Borrower Protection on FHA Reverse Mortgages

2 May, 2005 "I fear that some elderly homeowners who take out FHA reverse mortgages will not receive all the payments to which they are entitled. FHA insurance protects the lender, not the borrower. When you consider that payments to the borrower must continue for life -- which can be forty years or more -- there is a distinct possibility that some lenders will just not be there to complete the payments. They will profit from the shorter-lived borrowers, then default on those who live too long." Not so, there is no way this will happen. The FHA reverse mortgage program has been growing in popularity, and the protection it provides the elderly homeowners who participate is a major reason. They have the right to live in their house until they die or voluntarily move out, and any annuities or draws against their credit lines that they are due, are certain to be paid. It is true that the FHA insurance, in the reverse mortgage program as well as in all other FHA programs, protects the lender rather than the borrower. In the event that the amount owed by the borrower exceeds the value of the property, the loss to the lender will be covered by FHA. But under the reverse mortgage program, any payments due the borrower are also protected. HUD has a legal obligation to make such payments in the event that the lender does not. When the reverse mortgage loan balance gets to 98% or more of the "maximum claim amount", which is the maximum amount that can be collected, lenders are allowed to assign the loan to HUD and be paid the balance. HUD then assumes responsibility for making any additional payments that are due the borrower. HUD will also take over responsibility if, for some reason, the lender cannot make the required payments. The upshot is that borrowers are fully protected. The only possible blip in their lives arises from the transfer of servicing from the original lender to a servicer working for HUD, and that should be inconsequential. Copyright Jack Guttentag 2005

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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