Reverse mortgages can sting lenders and guarantors because they depend so heavily on home prices for repayment.
During stable times, regular mortgages are made based on the borrower's ability to repay, with foreclosure and sale of the home available as a backstop in case the borrower defaults.
For reverse mortgages, the collateral, namely the home, is just about all the lender can rely on. Home prices, which are still below their 2006 peaks, have been rising in the past couple of years, and economists do not see much risk of a significant drop in the near term.
But forecasting home prices over decades is much more difficult.
To help reduce its risk, in April 2013 the FHA limited the amount a homeowner can borrow as a lump sum to 60 percent in the first year, up to the maximum cap of $625,500. The prior limit was 100 percent.
The FHA is also creating new rules that will require lenders to make sure a borrower can pay for taxes, insurance, and upkeep on their home.
For some homeowners, reverse mortgages can fill a real need. Janie Baratta, 63, was getting hounded by bill collectors after her husband died in 2012. The former biological researcher at the University of California at Irvine had $50,000 in credit card bills she had run up during his illness, and there was still a $1,500 mortgage on her three-bedroom ranch in Irvine, California. Her $4,000 pension and social security were not enough to cover her expenses.
Then in 2012, she got a $300,000 reverse mortgage from High Tech Lending. Today, her credit cards are paid off. So is her regular home loan.
Reverse mortgage delinquencies can hurt the FHA, and are at least part of the reason why the loans carry such high interest rates and fees: a reverse mortgage now can carry a rate of just over 5 percent, against the current 30-year rate for government-backed mortgages of around 4.3 percent.
Reverse mortgages also discourage elderly homeowners from undertaking repairs and maintenance that someone else might do more proactively, said Mark Calabria, a former staff member of the Senate Banking Committee. That can hurt the value of the property, which in turn cuts into the proceeds that lenders will receive when it comes time to sell the home, leaving the FHA potentially on the hook because of its guarantee.
"How you care for the property matters," for future values, said Calabria, now the director of financial regulation studies at the libertarian Cato Institute in Washington, DC.