Reverse mortgages “saw a surge in popularity” as a response the most recent major financial crisis before the present one and today’s homeowners “facing financial struggles under the current economic crisis caused by the coronavirus pandemic might also be considering a reverse mortgage to supplement their income,” the Government Accountability Office has said.
“While they can be used as financial tools to allow older homeowners to stay in their homes, they come with risks,” it added in an online posting.
Reverse mortgages allow homeowners to essentially borrow against the value of the home. Unlike a standard mortgage, they do not require a borrower to repay the loan as long as they meet certain conditions. Also unlike standard mortgages they do not have fixed terms but instead the loan is in place until the borrower dies, pays off the loan, sells the home or defaults.
The GAO stressed that a borrower who defaults, however, is at risk of losing the home to foreclosure. It noted that a default can be declared for a number of reasons, including that failure to pay property taxes or homeowners insurance, failure to keep the home in good repair, or no longer using the home as a primary residence.
It cited a report it issued in 2019 finding that defaults accounted for 18 percent of terminations of reverse mortgages the prior year, “mostly due to borrowers failing to meet occupancy requirements or paying property taxes and insurance.”
It noted that most reverse mortgages are administered by a subagency of the Federal Housing Administration, which it said “could do a better job evaluating the performance of its reverse mortgage program and overseeing the companies that service these loans.”
While the FHA allows loan servicers to put borrowers who are behind on property charges onto repayment plans to help prevent foreclosures, only 22 percent of such borrowers had received that option, it added.