In my visit back to Pennsylvania last week the subject of reverse mortgages came up on several occasions as more and more seniors have little recourse other than to tap their home equity in order to pay, primarily, medical bills. Long-term care costing upwards of $10,000 a month (i.e., after the three months that Medicare pays) will quickly wipe out whatever savings most elderly have, leaving them with few alternatives other than a reverse mortgage that, surprisingly, are now taken out as a lump sum by a margin of two-to-one.
Until reading this Wall Street Journal story, I didn’t even realize it’s possible to default on these loans, but, clearly it is, and those default rates are on the rise, but help is on the way.
Defaults occur when a borrower fails to pay property charges, including property taxes and homeowners insurance. Of the almost 600,000 reverse mortgages outstanding, 9.8% are currently delinquent, up from 8% in 2011, the first year for which statistics are available, according to the federal Department of Housing and Urban Development, whose Federal Housing Administration insures virtually all reverse mortgages.
Delinquencies have increased in recent years as up to 70% of borrowers have opted for lump-sum payouts.
“For many homeowners, taking all eligible cash upfront results in insufficient cash flow in later years for property upkeep, taxes and insurance,” HUD warned in a November report to Congress.
The good news: Help is available. Under guidelines HUD released in 2011, lenders—before initiating foreclosure proceedings—are required to notify borrowers who fall behind of free financial counseling. Such sessions can help them get back on track by, among other things, tapping benefit programs for some older individuals.
I haven’t seen any data on this recently, but reverse mortgages have got to be a booming business for banks with, as I recall, some very big up-front fees.