Reverse mortgages, which allow older adults to convert some of the equity in their homes into cash, have been a life line for many house-rich, cash-poor seniors struggling to get by.
But now, with a growing number of reverse mortgages falling into default, these retirees could end up losing their homes.
As the name implies, reverse mortgages work the opposite of traditional mortgages. Instead of the homeowner making monthly payments to the lender, the lender pays the homeowner, in a lump sum or a set amount each month.
Available to people age 62 and older, none of the money -- which might be used for medical bills, home repairs or day-to-day living expenses -- has to be repaid as long as the borrower remains in the home.
Still, the loan can end up in default if the borrower doesn't pay property taxes and homeowners insurance.
The U.S. Department of Housing and Urban Development, which insures virtually all reverse mortgages under its Home Equity Conversion Mortgage program, says it's in the process of compiling official statistics and can't say for sure how many reverse mortgages are in default.
But the industry estimates there are about 30,000 such loans, representing 5 percent of the some 550,000 outstanding reverse mortgages nationwide. Although the number of defaults is still relatively small, a government study suggests they are on the rise.
HUD's inspector general's office in August reviewed four of 16 HECM loan servicers nationwide, finding the number of defaults shot up 173 percent from May 2009 to March 2010.
So far there have not been any foreclosures, HUD and industry experts say, meaning no seniors have been evicted from their homes. The inspector general's report said HUD, which would have to approve the foreclosure process, had been looking the other way because it was loath to foreclose on "senior citizen borrowers."
The report was highly critical of the agency for not having a way to accurately track defaults and, as a result, not knowing the extent of the problem or being able to help borrowers figure a way to become current.
It estimated the government could be on the hook for at least $1.5 billion in the event the roughly 20,000 loans identified in the study ended up in foreclosure.
"Nobody really wants to see situations where older homeowners end up on the street," said Barbara Stucki, vice president at the National Council on Aging, which provides mandatory counseling for homeowners before they can get a reverse mortgage and lately has begun counseling borrowers in default.
"HUD, to its credit, is taking it slowly."
HUD says it is working on a tracking system and expects to release default data "in the near future."
In January, HUD, through the Federal Housing Administration, which insures the loans, instructed lenders to send notices to homeowners with delinquent taxes or insurance and to start working with them to avoid foreclosure. Options include HUD-funded financial counseling from an approved counselor to help set up a repayment plan or explore the possibility of refinancing.
The agency called foreclosure "a last resort" when dealing with elderly clients.
"We found, with a lot of extra help, we have been able to help these people get back on track," Ms. Stucki of the council on aging said.
Still, she predicted some seniors would lose their homes.
"Absolutely. I think they will," she said.
Peter Bell, president of the National Reverse Mortgage Lenders Association, said lenders had been successfully working with delinquent borrowers to get current, sometimes helping them get food stamps or discount prescription drug cards.
He said defaults were a function of the tough economy and the collapse in the housing market.
"In the past, when property values were going up, if someone fell behind in taxes and insurance, there was always the option of refinancing into a new HECM to make money available to pay property charges," he said.
Lenders can make tax and insurance payments for borrowers using their untapped funds, but that money eventually runs out or is not available, such as when a reverse mortgage was taken in a lump sum.
HUD's new guidelines call for lenders to stress to homeowners their obligation to pay taxes and insurance before closing on the loan.
And although eligibility for a reverse mortgage isn't based on income and credit history (the primary factors are age and the value of the home), the agency has introduced a new financial tool to help lenders evaluate a borrower's ability to keep up with property expenses. If there are major doubts, borrowers may be required to establish a reserve fund for those expenses.
Ms. Stucki said reverse mortgages had been going bad for a variety of reasons tied to the economy.
"It's amazing how many people, even in their 70s, are working. Then they lose their job and are struggling to make ends meet." Others are supporting family members who lost their jobs, or they have big medical expenses, she said.
One of the most troubling trends is a growing number of people entering their retirement years with mortgage payments, Ms. Stucki said.
She cited recent studies showing about 35 percent of homeowners 65 and older were still making mortgage payments, up from about 24 percent 10 years ago.
Some of those retirees, who are finding it harder to sell their home and downsize in a depressed real estate market, have been turning to reverse mortgages to defer their mortgage obligation and get rid of burdensome monthly payments. But that leaves them with no equity to tap in an emergency.
"For many people who have not saved enough for retirement, that day of reckoning comes where there is not enough to go around, especially for people who have a mortgage," Ms. Stucki said.
Mr. Bell said defaults in the industry were a "manageable" problem and that reverse mortgages remained "a safe, flexible tool" to meet seniors' financial needs.
"People say, 'Why not take a home equity loan instead?'" he said. "That's fine if you have income and can make the payments. For seniors on a fixed income, making those payments can be difficult." In addition, many seniors may not qualify for a home equity loan based on their income and credit history.
Mr. Bell recommends homeowners choose a reverse mortgage that provides a line of credit to draw on when needed instead of taking a lump sum upfront, which may be easier to spend and will accrue more interest charges.
He said the biggest advantage of a reverse mortgage was "patient money."
"It's funds a homeowner can get today and not make any payments on until they leave the home or pass away," he said.
"It gives enormous ability to help people reorganize their financial picture."
The U.S. Department of Housing and Urban Development, which insures virtually all reverse mortgages under its Home Equity Conversion Mortgage program, says it's in the process of compiling official statistics and can't say for sure how many reverse mortgages are in default.
But the industry estimates there are about 30,000 such loans, representing 5 percent of the some 550,000 outstanding reverse mortgages nationwide. Although the number of defaults is still relatively small, a government study suggests they are on the rise.
HUD's inspector general's office in August reviewed four of 16 HECM loan servicers nationwide, finding the number of defaults shot up 173 percent from May 2009 to March 2010.
So far there have not been any foreclosures, HUD and industry experts say, meaning no seniors have been evicted from their homes. The inspector general's report said HUD, which would have to approve the foreclosure process, had been looking the other way because it was loath to foreclose on "senior citizen borrowers."
The report was highly critical of the agency for not having a way to accurately track defaults and, as a result, not knowing the extent of the problem or being able to help borrowers figure a way to become current.
It estimated the government could be on the hook for at least $1.5 billion in the event the roughly 20,000 loans identified in the study ended up in foreclosure.
"Nobody really wants to see situations where older homeowners end up on the street," said Barbara Stucki, vice president at the National Council on Aging, which provides mandatory counseling for homeowners before they can get a reverse mortgage and lately has begun counseling borrowers in default.
"HUD, to its credit, is taking it slowly."
HUD says it is working on a tracking system and expects to release default data "in the near future."
In January, HUD, through the Federal Housing Administration, which insures the loans, instructed lenders to send notices to homeowners with delinquent taxes or insurance and to start working with them to avoid foreclosure. Options include HUD-funded financial counseling from an approved counselor to help set up a repayment plan or explore the possibility of refinancing.
The agency called foreclosure "a last resort" when dealing with elderly clients.
"We found, with a lot of extra help, we have been able to help these people get back on track," Ms. Stucki of the council on aging said.
Still, she predicted some seniors would lose their homes.
"Absolutely. I think they will," she said.
Peter Bell, president of the National Reverse Mortgage Lenders Association, said lenders had been successfully working with delinquent borrowers to get current, sometimes helping them get food stamps or discount prescription drug cards.
He said defaults were a function of the tough economy and the collapse in the housing market.
"In the past, when property values were going up, if someone fell behind in taxes and insurance, there was always the option of refinancing into a new HECM to make money available to pay property charges," he said.
Lenders can make tax and insurance payments for borrowers using their untapped funds, but that money eventually runs out or is not available, such as when a reverse mortgage was taken in a lump sum.
HUD's new guidelines call for lenders to stress to homeowners their obligation to pay taxes and insurance before closing on the loan.
And although eligibility for a reverse mortgage isn't based on income and credit history (the primary factors are age and the value of the home), the agency has introduced a new financial tool to help lenders evaluate a borrower's ability to keep up with property expenses. If there are major doubts, borrowers may be required to establish a reserve fund for those expenses.
Ms. Stucki said reverse mortgages had been going bad for a variety of reasons tied to the economy.
"It's amazing how many people, even in their 70s, are working. Then they lose their job and are struggling to make ends meet." Others are supporting family members who lost their jobs, or they have big medical expenses, she said.
One of the most troubling trends is a growing number of people entering their retirement years with mortgage payments, Ms. Stucki said.
She cited recent studies showing about 35 percent of homeowners 65 and older were still making mortgage payments, up from about 24 percent 10 years ago.
Some of those retirees, who are finding it harder to sell their home and downsize in a depressed real estate market, have been turning to reverse mortgages to defer their mortgage obligation and get rid of burdensome monthly payments. But that leaves them with no equity to tap in an emergency.
"For many people who have not saved enough for retirement, that day of reckoning comes where there is not enough to go around, especially for people who have a mortgage," Ms. Stucki said.
Mr. Bell said defaults in the industry were a "manageable" problem and that reverse mortgages remained "a safe, flexible tool" to meet seniors' financial needs.
"People say, 'Why not take a home equity loan instead?'" he said. "That's fine if you have income and can make the payments. For seniors on a fixed income, making those payments can be difficult." In addition, many seniors may not qualify for a home equity loan based on their income and credit history.
Mr. Bell recommends homeowners choose a reverse mortgage that provides a line of credit to draw on when needed instead of taking a lump sum upfront, which may be easier to spend and will accrue more interest charges.
He said the biggest advantage of a reverse mortgage was "patient money."
"It's funds a homeowner can get today and not make any payments on until they leave the home or pass away," he said.
"It gives enormous ability to help people reorganize their financial picture."
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