Reverse Mortgage Defaults: Do These Loans Carry a Higher Risk?

According to statistics compiled by the National Reverse Mortgage Lenders Association, between 10,000 and 15,000 Home Equity Conversion Mortgages (HECMs) are currently in technical default. Some lenders have even foreclosed on seniors who could not arrange a payment plan or otherwise get their loan of out default.

Initially, this may come as a shock. With an HECM, borrowers are not required to make monthly payments. Still, it is possible to default on the loan agreement, and unfortunately, some seniors appear to be doing so.

The Key Points to Maintaining a Reverse Mortgage

There are a few things that seniors must do to maintain an HECM. The first is to keep up with home repairs. If the home falls into disrepair, the loan will be placed in technical default. In some cases, a borrower's loan agreement might feature a “repair rider.” A repair rider is an agreement that gives seniors a specific amount of time after closing their loan to make certain necessary repairs. Seniors who fail to uphold their part of the agreement will also be placed in default.

However, the majority of all reverse mortgage defaults have to do with borrowers’ homeowners insurance and property taxes. Seniors must maintain all necessary insurance throughout the life of their loan. The required insurance will depend on the individual’s geographical area. Some areas only require basic hazard insurance, while other areas also require borrowers to carry flood insurance. As long as borrowers keep up with these two costs and continue to use their home as their principal residence, their loan will be safe from default.

The Truth About Reverse Mortgage Defaults

News of reverse mortgage defaults are frequently making headlines. However, the truth is, reverse mortgages are no riskier than home equity loans or forward mortgages. In fact, since borrowers are not required to make monthly payments, these loans should be much safer.

To prevent future defaults, reverse mortgage counselors are required to educate seniors on their responsibilities as a borrower. Many lenders also work to ensure that borrowers understand the long-term implications of these loans. Still, the Department of Housing and Urban Development (HUD) has decided to reduce the risk of default by implementing financial assessments. In the future, lenders will be required to assess seniors based on their credit and income. When this occurs, seniors might be denied a reverse mortgage if their income or credit score is too low.

While financial assessments are not yet required, there are steps seniors can take to protect themselves against default. To ensure that one’s insurance and taxes get paid, seniors can set aside a portion of their proceeds to cover these costs. When a senior chooses this option, his or her loan servicer will be the one to handle all insurance and tax payments.

Future defaults can also be avoided through careful planning and education. Seniors who know that they cannot afford to pay their property taxes and insurance should not pursue a reverse mortgage. The bright side is that, as long as seniors keep up with these costs, their loans are completely safe and will be safe for as long as they remain in their home.