To encourage lending, the federal government insures reverse mortgages once the balance owed reaches 98 percent of the loan's maximum limit. Borrowers pay hefty premiums for that insurance, but lenders reap the benefits.
From October 2008 through November 2010 the insurance fund paid out about $924 million for such claims by lenders. Federal insurance also covers lenders' shortfalls when borrowers or their heirs are unable to sell a property for more than the balance owed on the mortgage, which accounted for about $68 million worth of claims paid to lenders during that period.
Another growing problem is defaults by borrowers who can't keep up with property tax and insurance payments. A 2010 report by the Department of Housing and Urban Development found that 7,635 reverse mortgages were in default for that reason, in addition to 13,000 similarly defaulted loans at four of the 16 financial institutions servicing reverse mortgages. Those defaults could trigger a loss of $1.47 billion for the insurance fund. New rules require lenders to report all such delinquencies to the agency and to notify borrowers that they must pay up or face foreclosure.