Are reverse mortgages headed in reverse? Based on forthcoming federal rule changes for seniors who expect to apply for one, you might think so. But as a taxpayer, you might say, bravo: Toughening up qualification standards — including such basics as checking applicants’ credit, income and cash flows — is a leap forward, long overdue.
Last week the Federal Housing Administration, whose reverse mortgage program dominates the field, adopted guidelines tightening eligibility standards as part of an effort to avoid additional losses to government insurance funds. The changes, which are scheduled to take effect in less than four months, come on top of earlier reductions in maximum financing amounts that have resulted in sharp declines in the numbers of new loans being made. Volume has plunged by more than 50 percent in the past five years alone.
Aggressively marketed by entertainers such as Henry “Fonzie” Winkler and Robert Wagner, reverse mortgages are targeted at seniors 62 or older. They allow borrowers to tap into their home equity to obtain cash. Unlike standard mortgages, there are no monthly payments required and the amounts borrowed need not be repaid until the seniors die, move out or sell their houses.
Originally intended primarily as an income supplement tool for retirees, the program grew rapidly during the last decade. But it also became a nightmarish money pit for taxpayers as thousands of borrowers defaulted on their obligations to pay local property taxes and insurance premiums, and the values of many of the houses securing the mortgages sunk in the wake of the recession. In 2012, one out of 10 borrowers was in default. Ultimately the Treasury had to bail out FHA’s insurance fund with a $1 billion-plus cash infusion.