Why Are There Reverse Mortgages?
The U.S. senior citizen population is growing. Between 1990 and 2000, the number of individuals at least 65 years of age increased from 31.2 million to nearly 35 million. Many more are reaching the minimum social security retirement age; by 2010, more than 50 million people in this country will be at least 62 years old.1 Life expectancies are lengthening, creating the need for retirement income to last longer than in previous generations. However, according to the U.S. Government Accountability Office, “Efforts to increase personal savings outside pension arrangements seem to have had only marginal success.”2 As a result, older people who need additional funds to cover general living expenses are turning to the reverse mortgage lending market in greater numbers.
Historically, the largest investment of the average American household is its primary residence. A recent study by the American Association of Retired Persons (AARP) indicates that more than 80 percent of households over the age of 62 own their own home, with an estimated value of $4 trillion.3 Until recently, equity in these homes has not been tapped, but now it represents a likely source of retirement income and an opportunity for significant growth in the reverse mortgage lending industry. This article describes the features of reverse mortgage loan products, identifies key consumer concerns, and provides an overview of potential safety and soundness and consumer compliance risks that lenders should be prepared to manage when implementing a reverse mortgage loan program.
What Is a Reverse Mortgage?Reverse mortgage loans are designed for people ages 62 years and older. This product enables seniors to convert untapped home equity into cash through a lump sum disbursement or through a series of payments from the lender to the borrower, without any periodic repayment of principal or interest. The arrangement is attractive for some seniors who are living on limited, fixed incomes but want to remain in their homes. Repayment is required when there is a “matu-rity event”—that is, when the borrower dies, sells the house, or no longer occupies it as a principal residence.
Almost all reverse mortgage lending products are non-recourse loans: Borrowers are not responsible for deficiency balances if the collateral value is less than the outstanding balance when the loan is repaid. This situation, known as cross-over risk, occurs when the amount of debt increases beyond (crosses over) the value of the collateral.
Reverse mortgages are fundamentally different from traditional home equity lines of credit (HELOCs), primarily because no periodic payments are required and funds flow from the lender to the borrower. The servicing and management of this loan product also differ from those of a HELOC