Reverse Mortgages are often billed by lenders as being 100% safe. Since they are insured by the FHA and because they are non-recourse loans, there is no risk of you ever owing the lender money, even if your reverse mortgage is underwater. If you read the fine print, though, you will see that it is still possible to default on your reverse mortgage.

Most reverse mortgages are canceled only when the last remaining borrower passes away or moves out, or when the borrower voluntarily chooses to repay the loan. However, if you fail to pay property taxes and/or fail to maintain the home, you are in violation of the the terms of the loan agreement, and the lender is entitled to cancel the reverse mortgage. This is because a tax lien supersedes the reverse mortgage lien, which means that when the home is sold, the government has priority over the lender in collecting on any debts.

If you are found to be in default, the lender will immediately cut off any unused portion of your line of credit and/or stop remitting monthly payments to you if you elected to receive your reverse mortgage disbursement as term/tenure payments. After giving you a chance to rectify the situation, it may then apply with the local court to foreclosure on your property, and if approved, the property will be sold. Any leftover proceeds from the sale (after the reverse mortgage is repaid and money is set aside for unpaid taxes and maintenance costs) will be distributed to the borrower. Of course, the borrower’s credit will be shattered, and it will be difficult to obtain another loan.

Unfortunately, default is an issue that affects a significant portion of reverse mortgage borrowers – perhaps as many as 30,000. That’s because many borrowers receive the loan proceeds as a lump-sum payment, which is then used to repay debt (such as an existing mortgage) or spent quickly. Such borrowers often fail to set aside enough cash to pay property taxes and maintain the property, and/or are gripped by financial hardship.

In early 2010, the FHA encouraged lenders to foreclose on properties whose reverse mortgages were in default. At the time, the FHA was dealing with financial hardship of its own, and was rumored to be seeking a government bailout. However, it seems that the majority of lenders are still reluctant to foreclose (because of the bad press that it would generate) are awaiting further guidance from the Department of Housing and Urban Development (HUD), which should be released in 2011. There is technically an emergency loan program that is designed to help borrowers whose loans are in default, but only those who are temporarily unemployed are eligible. In short, those that are currently in default can only sit tight and wait.