Reverse Mortgage Troubles

A reverse mortgage allows an elderly homeowner to access the equity value of a house without having to sell the house. It is easier to qualify for a reverse mortgage than it is to qualify for a home equity loan. Reverse mortgage troubles involve the additional fees, expenses and interest payments that the homeowner must make. Trouble can also occur if the value of the house drops below the amount of money that the homeowner receives from the bank.

History

• One precursor to the reverse mortgage is the sales-leaseback arrangement, in which the elderly homeowner sells the house and then pays rent while living in the house. Another precursor is the reverse annuity mortgage, where the homeowner sells the house and purchases an annuity. The annuity then proceeds to pay the mortgage bill, and the homeowner keeps the additional money the annuity provides. Both of these options became available in the 1970s, according to the University of Wisconsin.

Government Risks

• The reverse mortgage creates risk for the lender, since the value of the property may drop. The Federal Housing Administration (FHA) insures reverse mortgages for qualifying homeowners. The homeowner must be older than 62 and have little or no balance remaining on the current mortgage to qualify for an FHA reverse mortgage. The government takes a large loss if many people take out FHA reverse mortgages and housing values drop. The FHA estimates a loss of $800 million on these mortgages for fiscal year 2010, according to U.S. Sen. Claire McCaskill.

Loss Prevention

• A reverse mortgage provides additional income to the homeowner until the homeowner dies. If the homeowner lives only a short time after taking out the reverse mortgage, the bank makes few payments and keeps the house anyway. An option known as a certain annuity requires the bank to make payments for 10 years even if the borrower dies earlier, according to the University of Wisconsin. This arrangement provides additional income to beneficiaries of the estate.

Warning

• Some reverse mortgage sales agents are very aggressive and use high-pressure tactics to sell these mortgages to elderly homeowners. Loan counselors have a responsibility to explain the drawbacks of these mortgages, such as their high costs and fees in comparison with other methods of accessing home equity. According to Sen. McCaskill, the Housing and Economic Recovery Act of 2008 added additional safeguards, such as requiring a reverse mortgage sales agent to hold FHA certification to make FHA-insured loans.

Types

• There are several types of reverse mortgages available. The tenure mortgage pays the homeowner for as long as the homeowner lives in the house; the term provides payments over a fixed period of time, and the line of credit allows the homeowner to borrow money, similar to a home equity line of credit. Line of credit mortgages are the most popular type of reverse mortgage, but they create risks for the homeowner since the person will not receive any additional income after using up the line of credit.