Can You Lose Your Home With A Reverse Mortgage?

Reverse mortgages have gained popularity since the economic downturn, with seniors 62 years old and older opting for this unique financial instrument.

Instead of making monthly mortgage payments, those with a reverse mortgage tap their equity, receiving monthly payments as long as they remain in the house. For many seniors in these uncertain times, it seems safe and secure.

But Lyn R. Link, who calls himself "the reverse mortgage critic," says people with reverse mortgages are in fact losing their homes to foreclosure. It's not that they're missing mortgage payments -- there are none.

But Link says the U.S. government has grown concerned recently that a large number of reverse mortgage holders have stopped paying property taxes, stopped their insurance payments, and have not maintained their properties. All are required under the terms of a reverse mortgage.

Unknown number of defaults

The U.S. Department of Housing and Urban Development (HUD) says it can't give an exact number of reverse mortgages currently in default.  However, a recent article in U.S. News and World Report quotes a source putting defaults at 20 percent. 

"With 525,000 active reverse mortgages, that would put those loans in noncompliance at 105,000," Link wrote on his blog. " I don't believe it's that high based on other sources, but until HUD can provide exact numbers we just won't know."

In any case, he says, that's too many senior homeowners with a reverse mortgage facing the prospect of losing their home. Even with plans to help borrowers catch up on their taxes and insurance, he says lenders may have no choice but to proceed with foreclosure to cure the loan default.

Link says he isn't a critic of all reverse mortgages, but says he's worried some lenders are steering seniors into reverse mortgages that aren't suitable for their needs. On the other hand, he says, the loans are very profitable for the lenders.

Déjà vu

If that has a familiar ring to it, it sound eerily similar to the way millions of borrowers were steered into subprime loans in the early part of the last decade, helping to bring on the housing collapse.

While a fixed rate is most desirable with a conventional mortgage, Link maintains the opposite is true in reverse mortgages. He says a senior is much better off with an adjustable rate, which he says is more flexible and help preserve equity.

"Despite the disadvantages with the fixed rate, in nine short months it went from 2.7 percent of the total reverse mortgages made monthly to 68.9 percent: a staggering 2,452 percent increase," Link said.

How it works

A reverse mortgage enables homeowners 62 and older to convert the equity in their home into cash for any purpose. The best part is that there is no repayment for as long as the homeowners live in their home.  Credit and income are not used to qualify, and Social Security and Medicare benefits are not affected.

When the homeowners no longer live in their home, the reverse mortgage is typically repaid from the sale of the home. There is no debt left to heirs since the lender can only look to the property for repayment. Reverse mortgages are growing in popularity as public awareness increases and associated costs continue to decrease.

The Department of HUD recently approved a single national loan limit of $625,500 from the previous limits ranging by county from $200,160 to $362,790. This new higher loan limit is expected to increase the number of retirees who qualify for a reverse mortgage, and to enable existing reverse mortgage borrowers to refinance their reverse mortgage to receive more money from their home.