Reverse Mortgages

A reverse mortgage is a loan for homeowners age 62 and older that is secured by the equity in a home. Loan repayment is not required as long as the borrower lives in the home and complies with other loan requirements, including maintaining the home, paying property taxes, and having insurance.

A reverse mortgage becomes due when the last borrower no longer lives in the home or fails to comply with the conditions of the loan. In some cases, eligible nonborrower spouses may remain in the home after the borrower dies, but they must act quickly to meet short 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.

The home equity conversion mortgage (HECM) program: The Department of Housing and Urban Development (HUD) administers this reverse mortgage program. Private lenders issue HECM loans, which are insured by the Federal Housing Administration (FHA). 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. It also protects the borrower if the lender cannot make a scheduled payment. In fiscal year (FY) 2024, about 26,500 HECMs were originated. This is a drop relative to the high of nearly 115,000 loan originations in FY 2009.

HECMs make up the vast majority of reverse mortgage loans. Very few lenders offer so-called proprietary reverse mortgages, which are not insured by FHA. Proprietary loans typically have served borrowers with home values exceeding the Federal Housing Administration (FHA) maximum claim amount limit ($1,149,825 in 2024). 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 to help older homeowners who were “house rich but cash poor” access a portion of their home’s equity. More recently, reverse mortgage marketing materials recommend that wealthy people use HECMs as an investment strategy. This goes against the HECM program’s original mission to help borrowers use home equity to help with economic hardships.

HECM-for-purchase loans: These allow people age 62 and older to use the proceeds from a HECM loan to pay for a portion of the cost of the home. The borrower is required to pay a large down payment, typically between 29 percent and 63 percent of the purchase price. This down payment varies based on the buyer’s age and sales price of the home, among other things. The rest of the funds for purchase come from the HECM loan. Similar to a traditional reverse mortgage, borrowers do not repay the loan as long as they live in the home and meet the other reverse mortgage loan obligations, like maintaining the home and paying property taxes and homeowners insurance.

In 2023, FHA proposed a new guidance that would loosen consumer protections for HECM-for-purchase loans. Third parties would have been able to contribute to closing costs. In addition, lenders would have been able to offer “premium pricing credits.” These credits would lower closing costs in exchange for a higher interest rate—a very costly tradeoff for a consumer, given that interest costs are added to the loan balance each month. Consumer advocates were concerned that borrowers would not understand the true, long-term cost of the higher interest rate. In addition, borrowers would be unlikely to receive a credit at closing that would fully compensate them for the higher interest rate. In 2024, the FHA reversed the proposed guidance after considering public comments that raised concerns about consumer harm.

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, over 89,000 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.

Borrowers may have an especially difficult time making payments for loan obligations during declared emergencies. 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 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. Once granted, the extension is valid for as long as the borrower resides in the home. To qualify, borrowers must be age 80 or older. In addition, they must have a terminal illness, have a substantiated long-term physical disability, or be caring for someone with a terminal illness. However, 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.

HUD studied 533,894 HECM loans from 2000-2020 and found that the FHA incurred a net loss of approximately $10.4 billion during that period. Even before the study, HUD began taking 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 fewer HECM loan originations.

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 cannot access any additional reverse mortgage proceeds after the borrower dies. Other conditions must also be met. For example, the surviving spouse must certify annually that they reside 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 two or more hours are needed to cover all topics required by the counseling protocol. In contrast, other housing counselors—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. Criminals target older adults by offering free homes, investment opportunities, and foreclosure or refinance assistance (see also Protections for vulnerable consumers and Scams and Fraud).

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 and more emphasis on creating repayment plans to avoid unnecessary foreclosures. This is called loss mitigation.