A reverse mortgage is a loan secured by the value of a home. It 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,
- payment for a set period of years,
- line of credit whose unused portion grows over time and can be used as needed, or
- combination of these.
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. However, to do so, they must act quickly after the borrower's death to meet short deadlines set by the Department of Housing and Urban Development. 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. It also protects the borrower if the lender cannot make a scheduled payment. In FY2022, about 64,500 HECMs were originated. This is an increase from FY2021 when about 49,000 HECMs were originated. But it is a drop relative to the high of nearly 115,000 loan originations in FY2009.
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 ($970,800 in 2022). 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 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 considered. 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 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. 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 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 cannot access any additional reverse mortgage proceeds after the borrower dies. Other conditions must also be met. For example, the 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—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. They include criminals who target older adults by offering free homes, investment opportunities, and foreclosure or refinance assistance (see also Protections for vulnerable consumers policy in this chapter).
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.
REVERSE MORTGAGES: Policy
REVERSE MORTGAGES: Policy
Availability of home equity conversion mortgages (HECMs)
Congress should ensure the continuity of the HECM program by removing the annual limit on the number of HECMs.
HECMs should be used to allow borrowers to remain in their homes as they age. They should not be used as an investment strategy through a portfolio hedge for wealthy individuals. The Department of Housing and Urban Development (HUD) should eliminate the credit line growth feature of adjustable-rate HECMs.
HUD should study whether consumers who seek reverse mortgage loans have adequate access to them. HUD should also study the income and asset profile of borrowers who received the loans.
The origination fee for HECM refinances should be lower than for the original loan.
States should limit fees and interest rates of proprietary reverse mortgages not insured by the federal government.
The Consumer Financial Protection Bureau (CFPB) should require lenders to incorporate consumer protections. Lenders should be required to present borrowers with all home equity conversion loan options even if they do not offer them.
The CFPB should require lenders to assess whether a reverse mortgage is suitable for the applicant.
HUD should vigorously prosecute violations of the Real Estate Settlement Procedures Act of 1974 if lenders or others violate anti-kickback laws.
Policymakers should establish consumer protections for proprietary reverse mortgages not insured by the federal government.
States should require that proprietary reverse mortgages be nonrecourse loans to borrowers and their heirs.
States should prohibit the reduction of payments on private reverse mortgages before borrowers sell, die, or permanently move from the home. They should also prohibit any requirement that borrowers repay reverse mortgage loans before borrowers sell, die, or move from the home.
Proprietary reverse mortgage servicers should be required to:
- provide loss mitigation options for borrowers who are facing foreclosure, and
- carry insurance to protect the borrower in the event of their business failure.
Disclosure of loan terms
State and federal policymakers should improve disclosures to help borrowers understand the complexities of reverse mortgages. They should do so for both HECMs and proprietary reverse mortgages.
The 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,
- all loan documents and related information, and
- the costs, benefits, and risks associated with using a reverse mortgage and whether it is appropriate to use loan proceeds to purchase investments or an annuity.
The federal government should provide sufficient funding to pay for required HECM counseling. HUD should ensure that this counseling is high-quality. It should monitor and evaluate the housing counseling protocols.
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.
States should require counseling for all proprietary reverse mortgages. HECM-certified housing counselors should provide the counseling.
States should fund housing counseling programs to help older people plan for housing needs in later years. They should receive help to evaluate housing options, particularly with respect to home equity conversion.
Reverse mortgage scams and fraud
HUD should take enforcement action against and deter reverse mortgage fraud and scams. HUD should ensure that proper controls are in place to prevent HECM-for-purchase scams in which borrowers are persuaded to use HECM proceeds to buy low-value and uninhabitable homes based on fraudulent appraisals.
Public benefits eligibility
Reverse mortgage proceeds should not affect homeowners’ eligibility for public benefit programs. Reductions in state benefits should be prohibited when an older person has used a HECM. The benefits from such arrangements should not be counted as income or in-kind contributions in determining eligibility for Medicaid or other benefit programs.
Federal regulators should ensure that disclosures, sales practices, and advertising of reverse mortgage loans are not misleading or deceptive. They should not give the impression that a reverse mortgage is a government benefit rather than a loan. They should require advertisers to make it clear that celebrities appearing in the ads are paid spokespeople.
Policymakers should ensure that reverse mortgage servicers are not engaging in unfair, deceptive, or abusive practices.
HUD should develop procedures to ensure that mortgage servicers follow its guidance and requirements. This includes requiring servicers to evaluate borrowers and their eligible spouses for loss mitigation regardless of whether a foreclosure has been initiated. HUD should require that servicers offer loss mitigation when a borrower or eligible nonborrower spouse would otherwise qualify.
HUD should also create a reverse mortgage servicing complaint-collection system and ensure that servicers respond to consumers and resolve complaints in a timely manner.
Servicers should be required to provide loss mitigation options to HECM borrowers. They should provide options for borrowers to become current, including extensions of tax and insurance repayment timelines, beyond the pandemic emergency.
Policymakers should create or extend programs that would address affordability of ongoing reverse mortgage obligations. This includes property tax deferral programs and programs to increase the availability of affordable homeowners insurance.
State and local governments should develop property tax deferral programs that accept a secondary lien where a reverse mortgage is in effect. They should support programs to increase the availability of homeowners insurance, particularly in coastal areas, to help older homeowners obtain insurance at a reasonable price.
HUD’s at-risk foreclosure extension for HECM loans should include dementia as a covered condition. Borrowers should not need to recertify the underlying medical condition each year.
HUD should establish policies that protect nonborrowing spouses from foreclosure to the extent possible. Protections include:
- eliminating or extending certification and documentation timelines for nonborrowing spouses,
- allowing nonborrowing spouses the ability to cure any alleged default at any time before foreclosure is final, and
- requiring servicers to offer Mortgagee Optional Elections to nonborrowing spouses who qualify.
During declared emergencies, HUD should put in place policies to avoid foreclosures and keep homeowners in their homes until the emergency ends. These include:
- extension of deadlines for required documents, including at-risk extension letters;
- forbearance programs for property taxes and homeowners' insurance;
- a moratorium on evictions and foreclosures; and
- loss mitigation options for borrowers to become current.
These measures should last until the end of the emergency.
Proprietary reverse mortgage lenders should be required to develop similar programs for their borrowers.