Reverse Mortgages

A reverse mortgage is a loan secured by the value of a home and does not require payments as long as the borrower lives in the home. 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, whose unused portion grows over time, that can 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. In some cases, eligible nonborrower spouses may remain in the home after the borrower dies. However, to do so, they must act quickly after the borrower's death to meet short Department of Housing and Urban Development deadlines. In addition, borrowers are protected when the amount they owe is more than the value of their home. This is known as being a nonrecourse loan. When the loan is due, they owe the lesser of the loan amount or 95 percent of the appraised value of the home.

Home equity conversion mortgages: The Department of Housing and Urban Development (HUD) administers the federally insured reverse mortgage program known as the Home Equity Conversion Mortgage (HECM) program. Private lenders issue HECM loans, which are insured by the Federal Housing Administration. Borrowers pay mortgage insurance premiums at origination and on a monthly basis. This insurance protects the lender if the amount owed on the loan is more than the value of the home when the loan is due at loan termination. It also protects the borrower if the lender cannot make a scheduled payment. The number of HECM loans has fallen dramatically in recent years, from a high of nearly 115,000 loans in fiscal year 2009 to 31,272 in fiscal year 2019.

HECMs make up the vast majority of reverse mortgage loans. Very few lenders offer proprietary reverse mortgages, which are not insured by the Federal Housing Administration. Proprietary loans typically have served borrowers with home values exceeding the Federal Housing Administration (FHA) home value limit ($822,375 in 2021). These loans are also riskier for consumers, as they lack the consumer protections that HECMs offer.

The HECM program has undergone many changes over the years. It 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. More recently, reverse mortgage marketing materials have suggested that wealthy people take out HECMs as an investment strategy. Specifically, they are sometimes used as a type of investment portfolio hedge 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. This way, they do not deplete 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. This trend is unfortunate and goes against the HECM program’s original mission to help borrowers use home equity to help with economic hardships. 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, U.S. taxpayers—at risk of paying for these activities in the event of a future housing market downturn.

Foreclosures: Another program challenge relates to borrowers who used HECMs as loans of last resort when there were no other options available. At one point, households facing potential foreclosure on a “forward” mortgage were able to use a HECM to tap into the equity in their home to pay off the forward mortgage and avoid foreclosure. With a forward mortgage, monthly payments often include escrows for property taxes and homeowner’s insurance. But most reverse mortgage borrowers are responsible for making those payments directly, as well as for paying homeowners association dues and assessments. This can prove difficult for borrowers who previously were accustomed to having their mortgage servicer make these payments. Today, some of these borrowers appear to be having difficulty making required payments for taxes, insurance, and homeowners association dues and assessments. This puts them at risk of foreclosure. As of March 2016, 89,064 HECM loans were in technical default for failure to make one or more of these required payments.

In 2011, HUD provided loss mitigation guidance and procedures for dealing with delinquent loans. In order to decrease the risk of foreclosure, HUD has allowed borrowers in technical default who have not made required tax or insurance payments to repay the money they owe over a five-year period. HUD now permits but does not require repayment plans to be offered to borrowers even after the loan has gone into foreclosure. Servicers differ on whether and how they offer loss mitigation plans. As a result, borrowers’ loss mitigation opportunities depend in part on the policies of their loan servicer.

In declared emergencies, such as pandemics and natural disasters, borrowers may have an especially difficult time making payments for loan obligations. This puts them at risk of foreclosure. HUD can take steps to help these borrowers stay in their homes. During the COVID-19 pandemic, for example, HUD imposed a foreclosure and eviction moratorium that applied to HECM borrowers.

HUD’s at-risk foreclosure extension: To help at-risk older borrowers who face potential foreclosure, HUD offers foreclosure extensions in certain circumstances. They allow borrowers to remain in the home and avoid foreclosure. The servicer makes payments on unpaid obligations, such as property tax bills, on behalf of the borrower. The amount paid is added to the balance of the loan. Extensions are granted for a year and then must be recertified. In order to qualify, borrowers must be age 80 or older. In addition, they must have a terminal illness or a substantiated long-term physical disability, or they must be caring for someone with a terminal illness. But dementia is not considered a qualifying condition. Borrowers with dementia may have difficulty filing the required ongoing paperwork, such as occupancy certificates, and keeping up with tax and insurance payments.

HECM underwriting requirements: To address the defaults in the HECM program, HUD added new underwriting requirements. Lenders must examine a borrower’s credit history, income, and expenses to determine whether the borrower can afford to pay taxes and insurance on an ongoing basis. Borrowers must have a specified amount of income left over after paying those expenses. If not, lenders must set aside part of the loan to pay for property taxes and homeowners insurance. The set-aside will be large enough to cover those costs over the life expectancy of the youngest borrower.

Over the past few years, HUD has taken several steps to strengthen the mortgage insurance fund. It lowered principal limits in 2009, 2010, 2013, and again in 2014, and raised both up-front and ongoing mortgage insurance premiums. In 2017, HUD increased the up-front mortgage insurance premium and lowered the ongoing mortgage insurance premium and the principal limits. Together with the financial assessment, these changes have led to a lower volume of reverse mortgage loan issuance.

To protect spouses, HECMs must be underwritten to the age of the youngest spouse, even if the spouse is not a borrower. The nonborrowing spouse may remain in the home if the borrowing spouse dies. But they do not have access to any additional reverse mortgage proceeds after the borrower dies. Other conditions must also be met. For example, the spouse must certify annually that he or she resides in the home. The spouse also must prove that they have met the loan obligations, such as paying property taxes and insurance.

This policy does not affect loans with nonborrowing spouses made prior to August 2014. For these loans, HUD gives the lender the discretion to allow an eligible nonborrowing spouse to stay in the home when certain requirements are met, including strict deadlines.

Housing counseling: Housing counseling is a major consumer protection for reverse mortgage borrowers. Prospective HECM borrowers must receive counseling before they can apply for a loan. This is essential, as reverse mortgages are complex mortgage loans. Even the most sophisticated borrowers may have difficulty understanding them. 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. Unlike lenders, housing counselors are prohibited from making recommendations to prospective borrowers. Their role is to educate, answer questions, and verify that the borrower understands the basics of the loan.

Although housing counselors cannot recommend a specific course of action, the Consumer Financial Protection Bureau 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.

Fraud and financial exploitation: Older adults are often targets of fraud and financial exploitation, including through reverse mortgages. The Federal Bureau of Investigation and HUD’s Office of the Inspector General have warned about reverse mortgage scams, including fraudsters who target older adults by offering free homes, investment opportunities, and foreclosure or refinance assistance (see also Protections for vulnerable consumers).

Servicing challenges: Another challenge relates to reverse mortgage servicers. They are not consistent in how they deal with borrowers who face foreclosure and other problems with their loans. Consumers would benefit from HUD enforcement of existing regulations, as well as from more emphasis on creating repayment plans to avoid unnecessary foreclosures through loss mitigation.