According to a recent announcement from the Government Accountability Office (GAO), reverse mortgages saw a surge in popularity during the last financial crisis (2007-2009). And homeowners facing financial struggles under the current economic crisis caused by the coronavirus pandemic might also be considering a reverse mortgage to supplement their income.
“While they can be used as financial tools to allow older homeowners to stay in their homes, they come with risks,” the GAO warned.
A reverse mortgage is a loan available to homeowners age 62 years and older that allows them to convert part of the equity in their homes into payments from lenders. Seniors may use reverse mortgages to help supplement their Social Security or other retirement income.
Unlike traditional (or “forward”) mortgages, a reverse mortgage does not require a borrower to repay the loan as long as they meet certain conditions such as maintaining their home and paying property taxes and homeowners insurance.
Also unlike forward mortgages, reverse mortgages do not have fixed terms (for example 30 years). Instead, the loan is in place until the borrower dies, pays off the loan, leaves the property (for example, if the borrower sells the home), or defaults. At that point, the loan terminates and the senior (or their heirs) have to pay back the loan.
Increasing Defaults and Risks of Foreclosure
According to the GAO, in recent years a growing percentage of reverse mortgages have ended because borrowers defaulted on their loans. The GAO warns that a borrower who defaults on a reverse mortgage is at risk of losing the home to foreclosure.
“In a 2019 report, we found that defaults increased from 2% of loan terminations in 2014 to 18% in 2018, mostly due to borrowers failing to meet occupancy requirements or paying property taxes and insurance,” the GAO said. “We also found that [Federal House Administration’s ] FHA’s data did not show the reason for a large number of terminations. In 2015, FHA allowed loan servicers to put borrowers who are behind on property charges onto repayment plans to help prevent foreclosures for these seniors. But only about 22 percent of these borrowers had received this option.”
The GAO made 9 recommendations to improve the FHA’s oversight of reverse mortgages. To read the GAO’s full report, go here.