Administration (FHA).

Throughout the 1990s, HECM volume remained well below 10,000 loans per year. In the early 2000s, volume picked up and accelerated strongly until annual HECM volume reached a record level of 114,639 loans in 2009. By then the housing market had collapsed, and home prices continued to fall. Loan volumes have declined sharply in recent years, with fiscal year (FY) 2016 HECM volume totaling approximately 49,000 loans, the lowest level since 2005. Much of the recent decline is the result of the financial assessment implemented in 2014 that is now required of potential borrowers. Since the program began in 1989, FHA has insured approximately one million HECMs.

Proprietary reverse mortgages—proprietary reverse mortgages are loans made by private lenders and are not insured by the FHA. Since private lenders have not been able to offer competitive rates within the HECM loan-limit space, proprietary loans have typically served the “jumbo” sector of the reverse mortgage market (i.e., the sector where home values far exceed the FHA home value limit of $625,500).

Today few lenders offer proprietary reverse mortgage loans. A major downside of proprietary loans is that they lack many of the consumer protections that are mandatory for HECM borrowers. Therefore, these loans are riskier to the consumer.

HECM challenges—the HECM program has undergone many changes over the years. The HECM loan was originally envisioned as a means to help older homeowners who were “house rich but cash poor” gain access to a portion of their home’s equity. At the onset of the program, it was expected that most borrowers would choose to receive a monthly payout over time to supplement their income. However, HECM program data show that borrowers more frequently chose the line of credit option, and many borrowers withdrew a large amount of loan proceeds early in the loan term.

The HECM market changed further in 2009 as securitization of HECM loans contributed to a major shift in borrowers choosing loans with a fixed interest rate, which required them to take all proceeds in a single, lump-sum payment at the onset of the loan. In some cases, lenders offered only fixed-rate loans to consumers, thereby forcing them to take the loan proceeds all at once. By 2010 nearly 68 percent of borrowers took proceeds in a lump sum, and the fixed-rate product has continued to dominate the HECM market. Since homeowners who take all their funds up front do not have access to any additional HECM proceeds, many have no funds left to pay property taxes and homeowners insurance.

Reverse mortgages were often recommended as loans of last resort, for use when there were no other options available. As a result, low-income households who were facing financial difficulty—such as a foreclosure on a “forward” mortgage—used the reverse mortgage to stave off the foreclosure. With a forward mortgage, monthly payments often include escrows for property taxes and homeowners insurance; but with a reverse mortgage, the borrower is responsible for making those payments, as well as for paying homeowners association dues and assessments. Today many borrowers appear to be having difficulty making those payments.

Reverse mortgage borrowers are responsible for paying property taxes, homeowners insurance, and homeowners’ association dues and assessments as a condition of the loan and as specified in the mortgage note. Failure to do so places the loan into default (delinquency) status, and unless these charges are paid, the loan will become due and payable and will go into foreclosure.

According to the 2015 HECM Actuarial Review 45,381 loans (approximately eight percent of active HECM loans not assigned to HUD) were in technical default for nonpayment of property taxes and/or homeowners insurance as of March 2015. Based on an internal audit of the HECM program, in 2010 HUD’s Inspector General found that the department was not tracking almost 13,000 defaulted loans, had granted deferrals on these loans, and had no formal procedures in place regarding how servicers should manage defaulted loans. In January 2011, HUD issued a mortgagee letter that provided loss-mitigation guidance and procedures for dealing with delinquent loans. In August 2013 the department obtained authority from Congress to make changes to the HECM program via mortgagee letter, thereby allowing changes to be made outside of the public rulemaking process. Since receiving that authority, HUD has issued over 25 mortgagee letters changing various regulations of the HECM program.

HUD’s financial assessment requirement—HUD issued final requirements for a financial assessment of reverse mortgage borrowers in November 2014. The new rule went into effect in April 2015. The rule requires lenders to examine credit history, income, and expenses, and requires that borrowers have a specified amount of residual income available after paying those expenses. For borrowers who do not meet the minimum residual income requirements, lenders will be required to set aside loan proceeds to cover property taxes and homeowners insurance costs over the life expectancy of the youngest borrower. As of February 2016 only 11 percent of HECMs were endorsed with a fully funded life expectancy set-aside. HECM loan volume decreased from 2015 to 2016 because fewer borrowers now qualify for HECMs.

FHA Mutual Mortgage Insurance (MMI) Fund—as a result of decreased home values, the FY 2013 Actuarial Report on the FHA MMI Fund projected losses. In September 2013, the FHA obtained a $1.7 billion draw from the US Treasury to shore up the capital reserve fund to the minimum level required by law.

Over the past few years, HUD has taken several steps to strengthen the MMI Fund. It lowered principal limits in 2009, 2010, 2013, and again in 2014, and raised both up-front and ongoing mortgage insurance premiums. The ongoing annual mortgage insurance premium is 1.25 percent of the outstanding loan balance. In 2013, HUD imposed a 60 percent limit on the amount of funds that could be drawn in the first year, while allowing an exception if more funds are required to pay mandatory obligations. If more than 60 percent of available funds are drawn, the up-front mortgage insurance premium (MIP) is 2.5 percent; if 60 percent or less, the MIP is .5 percent. HUD also instituted a single-disbursement lump-sum option for HECMs with a fixed interest rate. Borrowers that choose this option cannot receive any further loan proceeds.

Nonborrowing spouse protection—in response to lawsuits filed by AARP Foundation Litigation, HUD implemented a new policy in 2014 regarding nonborrowing spouses of reverse mortgage borrowers. Under the new policy, HECM loans will be underwritten to the age of the youngest spouse; the nonborrowing spouse will be allowed to remain in the home if the borrowing spouse dies but will not have access to any additional reverse mortgage proceeds after the death of the borrower. Other conditions must also be met, such as completion of an annual certification that the spouse resides in the home and that the obligations of the loan are met (i.e., that taxes and insurance are paid). This policy does not affect loans with nonborrowing spouses made prior to August 2014. For loans made prior to August 2014, HUD issued a mortgagee letter in June 2015 that gives the lender the ability to allow an eligible nonborrowing spouse to stay in the home as long as he or she meets certain requirements. However, the lender has the discretion of whether to offer this option.

Misuse of FHA insurance guarantees—recent changes in reverse mortgage marketing indicate a shift away from advocating their use to help older Americans age in place to instead using them as a type of investment portfolio insurance when investment values fall, or as a means to delay filing for Social Security benefits. The idea is that if investment values fall, borrowers can use their reverse mortgage line of credit to obtain funds, while not depleting their investment accounts when asset prices are low. When asset prices recover, they can repay the loan. The inherent risk in this strategy is that the asset price recovery must exceed the costs of the loan, which cannot be known in advance. Likewise, the suggestion that people should take out a loan on their house to obtain a higher Social Security benefit requires an analysis that is dependent on many factors and might not result in a net benefit after loan costs are taken into account.

Although use of reverse mortgages for these purposes is not currently prohibited, care must be taken to ensure that the HECM program remains true to its original mission: to provide older homeowners with access to their home equity during a time of “economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income” through FHA-insured reverse mortgages. The use of reverse mortgages to hedge investment portfolios is a perversion of the original intent of the HECM Program and a misuse of FHA insurance that puts the FHA insurance fund—and ultimately, US taxpayers—at risk of paying for these activities in the event of a future housing market downturn.

One way HUD could take steps to ensure that homeowners who need money have access to HECMs but not allow HECMs to be used for portfolio hedging is to eliminate the credit-line growth feature of adjustable-rate HECMs taken as a line-of-credit payout. Currently, the loan balance and the credit line of adjustable-rate HECM loans grow over time, at the same rate as the outstanding loan balance. The growth rate consists of the sum of the interest rate, mortgage insurance premium, and fixed lender margin specified at loan origination. Any untapped loan proceeds grow over time, and borrowers can end up with access to a far larger amount of funds than the home was worth at the time the loan was originated. The credit line grows regardless of any changes in the value of the home. If home prices fall, line-of-credit borrowers have access to an ever-increasing amount of funds. This feature introduces increased risk to the MMI Fund.

Housing counseling—housing counseling is a major component of consumer protection for reverse mortgages. Reverse mortgages are complex financial loans not easily understood by even the most sophisticated borrowers, and they are not suitable for all homeowners age 62 and older. HECM counselors report that they often require two or more hours to cover all topics required by the counseling protocol. In contrast, other housing counselors—and specifically many who conduct counseling via telephone—manage to conduct a session in less than one hour. It has also been reported that many borrowers do not understand the ongoing mortgage insurance premium charges.

Suitability—the Consumer Financial Protection Bureau (CFPB) has the authority to develop suitability standards and regulations regarding lender responsibilities. Doing so would help ensure that borrowers take out the loans (or find other alternatives) that are best suited to their needs. Housing counselors are prohibited from recommending any loan or other course of action. Their role is to educate, answer questions, and verify that the borrower understands the basics of the loan. Lenders, on the other hand, are able to recommend reverse mortgage loan products without regard to the needs of the consumer.

Foreclosure mitigation—for borrowers who are in technical default for nonpayment of property taxes and homeowners insurance, HUD has taken steps to expand the timeline for repayment plans up to five years and now allows repayment plans to be offered to borrowers even after the loan has gone into foreclosure. However, mortgage servicers do not consistently follow these rules.

HUD also created an exemption for at risk borrowers who are age 80 or older and have a terminal illness or are caring for someone with a terminal illness. However, dementia is not considered a terminal illness under this definition. Legal advocates have expressed concern that older borrowers with dementia often have difficulty filing the required ongoing paperwork, such as occupancy certificates, and keeping up with tax and insurance payments. Given that the HECM program is specifically designed for older borrowers, more consumer protections need to be developed to ensure that the most vulnerable do not end up losing their homes (see this chapter’s section on Federal and State Roles in Consumer Protection Regulation).

Sales practices—some advertisements may inadvertently create the impression that a reverse mortgage is a federal benefit rather than a loan. Advertisements featuring well-known spokespeople and sales agents often imply that the loans are without risk or cost and that they could benefit everyone. Advertisements should contain language that makes it clear that reverse mortgages are loans, that borrowers must meet certain obligations under the terms of the loan or they can be foreclosed upon, and that the celebrities are paid spokespeople.

HUD issued a mortgagee letter in 2014 reminding lenders of their obligations regarding advertising reverse mortgages. In 2015 the CFPB issued a report that reviewed reverse mortgage advertisements and also convened focus groups to collect consumer impressions. The CFPB concluded that consumers often misunderstand the reverse mortgage advertisements and do not realize they can lose their home if they fail to meet their obligations.

Product availability—in the past many lenders only offered certain reverse mortgage products to borrowers. The available loan products included both fixed-rate and adjustable-rate loans. However, some lenders only offered borrowers the more expensive fixed-rate product. HUD issued a rule proposal in May 2016 that would require lenders to inform borrowers of all HECM products, features, and options that FHA insures. As of November 2016 a final rule has not been issued.

Reverse Mortgages: Policy

Home equity conversion mortgages (HECMs)

In this policy: Federal

To guarantee the continuity of the HECM program, Congress should remove the statutory limit on the number of such loans that the Department of Housing and Urban Development (HUD) may insure.

HUD should prohibit the use of reverse mortgages as a portfolio hedge for wealthy individuals and should eliminate the credit line growth feature of adjustable-rate HECM loans where borrowers choose a line-of-credit payout.

HUD should conduct a study after implementation of the financial assessment to see whether consumers who seek reverse mortgage loans have adequate access. HUD should study the income and asset profile of borrowers who received the loans.

Lower costs

In this policy: FederalState

HUD should establish a lower origination fee limit for HECM refinances.

States should limit fees and interest rates associated with proprietary reverse mortgages.

Protecting home equity loan payments

In this policy: State

States should enact legislation to require that proprietary reverse mortgages be nonrecourse loans to borrowers and their heirs.

States should enact legislation that prohibits reduction of payments and any requirement that borrowers repay proprietary reverse mortgage loans before they sell, die, or permanently move from the home.

Foreclosure prevention

In this policy: FederalState

State and local governments should consider creating or expanding property tax deferral programs by accepting a secondary lien where a reverse mortgage is in effect.

States should consider measures to increase the availability of homeowners insurance, particularly in coastal areas, to enable older homeowners to obtain insurance at a reasonable price.

Disclosure of loan terms

In this policy: FederalState

The Consumer Financial Protection Bureau (CFPB) should explore the potential of disclosures involving machine-readable technology that can help consumers compare various reverse mortgage products.

States should require full disclosure of all projected proprietary reverse mortgage costs and benefits, of all loan documents and related information, and of the costs, benefits, and risks associated with using a reverse mortgage to purchase investments or an annuity.

Lender responsibility

In this policy: Federal

The CFPB should explore suitability standards and regulations on lender responsibilities to provide greater assurance that borrowers take out the loans, or find alternatives, that are best suited to their needs.

The CFPB should require lenders to present all HECM loan types to consumers whether or not the lender offers a particular loan product.

HUD should vigorously prosecute violations of the Real Estate Settlement Procedures Act of 1974 if lenders or others violate anti-kickback laws.

Loan counseling

In this policy: FederalState

HUD should use its authority to permit a portion of mortgage insurance premiums to fund counseling. If HUD does not do so, Congress should provide sufficient funding to pay for the HECM counseling required by federal law.

Foreclosure mitigation counseling should be adequately funded and available to those who might benefit. HUD should consider extending the repayment plan timeframe for borrowers who can become current if given a longer repayment period.

HUD should continue to monitor the housing counseling protocols and ensure that counseling is consistent and of high quality.

States should fund housing counseling programs to help older people plan for housing needs in later years and evaluate housing options, particularly with regard to home equity conversion.

States should require counseling by HUD HECM-certified housing counselors for all proprietary reverse mortgages.

Scams

In this policy: Federal

HUD should investigate and deter scams, such as bogus counseling services and questionable investment and annuity practices.

HUD should ensure that proper controls are in place to prevent HECM-for-purchase scams.

Refinancing

In this policy: Federal

HUD should establish an origination fee limit for refinances that takes into account any lower origination costs for lenders on such loans.

Related benefits issues

In this policy: FederalLocalState

Proceeds from reverse mortgages should not affect homeowners’ eligibility for means-tested state or local public benefit programs or be considered income for tax purposes.

Reductions in state benefits should be prohibited when an older person has used a home equity conversion mortgage. The benefits from such arrangements should not be counted as income or in-kind contributions in determining eligibility for Medicaid or other benefit programs.

Truth in advertising

In this policy: Federal

The CFPB and the Federal Trade Commission should regulate the disclosures, sales practices, and advertising of reverse mortgage loans to ensure they are not misleading or deceptive. They should require advertisers to make it clear that celebrities appearing in the ads are paid spokespeople.

Servicing

In this policy: Federal

HUD should:

  • develop procedures to ensure that mortgage servicers follow its guidance and requirements and should require servicers to evaluate borrowers and their eligible spouses for loss mitigation regardless of whether a foreclosure has been initiated; and
  • develop a reverse mortgage servicing complaint-collection system and ensure that servicers respond to consumers and resolve complaints in a timely manner.