Reverse mortgages backed by the Federal Housing Administration (FHA), otherwise known as home equity conversion mortgages (HECMs), account for almost all reverse mortgages in the United States, according to the National Reverse Mortgage Lenders Association. In 2021, more borrowers entered into reverse mortgages—49,207—than the year before.
However, other ways to tap home equity—such as home equity loans, home equity lines of credit (HELOCs), and cash-out refinancing—generally are more popular. In 2018, the most recent year for which data is available, home equity loans, HELOCs, and cash-out refinances totaled 2.506 million, according to data from the Home Mortgage Disclosure Act. That same year, there were 33,000 reverse mortgage originations.
- Federally insured reverse mortgages bounced back in 2021 close to pre-pandemic levels but still remained well below its peak a decade earlier.
- In 2021, the Federal Housing Administration’s (FHA’s) Mutual Mortgage Insurance Fund, which backs insurance on reverse mortgages, had its first year of positive financial performance since 2015.
- More women than men continue to use reverse mortgages.
How HECMs Work
Available to homeowners with considerable home equity who are age 62 or older, HECMs let homeowners borrow against the value of their home. Unlike a forward mortgage—the type used to buy a home—a reverse mortgage doesn’t require the homeowner to make any loan payments, making reverse mortgages a financial strategy for people who find themselves short on cash in retirement. The loan is not repaid until the borrower passes away or moves out.
HECMs are the most common type of reverse mortgage in the United States. Also called an FHA reverse mortgage, this type of mortgage is only available through an FHA-approved lender.
Through its parent agency, the U.S. Department of Housing and Urban Development (HUD), the FHA annually reports on the number of HECM endorsements as part of its report on its overall mortgage insurance program. In HUD and FHA terminology, an endorsement is a formal agreement on a mortgage contract adding the loan to the FHA mortgage insurance program, which insures lenders against losses from default on mortgages.
The most recent annual report provides a statistical snapshot of the federal HECM program, and thus of the overall picture of reverse mortgage lending. In the federal fiscal year (FY) 2021, which ended on Sept. 30, 2021, the FHA gave a mortgage insurance endorsement to 49,163 HECMs. That’s up from 41,825 in FY 2020 and 31,272 in FY 2019. In FY 2009, the FHA had given 114,425 HECM endorsements.
Who Gets Reverse Mortgages?
Federally insured reverse mortgages are a bit more popular among women than men, according to HUD. More than a third (36%) of them served single female borrowers, and about one in five (21%) served single male borrowers. Four out of five (41%) served multiple borrowers in FY 2021.
Among other demographics, 72% of HECM endorsements served White borrowers, 6.37% served Black borrowers, and 5.41% served Hispanic borrowers. By comparison, Black borrowers comprised 17% of overall FHA-backed mortgage insurance and Hispanic borrowers comprised about 25%. Reverse mortgage numbers were more in line with the remainder of the mortgage market: About 6% of borrowers were Black and 10% Hispanic, according to the HUD annual report. (Disclosure of race and ethnicity is voluntary among borrowers.)
In FY 2021, the average borrower age increased slightly, to 73.95, from 73.51 in FY 2020.
Line of Credit Dominates
HECM borrowers have several options for getting cash. Each plan has pros and cons, and the type of payment will affect how much money the borrower receives in the short and long runs, not to mention how quickly they will use up their home equity.
Most borrowers (approximately 90%) with HECMs opted for the line-of-credit payment option in FY 2021. Other payment options are a lump sum payment, monthly payments received for a fixed term of months, or equal monthly payments during the tenure of the loan.
Insurance Fund Trends Down
In FY 2021, HECM claims on the FHA Mutual Mortgage Insurance Fund totaled $2.99 billion, down from $6.23 billion in FY 2020.
Most of the claims were from cases assigned to HUD when the mortgage reaches 98% of the maximum claim amount set by the FHA. Most of the other claims came from cases when the borrower no longer occupies the home, as the rules require, and the property is sold at a loss.
The reverse mortgage insurance program’s finances showed improvement, HUD noted. It was the first year of a positive financial performance of the HECM fund since FY 2015, HUD said in the annual report. HUD cited the stand-alone capital ratio of 6.08% as of Sept. 30, 2021, compared with a negative 0.78% capital ratio from the previous fiscal year.
In FY 2021, HECM borrowers withdrew an average of 73.26% of their available principal limit on their initial draw, up from about 67.7% in FY 2020 and 63.1% in FY 2019. Large up-front draws cause faster compounding of balances and faster depletion of borrower equity, HUD noted.
California, Florida Lead
California represented nearly 36% of all HECMs in FY 2021. The next biggest states were Florida at 6.19%, Texas at 4.07%, New York at 3.14%, and Pennsylvania at 1.08%. These five states also represented nearly 51% of all HECM loans.
The Least Popular Option
While federally backed reverse mortgages gained back some of their popularity in the past year, other forms of tapping home equity remain far more popular. In a 2020 report on reverse mortgage usage, the Urban Institute drew on statistics from FY 2018, when HUD reported 48,329 FHA-backed HECMs. By comparison that year, there were 1.12 million HELOC loans, nearly 1.1 million cash-out refinancing mortgages, and 296,000 home equity loans with monthly repayments.
Proposed AARP Reforms to Make Reverse Mortgages Safer
Lower costs: The origination fee for HECM refinances should be lower than for the original loan. States should limit fees and interest rates of proprietary reverse mortgages, aka jumbo reverse mortgages.
Lender responsibility: The Consumer Financial Protection Bureau (CFPB) should require lenders to incorporate consumer protections; lenders should give borrowers information on all HECM loan options, even if they do not offer them.
Truth in advertising: Federal regulators should ensure that disclosures, sales practices, and advertising of reverse mortgage loans are not misleading or deceptive. They should not give the impression that a reverse mortgage is a benefit rather than a loan. They should require advertisers to make it clear that celebrities appearing in the ads are paid spokespeople.
Scams and fraud: HUD should take enforcement action against and deter reverse mortgage fraud and scams.
Public benefits eligibility: Proceeds from reverse mortgages should not affect homeowners’ eligibility for public benefits programs.
Researchers have identified potential reforms to make reverse mortgages more appealing to seniors who would like to bolster their retirement financial picture. One obstacle is the high up-front cost associated with origination fees compared with other home equity vehicles. Proposals have ranged from bringing back a former FHA program that discounted up-front insurance premium costs to having the federal government make the loans directly. Another idea is to use some of the loan proceeds to establish an annuity to help borrowers cover their property taxes and insurance and thus lessen the risk of foreclosure for getting behind on these obligations.
How much equity can you get on a reverse mortgage?
The proceeds that you’ll receive from a reverse mortgage will depend on the lender and your payment plan. For a home equity conversion mortgage (HECM), the amount that you can borrow will be based on the youngest borrower’s age, the loan’s interest rate, and the lesser of your home’s appraised value or the Federal Housing Administration (FHA’s) maximum claim amount, which is $970,800 as of Jan. 1, 2022. However, you can’t borrow 100% of what your home is worth—or anywhere close to it.
What is the downside of a reverse mortgage?
While a reverse mortgage can solve some cash flow problems, it is not an action to take lightly because it’s probably taken years of hard work to accumulate your home equity. Taking out a reverse mortgage means spending a significant part of that equity on loan fees and interest. A couple of disadvantages to consider are the hefty fees and high interest rates that can eat up a substantial portion of a homeowner’s equity.
Can a family member take over a reverse mortgage?
If you inherit a reverse mortgage from your parents or grandparents, you will need to pay back the mortgage in full. To do that, you can either pay the lender from your own funds, refinance the property, or sell it.
The Bottom Line
The use of reverse mortgages to tap home equity among homeowners age 62 or older has increased in the past five years, but it remains far below its 2009 peak. Reverse mortgages remain far less popular than home equity loans. Academic researchers have identified ways that the main federal program backing reverse mortgages through the FHA could be adjusted. These proposals are intended to make reverse mortgages more appealing to older homeowners who would like to use their home equity without selling their house.