The vast majority of reverse mortgages in the U.S. are federally insured loans known as Home Equity Conversion Mortgages (HECMs), which represent a tiny fraction of the mortgage market. The Federal Housing Administration (FHA) has insured about 1.3 million HECMs since 1990. By contrast, the Mortgage Bankers Association estimates that some 13.5 million purchase and refinance loans were closed in 2021 alone, when economic tailwinds drove borrower demand to new heights.
About one in three HECMs originated since 1990 remain active today. Despite their comparatively small market size, they have an outsized impact for many senior households. Even though the life expectancy for the average American has declined since the start of the COVID-19 pandemic, the senior population is poised to grow in the coming years. AARP reports that 10,000 people turn 65 each day and this demographic is expected to double by 2050.
“There are more and more senior homeowners that are looking to incorporate the use of home equity into a strategic part of their retirement-income plan,” says Steve Irwin, president of the National Reverse Mortgage Lenders Association, a trade group that represents 300 member companies.
“Some people would say that reverse mortgages, almost by their design, are going to eventually terminate in foreclosure.”– Sarah Bolling Mancini, senior attorney, National Consumer Law Center
Unlike forward mortgages, reverse mortgages do not require monthly repayments, but this does not eliminate the risk of default or foreclosure. A report released this past February by the National Consumer Law Center (NCLC) concludes that “reverse mortgages end in foreclosure much more often than they should.” Chief among the reasons cited are borrowers who fall behind on their property tax and homeowners insurance bills, as well as heirs who struggle to repay the reverse mortgage once the borrower dies or leaves the home.
“Some people would say that reverse mortgages, almost by their design, are going to eventually terminate in foreclosure,” says NCLC senior attorney Sarah Bolling Mancini, the lead author of the report. “Even though the loan eventually is going to come due and payable after the death of the borrower … it could be satisfied through a market sale, through a short sale, through a deed in lieu.”
The report calls for federal agencies to make several improvements to the HECM servicing process. More specifically, it recommends the FHA add flexibility to its loss-mitigation policies, and it seeks to have the Consumer Financial Protection Bureau include reverse mortgages under existing consumer protections covered by the Real Estate Settlement Procedures Act.
Reverse mortgage borrowers retain responsibility for property charges (i.e., taxes and insurance). In many cases, these costs are paid on their behalf through a life expectancy set-aside (LESA) account. The FHA implemented these accounts in 2015 as part of a financial assessment that determines the borrower’s ability to afford ongoing housing expenses. For example, if a borrower is required to have one of these accounts, is expected to live for 15 years and has yearly property charges of $5,000, then $75,000 is deducted from the loan proceeds.
“We have seen that this financial assessment and the use of these set-asides has dramatically decreased the amount of delinquencies on these reverse mortgages,” Irwin says. “It has been a huge improvement to the program.”
In situations where a LESA is not required and the homeowner fails to stay current on property charges, the servicer covers the expenses. The loan can then go into default if the homeowner doesn’t repay the servicer. Consumer advocates are calling for the FHA to push for repayment plans, rather than foreclosures, in the majority of these cases and for servicers to be initially reimbursed through the FHA’s insurance fund. Additionally, the NCLC recommends that loans with a repayment plan should be removed from default status, thereby reducing the servicing costs and ultimately benefiting the insurance fund.
“There are reasons why homeowners get confused about this,” Mancini says. “They’ve been told that they have no mortgage payment anymore. They’re used to having (taxes and insurance) escrowed. They’re not used to going to the tax assessor and paying, you know, $5,000 a year. And it’s a really large one-time cost for an older adult living on limited income.”
Irwin notes that all HECM loan applicants must complete independent third-party counseling prior to approval. These educational sessions are designed to cover the borrower’s financial responsibilities in detail, which should eliminate confusion around property taxes and insurance.
“We maintain a consumer website, ReverseMortgage.org, which has several consumer guides that we make available to our members,” Irwin says. “We continually have educational outreach to new members, new lenders, on servicing timelines and work to align consumer expectations to the realities of how these products are serviced.”
Mancini maintains that the quality of counseling varies by company. She has heard reports of borrowers who’ve received nothing more than a 30-minute phone session. Although loan originators are not responsible for these tasks, they should be able to serve as knowledgeable, trusted advisers.
“I do think that originators could play a big role in saying, ‘Look, you’re going to need to get to know your servicer. And by the way, it might change more than once, but here are the things that can go wrong if you’re not reading the letters from them and not picking up the phone when they call,’” Mancini says. ●