Burgess COMMENTARY

Peter Burgess

A reverse mortgage or home equity conversion mortgage (HECM) is a type of home loan for older homeowners (62 years or older) that requires no monthly mortgage payments.

A reverse mortgage or home equity conversion mortgage (HECM) is a type of home loan for older homeowners (62 years or older) that requires no monthly mortgage payments. Borrowers are still responsible for property taxes and homeowner’s insurance. Reverse mortgages allow elders to access the home equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home. Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. The rising loan balance can eventually grow to exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years. However, the borrower (or the borrower’s estate) is generally not required to repay any additional loan balance in excess of the value of the home.[1]

Specific rules for reverse mortgage transactions vary depending on the laws of the jurisdiction. For example, in Canada, the loan balance cannot exceed the fair market value of the home by law.

One may compare a reverse mortgage with a conventional mortgage, where the homeowner makes a monthly payment to the lender, and after each payment, the homeowner's equity increases by the amount of the principal included in the payment.

Regulators and academics have given mixed commentary on the reverse mortgage market. Some economists argue that reverse mortgages allow the elderly to smooth out their income and consumption patterns over time, and thus may provide welfare benefits.[2][3] However, regulatory authorities, such as the Consumer Financial Protection Bureau, argue that reverse mortgages are 'complex products and difficult for consumers to understand,' especially in light of 'misleading advertising,' low-quality counseling, and 'risk of fraud and other scams.'[1] Moreover, the Bureau claims that many consumers do not use reverse mortgages for the positive, consumption-smoothing purposes advanced by economists.[1] In Canada, the borrower must seek independent legal advice before being approved for a reverse mortgage.