While FHA insurance protects lenders against loss when borrowers who take out home equity conversion mortgages live a very long time, borrowers are also fully protected. reverse mortgage, HECM, FHA, HECM for purchase, HECM saver, adjustable, rate HECM, fixed-rate HECM

Borrower Protection on FHA Reverse Mortgages
2 May, 2005, Revised January 27, 2010, July 27, 2012

"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.

"My mother has had an FHA Home Equity Conversion Mortgage for some time and has reached her $70,000 credit limit. The lender has sent her a letter saying that they are transferring the account to HUD. She is worried she will lose her home…?"

Not to worry, the transfer of her account to HUD is routine. Under HUD rules, a lender can assign a loan to HUD once the total amount owed by the owner – the sum of all payments to her, upfront fees that were financed and accumulated interest -- equals the "maximum claim amount.” This is the largest amount the lender can collect – it is $70,000 in your mother’s case.

On assignment, the lender is paid that amount and HUD becomes the owner. HUD will appoint a servicer to handle the loan, who could be but probably will not be the one your mother has been dealing with. The switch to a new servicer is the only change your mother will notice.

"So there is no way that a senior who takes out an FHA reverse mortgage can lose their home?"

True, provided that the borrower meets her obligations under the HECM contract. These obligations include paying property taxes and home owners insurance, which following the financial crisis many seniors were letting slip. See HECMs Hit an Unexpected Snag: Property Tax Defaults. I have not heard of any seniors getting dispossessed for this, but it could happen.

Note further that the spouse of a HECM borrower who is not a party to the HECM contract could lose the house when the contracting party dies. For example, the man is 65 and therefore eligible for a HECM but the wife is only 60 and not eligible. If he takes out a HECM, she is not protected when he dies or vacates the property.
Print