The Bad Reverse Mortgage Problem

For many seniors, the home they own is their biggest investment. It’s their lifesaver when money gets tight. For one thing, they can use the home’s equity by taking out a reverse mortgage home loan in Michigan.

As the bottom fell out of the US housing market in 2007, many reverse mortgages have gone bad. As a result, taxpayers are at risk of being stuck with the bill.

Bad Reverse Mortgages

Bad reverse mortgages develop like this:

A senior takes out a reverse mortgage back in 2006, when property values are high. With $100,000 in home value, the homeowner takes out a reverse mortgage of $65,000, and spends it all. The housing market then crashed, and the home’s value went down to $66,000.

During the last 7 years, interest on the home loan and fees has been building up. As a result, the homeowner now owes more than the home is worth, which is about $74,000. The difference between the home’s worth now and the amount the homeowner owes is about $8,000.

This difference is the amount the Federal Housing Administration (FHA) is stuck with, as it tries to prevent losses.

With this problem increasing in magnitude, it has now caught the attention of lawmakers. Noticing that the federal government is losing a fortune on reverse mortgages, senators are concerned that the losses are only piling up. As an unfortunate result, the FHA might be forced to turn to taxpayers for a bailout.

It’s not fair to saddle the taxpayers with this burden, however. As such, the people using these programs should pay for the costs.

What would these mean for the seniors counting on reverse mortgages?

With Congress working on making sure mortgagors do pay, and the full-draw, fixed-rate home mortgage no longer available, seniors almost have no options left. In this case, consulting specialists, like might be the best solution.

About Cody Lederman 28 Articles
Cody Lederman is a Certified Public Accountant for an accounting firm. He's also a professor in different taxation courses in a university in New York.