WASHINGTON — Advertised as a path to an affordable retirement, federally insured reverse mortgages are showing signs of a rebound, drawing the scrutiny of regulators seeking to reduce historically high default rates that have cost the government billions.
Industry analysts expect strong growth as the housing market improves, particularly in once hard-hit Sun Belt areas including Phoenix, Miami and San Diego, Calif., and aging Americans find value in growing old in their homes.
They are also being boosted by high-appreciation, gentrifying neighborhoods in older cities such as Brooklyn, N.Y.
Analysts say they expect continued interest as the leading edge of 78 million baby boomers approach 70. A poll by Gallup in April found that 68 percent of Americans ages 50 to 64 said they were “very” or “moderately” worried about having enough money in retirement.
Philadelphia, where many families have lived in the same neighborhoods for generations, has ranked at the top for reverse mortgages since 2011, according to an analysis of Federal Housing Administration data by Reverse Market Insight, a California-based company.
After retiring from his newspaper ad sales job two years ago, Myles Griffin and his wife took out a reverse mortgage in May to supplement their Social Security income. The couple took out loans worth nearly $30,000 on the home they have lived in for 40 years in Philadelphia to pay off credit card bills and remodel their kitchen, leaving open the option to tap into the remaining equity later.
“We had a look at whether we wanted to move into a senior living facility, but that was more expensive, so we decided to stay with the house,” Griffin said.
Reverse mortgages haven’t always worked well. After the housing boom, many Americans took advantage of flexible lending terms to draw large amounts of cash, later falling into financial trouble during the extended economic downturn.
To cover projected losses of $70 billion over a 30-year period, FHA was forced last year to receive a $1.7 billion emergency cash infusion from the Treasury, in large part because of losses from reverse mortgages during the downturn. The total projected losses, the most recent available, don’t reflect recent home-price increases, decreasing losses on its portfolio and other changes. Congress last year gave the agency new authority to tighten lending rules.
In the coming weeks, FHA is expected to finalize its proposed rule requiring loan applicants to undergo a detailed financial assessment. It’s aimed at reducing a current default rate of 10 percent, roughly double the level of regular mortgages.
The agency also has limited the amount of upfront payments a borrower can receive and recently reissued stern guidance to lenders to curtail deceptive marketing of reverse mortgages.
While HUD has power to issue warning letters, revoke a lender’s approval or initiate other sanctions, the Government Accountability Office and Consumer Financial Protection Bureau suggested in 2009 and 2012 that HUD may not have actively monitored marketing practices during the run-up of reverse mortgages in the late 2000s.
The latest guidance is intended to ensure “lenders know we’re keeping a watchful eye on their marketing and advertising practices,” said FHA Commissioner Carol Galante.
In the first half of the year, 27,648 reverse mortgages were issued worth $7.2 billion, according to FHA data. Although lower than the same period in 2013, Reverse Market Insight, which analyzed the data, said it expected this year’s total value to exceed the low in 2012, when 52,883 reverse mortgages were issued at a value of $12.7 billion.
Overall loan volume and applications have also been up in recent months, a leading indicator of increases in reverse mortgages, the company said.
At the peak in 2009, more than 111,000 reverse mortgages were issued worth $31.2 billion.
And this is likely to continue to be a popular option for many.
“Reverse mortgages will be a lifeline for millions of Americans in retirement in the years to come,” said Greg McBride, a chief financial analyst for Bankrate, citing growing financial pressures from rising college tuition for their children and health care.