Add the reverse mortgage industry to the list of federally insured housing programs sure to please lenders and consumers, and dump its mistakes on taxpayers.
As former U.S. senator and now industry shill Fred Thompson will tell you, reverse mortgages allow elderly homeowners – one spouse must be at least 62 years old to qualify – to take out loans against the equity they have in their homes. The loans do not have to be repaid until the owner dies, or sells the home.
The mortgages were supposed to provide a monthly income stream to help seniors enjoy an income beyond what Social Security affords them, with no risk of losing homes they may have lived in for decades. The loans typically carry a relatively low adjustable rate of interest.
Problems developed as collapsing home values sucked the equity out of homes that backed the mortgages. Owners were not keeping up with the taxes, insurance or maintenance. Survivors of dead spouses found themselves being dunned for the full amount of the loan.
The AARP, among others, started filing lawsuits, and the major banks walked away from a business that was earning them more black eyes for foreclosures on widows than it was profits. With less equity to draw on, potential new customers stayed home. There were less than one-half as many loans made last year – 54,591 – as there were in 2009. Still, more than 700,000 reverse mortgages remain in place.
But a niche for the big banks was a big deal for smaller lenders, who have shifted the focus of their lending to up-front, lump-sum loans carrying higher interest rates than the lines of credit. As Thompson says in his warm Tennessee accent, the funds are available to pay mortgage debt, medical bills, or credit card arrears.
Once spent, however, there may be nothing left to keep up with the property taxes and other expenses.
If this sounds like the come-on that a few years ago enticed millions of American homeowners to trade equity for a personal watercraft or trip to Disneyland, it is. And with the same dismaying results. Almost 10 percent of reverse mortgages backed by the Federal Housing Administration are delinquent, four times pre-recession levels (Note: Other FHA programs are in worse shape).
The U.S. House of Representatives has passed a bill that would reform the government role in the reverse mortgage market, and the Senate is working on the issue. The Obama administration has asked Congress for emergency authority to cap the up-front loans; with provisions included that would put some money in escrow to assure taxes and insurance get paid.
The FHA can take other measures on its own if Congress fails to act.
The housing recovery, if sustained, may alleviate the pressure on reverse mortgage holders, and the risk to taxpayers backstopping defaults. But reforms, if not a reassessment of why the government should insure these mortgages at all, must come soon; before millions of self-indulging but cash-strapped baby boomers turn their homes into income instead of the other way round.