Reverse Mortgages Become Sinkholes for Many

Reverse mortgages, which allow seniors age 62 and older to tap into their home equity and receive an annuity payment during their retirement years, have grown in popularity; but so have the potential pitfalls, according to a new report from the National Center for Policy Analysis (NCPA).

“Reverse mortgages advertised on TV sound like a super deal for seniors, but they are complicated and expensive,” says author and NCPA Senior Fellow Pamela Villarreal.  “The anticipation of monthly income from a reverse mortgage is often overshadowed by misunderstandings over how these agreements work.”

Like a traditional home mortgage, reverse mortgages accrue interest over time, and lenders charge an origination fee of up to $6,000 as well as annual charges for loan maintenance and mortgage insurance.  Moreover, reverse mortgages can go into default if a borrower fails to pay property taxes, homeowner’s insurance or maintain the home.

“Reverse mortgages have a default rate of 9.5 percent,” says Villarreal.  “While this rate seems small, it is almost twice the default rate of traditional home mortgages.” 

The Federal Housing Administration insures reverse mortgages, which provides lenders with a strong incentive to issue them, because they can claim compensation in the event of a default. But this government support means that taxpayers could foot the bill for any number of defaulted mortgages.

“In 2012, the FHA had about $140 billion in outstanding reverse mortgage loans,” says Villarreal.  “This means that a default rate of nearly 10 percent could cost taxpayers billions of dollars.”

The Ups and Downs of Reverse Mortgages:

The National Center for Policy Analysis (NCPA) is a nonprofit, nonpartisan public policy research organization, established in 1983. We bring together the best and brightest minds to tackle the country’s most difficult public policy problems — in health care, taxes, retirement, small business, and the environment. Visit our website today for more information.