Reverse mortgages: We can do better for our seniors

As Illinois families rebound from one of the worst economic crises of our lifetime, I worry about one portion of our population particularly hard hit — our seniors. During the crisis, seniors watched the equity in their homes plummet and saw their 401(k)s and retirement investments drained. Many retired seniors were forced to rejoin the workforce if they still could. With limited options, countless seniors turned to the largest asset they had, their home, and took out a reverse mortgage loan.

A reverse mortgage is a special type of home loan for those age 62 and older. Unlike a traditional mortgage, the borrower does not make scheduled payments to eventually pay off the debt. Reverse mortgages allow seniors to unlock the equity built up in their home now, and defer payment until they die, sell or move out. This financial tool is not without its risks — it is a complex type of mortgage with onerous conditions, and it is not easily understood.

Among the risks to seniors:

Ÿ Bad actors. The complexity of the reverse mortgage is often used by bad actors to take advantage of seniors by pushing them into higher-cost products. Through advertisements, lenders mislead seniors into believing they are receiving a “free” loan as long as they remain in their home. Many borrowers are not made aware that they are still responsible for the property taxes and escrow on the mortgage.

Ÿ High upfront costs. Reverse mortgages generally have high upfront fees. Additionally, the mortgage insurance premium charged by the Federal Housing Administration can make a reverse mortgage significantly more expensive than a traditional mortgage or home equity loan.

Ÿ Higher interest rates. Compared with conventional forward mortgages, reverse mortgages frequently have higher interest rates. Borrowers often do not realize that interest becomes compounded on their loan amount, resulting in what is known as a “rising balance/falling equity” situation.

Ÿ Inadequate life planning. It can be difficult to plan sufficiently for retirement. A senior who expects to live in his or her home for another 10 to 15 years may not anticipate circumstances like living longer, moving elsewhere or the housing market deflating, which can result in a loan total exceeding the value of the home.

Reverse mortgages have led far too many seniors down a path to financial ruin. Last year over 58,000 reverse mortgages — nearly 1 in 10 — defaulted.

Every American, not just seniors, should be concerned about the reverse mortgage program. The federal government insures the majority of these loans through the FHA’s reverse mortgage program, which is currently in a major deficit. This means taxpayers are on the hook for billions of dollars.

Throughout the coming weeks, I will be working across party lines to introduce reform legislation to protect our seniors and enhance the soundness of a reverse mortgage. The FHA is poor at establishing appropriate underwriting standards for borrowers and setting good standards for lenders. Changing these standards, and ensuring that premiums paid into the insurance fund actually cover the losses experienced, could help immensely.

American seniors have worked their entire lives to improve this country and pave a more promising path for future generations. We owe it to them to provide safe, reliable tools so they too can meet their financial needs.

Ÿ Mark Kirk, of Highland Park, is a U.S. senator.