Reverse Mortgages: Background and Issues

Publication Date: January 2007

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

Since the 1970s, parties have sought to create mortgage instruments that would enable elderly homeowners to obtain loans to convert their equity into income, while providing that no repayments would be due for a specified period or, ideally, for the lifetime of the borrower. These instruments have been referred to as reverse mortgages, reverse annuity mortgages, and home equity conversion loans.

Reverse mortgages are the opposite of traditional mortgages in the sense that the borrower receives payments from the lender instead of making such payments to the lender. Reverse mortgages are designed to enable elderly homeowners to remain in their homes while using the equity in their homes as a form of income.

In general, reverse mortgages may take one of two forms -- term or tenure. Under a term reverse mortgage, the borrower is provided with income for a specified period. Under a tenure reverse mortgage, the borrower is provided with income for as long as he or she continues to occupy the property.

For borrowers, the most risky reverse mortgage is the term reverse mortgage. Borrowers have been reluctant to enter such mortgages because at the end of the loan term the borrower would likely have to sell the home and move.

For lenders, the most risky reverse mortgage is the tenure reverse mortgage. Lenders have been reluctant to originate such mortgages because the borrower is guaranteed lifetime income and lifetime occupancy of the home. This is risky because the mortgage debt grows over time, and the debt could exceed the value of the home if the borrower lives longer than his or her life expectancy. The use of tenure reverse mortgages has grown in recent years due to the availability of an FHA-insured reverse mortgage. Under the FHA program, the risk of the borrower living too long is shifted to the federal government.

At present, the three major reverse mortgage products are the FHA-insured reverse mortgage, the Fannie Mae reverse mortgage, and a proprietary plan from a private lender. In most cases, the FHA program provides higher cash benefits to the borrower than the private plans; it is the one most borrowers choose.

Currently, FHA-insured reverse mortgages are subject to the FHA loan limit for the area in which a property is located, and these limits vary according to the median home prices in the area. An issue for policymakers is whether to have a national reverse mortgage limit under the FHA program instead of having the limit vary according to the area FHA loan limit.

This report will be updated as deemed necessary in response to changes in law or regulation.