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Gov’t Watchdog: Reverse Mortgages Present Benefits and Risks for Seniors

The Government Accountability Office (GAO) recently published a blog post on its “WatchBlog” devoted to providing additional information and context for seniors who may be considering a reverse mortgage transaction for themselves. The post — derived from a 2019 study on the product category by GAO and its director of financial markets and community investment Alicia Puente Cackley — aims to lay out the potential benefits and risks that a senior should be aware of before entering into a reverse mortgage loan.

“Reverse mortgages saw a surge in popularity during the last financial crisis (2007-2009),” the blog post reads. “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. While they can be used as financial tools to allow older homeowners to stay in their homes, they come with risks.”

Detailing some of the key product features of a reverse mortgage including the lack of a requirement for the borrower to repay the loan while living in the property as long as taxes and insurance is maintained, the post points to risks by detailing an increase in defaults that took place between 2014 and 2018.

“Reverse mortgage borrowers can default if they violate conditions of the mortgage,” the post reads. “For example, a borrower might fail to pay property taxes or homeowners insurance. A reverse mortgage might also default if the borrower no longer occupies the home as a primary residence or has not kept the home in good repair.”

Citing its 2019 report which made a series of recommendations for improving the HECM program, GAO cites the observed increases in defaults and the reasoning behind them.

“In a 2019 report, we found that defaults increased from 2% of loan terminations in 2014 to 18% in 2018, mostly due to borrowers failing to meet occupancy requirements or paying property taxes and insurance,” the blog post reads. “We also found that FHA’s data did not show the reason for a large number of terminations. In 2015, FHA allowed loan servicers to put borrowers who are behind on property charges onto repayment plans to help prevent foreclosures for these seniors. But only about 22% of these borrowers had received this option.”

GAO also restates its assertions from the report regarding FHA’s evaluation of the HECM program, and its oversight specifically of reverse mortgage servicing companies.

“We made 9 recommendations to improve FHA’s oversight of reverse mortgages and testified before Congress about our findings in September 2019,” the post reads.

Read the blog post at GAO’s “WatchBlog,” and RMD’s original coverage of the agency’s 2019 report on the HECM program and its recommendations.