Reverse Mortgages: Soon to be a Public Burden?

For many seniors, the home they own is their biggest investment -- and can be a lifesaver when money gets tight. For one thing, they can use the equity in that home by taking out a reverse mortgage.

But since the bottom fell out of the housing market in 2007, many of those reverse mortgages have gone bad and taxpayers could get stuck with the bill. Let's look at the problem of bad reverse mortgages.

A reverse mortgage on Tom Moore's home was just what he needed for peace of mind. He used the money to pay off bills, and under reverse mortgage rules, he will not have to pay off that loan until he dies or sells the home. "I thought it might be the lifeboat the good Lord is sending by, that I need to jump in."

Moore's finances are in better shape now, but many other seniors have found themselves in a different situation.
Here's how the problem develops.. A senior takes out a reverse mortgage back in 2006, when property values are high. Using the example of $100,000 in home value, the homeowner takes out a reverse mortgage of $65,000 and spends every penny. Then the housing market crashes and the home is now worth $66,000. During the last 7 years, interest on the loan and fees has been building up, and how the homeowner owes more than the home is worth, amounting to about $74,000. The difference between what the home is worth now, versus what the homeowner owes on the reverse mortgage, is about $8,000.

That's the amount the Federal Housing Administration (FHA) gets stuck with. because most reverse mortgages are government backed -- meaning, the F-H-A steps in to prevent losses.

When you consider this scenario is playing out over and over again because of the housing market crash, you begin to understand the magnitude of the problem. That fact has now caught the attention of lawmakers.

"The federal government was losing a fortune on these reverse mortgages," says Tennessee Senator Bob Corker, who serves on the Senate Banking Committee. "It was amazing how much were were losing. on them."

Senator Bob Corker says he is concerned about the losses piling up from bad reverse mortgages, which could be as high as 115 billion dollars. The danger is that those losses could force the FHA to turn to taxpayers for a bailout.

Is it fair to saddle that debt on the backs of taxpayers through the FHA?

"No it is not" Senator Corker says. "The people who use these program should pay for the cost of these programs."

He says Congress is working on the problem.

"If the government is going to be, quote, the backstop for reverse mortgages," he says, "then we need to make sure that the people that are getting the mortgages are paying for them, not the taxpayers."

Meanwhile Tom Moore is just grateful the FHA guarantees reverse mortgages like his and hopes he never finds himself upside down. "I'd be lying if I said I didn't feel a bit guilty about using the government," he says, "and someone else paying my mortgage for me."

As Senator Corker alluded to, for now, the full-draw, fixed-rate mortgage like the one Tom Moore has, is not available anymore. The F-H-A has now combined that reverse mortgage program with another one, that does lower the amount of money that borrowers would be eligible to receive.

Corker tells us, the Senate Banking Committee will consider the multi-billion dollar bailout the F-H-A wants, in the coming weeks.

{A href=""}By Calvin Sneed

close video ad
Unmutetoggle ad audio on off