Falling Home Prices Reduce Reverse Mortgages

Falling home prices around the country have cut the amounts seniors can receive on reverse mortgages from the Federal Housing Administration. The popular FHA program is running a $798 million deficit this fiscal year, forcing the agency to cutback new reverse mortgages.

Analysts say the move amount to a cutback of 10 percent on all new FHA reverse mortgages. Those who have existing FHA reverse loans are not impacted by the change.

The National Reverse Mortgage Lenders Association estimates the policy could prevent more than 1 in 5 applicants from paying down their existing mortgage note with the funds from a new reverse mortgage. The Association says this could lead some seniors to delinquency and foreclosure.

Under the new FHA policy, a $100,000 FHA reverse mortgage would be reduced by $10,000 to $90,000 in proceeds. This reduction would leave many applicants without the money to pay off the balance of their note.

In a reverse mortgage, the bank providers homeowners 62 and older with a lump-sum payment, monthly payments, or a credit line the borrower can draw upon. The reverse mortgage is secured by the equity in the home and is only payable when the owners sell the house.