Questions Arise about Reverse Mortgages

On the front page of the AARP website Tuesday was a column from personal finance journalist Liz Pulliam Weston, where she noted that the federally backed Home Equity Conversion Mortgage comes in a cheaper version than what is common on the market.

The retiree organization is taking a stronger stance on reverse mortgages. Last month, it issued a critical report on reverse mortgages — popular with retirees and the elderly — noting that loan defaults and foreclosures have become a major issue for many people because the slump in the housing market has led to many houses being worth less than the mortgage.

Unlike forward mortgages, where defaults result from the failure to make loan repayments, defaults with reverse mortgages are mainly due to the failure to pay property taxes or the required homeowners insurance. The number of loans that are delinquent in making such payments has grown to an estimated 30,000, or nearly 6 percent of all outstanding loans.

And on Tuesday, AARP took further action, filing a lawsuit against the Department of Housing and Urban Development, arguing that changes in federal policy for reverse mortgages are forcing older homeowners into foreclosure.

AARP's case centers on reverse mortgages where only one spouse signed the loan document. HUD changed its policy in late 2008 so that surviving spouses who are not named on the mortgage must pay the full loan balance to keep the home, even if the debt exceeds the current property value.

A reverse mortgage is a loan secured by the home that requires no repayment until the last borrower dies, moves permanently, or sells the home. Such loans are generally nonrecourse loans — meaning that, under most circumstances, neither the borrower nor the heirs will owe more than the home is worth — at least until HUD changed its policy. You have to be 62 to be eligible for such a loan.

Loans insured by the Home Equity Conversion Mortgage program constitute more than 90 percent of all reverse mortgages. Since the program began in 1989, more than 660,000 loans have been made — three-quarters of them in the past five years. So you can see where a change in government policy regarding reverse mortgages could reverberate through the midlifer crowd.

Since 1990, the aveage age of reverse mortgage borrowers has declined from 76.7 years to 72.9 years, according to HUD data. That means that people are living longer with such mortgages.

The issue is that the federal government, which has already paid out billions for the losses at home lenders Fannie Mae and Freddie Mac, is now leery about losing money on gauranteeing reverse mortgages. Another government entity, Ginnie Mae, is now the primary backer of such debt. It's raised the mortgage insurance premium paid by borrowers by 150 percent and rolled out the cheaper version mentioned by Weston to increase the number of low-risk loans in its pool.

For borrowers who need a small amount of money for a short period of time, then the new reverse mortgages are a good buy. But long-term, the interest rates and origination fees are higher than the regular reverse mortgage.

Others are also examining the issue of reverse mortgages given the changes in the housing market. The Federal Reserve Board is exploring new disclosures to show how loan balances grow over time so that consumers will have a more understandable tool for planning the use of their home equity over their retirement years. Data indicates that borrowers are taking out larger loan amounts earlier in their retirement years.

Back in January, I wrote about the possibilities for reverse mortgages, and I still believe in them. But the AARP's lawsuit raises some legitimate questions for anyone considering one of these as an option for providing money during the retirement years.