The Ups and Downs of Reverse Mortgages

May 29, 2013

In post-recession America, seniors are quickly recognizing that they are not as financially equipped as they once thought and are searching for new ways to gain money for retirement. One of the ways presented by television ads to gain that money is reverse mortgages. Reverse mortgages, formally known as home equity conversion mortgages (HECM), allow seniors to tap into their home equity and receive a lump sum or annuity payment during their retirement years. Television advertisements make reverse mortgages sound appealing, but there are several negative things that can happen if borrowers do not fully understand the terms, says Pamela Villarreal, a senior fellow with the National Center for Policy Analysis.

Although reverse mortgages are limited to seniors, borrowers are applying at earlier ages.

  • According to a Met Life survey, the average borrower is 71.5 years old, but one in five borrowers is age 62 to 64.
  • Two-thirds of borrowers are using reverse mortgages to pay down debt (including conventional mortgage debt), while only 27 percent use the mortgages to enhance their lifestyle.
  • The survey also found that about one-third of homeowners using reverse mortgages have a mortgage balance that is at least half of their home value. This troubling trend will increase as more baby boomers enter retirement with mortgage debt than previous generations.

The FHA insures reverse mortgages, which provides lenders with a strong incentive to issue them because they can claim compensation in the event of a default. But this government support means that taxpayers could foot the bill for any number of defaulted mortgages:

  • The FHA's 2012 financial statement reveals about $140 billion in outstanding FHA-insured reverse mortgage loans.
  • The federal Consumer Financial Protection Bureau reported in 2012 that about 9.4 percent of reverse mortgages were at risk of default -- nearly double the default risk for ordinary home mortgages (about 5 percent).
  • The Government Accountability Office reported that projected defaults in 2010 alone would require a taxpayer subsidy of $789 million.

With a much higher default rate than traditional mortgages, reverse mortgages and their inherent risks should be left up to the market, not the FHA. If lenders cannot and will not bear the risk, the reverse mortgage market should not exist in the first place.

Source: Pamela Villarreal, "The Ups and Downs of Reverse Mortgages," National Center for Policy Analysis, May 2013.

 

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