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Seniors more likely to fall victim to reverse mortgage foreclosures

Foreclosures are rising among seniors who have taken out a reverse mortgage on their homes.

Reverse mortgages have become extremely popular in recent years, especially among those who are retired and need to supplement their income. A reverse mortgage allows homeowners to borrow against the liquidity in their home, thus allowing them to free up the value in their real estate without having to move out. However, there are serious risks with reverse mortgages and, as the New England Center for Investigative Reporting notes, in recent years many seniors have fallen victim to foreclosure and other financial struggles because of their reverse mortgages.

How a reverse mortgage works

Reverse mortgages are insured by the federal government and were introduced in 1990 as a way of helping older Americans get by. The program allows those who are 62 or older to borrow against the value of their home. The borrowers do not have to repay their loan until they pass away or sell their home. Many seniors use reverse mortgages as a way to supplement their retirement income and to pay bills.

However, the program has some serious risks. The homeowners are still responsible for paying insurance and taxes on their homes. Falling behind on those payments can lead to foreclosure and to the borrowers losing their homes. One federal government report found that 90,000 reverse mortgage loans were more than 12 months behind in tax and insurance payments and would likely result in "involuntary termination" by the end of fiscal year 2017. The report also found that 18 percent of reverse mortgage loans taken out between 2009 and June 2016 would likely go into default, compared with just three percent of federally insured loans in the traditional mortgage market.

Rules mean further tightening

Seniors who took out reverse mortgages before 2015 are at the highest risk of being foreclosed upon. That's because prior to that year the only eligibility criteria for applying for the loans was having liquidity in one's home. After 2015 federal regulators required applicants to pass a financial assessment test to ensure they could pay insurance and taxes on their homes.

However, new rules introduced by the federal government that are designed to shore up the financial viability of the reverse mortgage program in the long-term could see many seniors facing some short-term financial pain. As Reuters reports, beginning in October 2017, upfront premiums for reverse mortgages are rising from 0.5 percent to 2 percent of the home's value. Furthermore, the amount that can be borrowed against a home will fall by approximately 10 percent.

Bankruptcy may be an option

A great number of seniors, just like many Americans, are facing significant financial strain and are finding it harder to keep up with bills and debt payments. Being faced with foreclosure is an especially difficult and frightening experience. However, one way to possibly stay in one's home and to keep creditors at bay is by filing for bankruptcy. While bankruptcy will not work for everyone, in a lot of situations it could provide those who are struggling financially with the breathing room they need to get back on their feet sooner.

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