WASHINGTON, D.C. — Three years ago, with his former partner suffering from cancer, Jim Dorsey decided to borrow against the equity on his Vashon Island home with a reverse mortgage. The couple didn’t have children and didn’t plan to move, so a loan that didn’t have to be repaid until he died seemed like a good deal.
Dorsey, 69, isn’t so sure now. The retired high-school teacher figures the loan — which netted him a $75,000 lump sum after paying off his existing mortgage — will reduce his home equity by $100,000, compared with what it otherwise might have been, if he lives another decade.
Then again, Dorsey can stay in the house for as long as he pays his property taxes and homeowner’s insurance. Plus, he won’t be liable for the shortfall if his final loan balance exceeds his home’s value.
That’s because almost all reverse mortgages since 1989 have been insured by the Federal Housing Administration. The agency collects mortgage-insurance premiums from borrowers, much of which are used to make lenders whole if borrowers default.
“The feds are assuming the risk,” he said. “The bank is in the catbird seat.”
That risk has put the FHA’s reverse-mortgage portfolio $5.25 billion in the hole as worrisome numbers of borrowers fail to keep up with taxes and insurance or convey their homes to the FHA rather than go through the expense of marketing and selling their properties.
In response, Congress passed legislation sponsored by U.S. Rep. Denny Heck, D-Olympia, allowing the FHA to fast-track changes to stem the deficit. President Barack Obama signed the bill. The agency plans to use the new authority to tighten lending terms that could reduce loan amounts or even disqualify some borrowers.