According to the most recent statistics, 20% of conventional mortgages in the US are now underwater, which means that the loan balance exceeds the value of the home. While comparable figures for reverse mortgages are not available, it stands to reason that a similar proportion of reverse mortgage borrowers are in the same position. Before you start to worry about whether your reverse mortgage is affected by such a condition, there are a few things that you should know.
First of all, all HECM reverse mortgages are no-recourse loans and are insured by the Federal Housing Administration (FHA). That means that if the proceeds from the sale of your home are not enough to repay the balance of the reverse mortgage, your lender is contractually prevented from seeking the difference from you or your estate/heirs. Instead, the FHA will reimburse the lender using funds from the insurance pool. As a result, it is IMPOSSIBLE that you will ever end up owing your lender more than what you borrowed, regardless of what happens to the value of your home in the interim. (Note that this is not necessarily the case with a conventional mortgage).
Second, your lender is permitted neither to alter the terms of the loan nor the size of the loan after the reverse mortgage is originated. If you elected to receive a line-of-credit for $XX or a tenure monthly payment of $XX for the rest of your life, your lender is contractually obligated to honor this commitment for as long as the reverse mortgage remains outstanding (until the borrower passes away, sells the home, or moves out). Even if the value of the home declines to the point that the reverse mortgage is well underwater, the lender is not allowed to cancel or reduce any proceeds that you have yet to receive.
Only if you breach the terms of the contract can the lender freeze the payout of any unclaimed proceeds. That begs the question of whether you should deliberately withdraw any remaining funds in order to guard against such a possibility. For example, if the primary borrower were to pass away tomorrow, the unused portion of any credit line would be immediately frozen. If the home has appreciated in value, then any leftover proceeds will be distributed to the borrower’s estate following the sale of the home. If the home has depreciated significantly, however, then the borrowers’ heirs will receive nothing.
By preemptively withdrawing all unused funds if your reverse mortgage is underwater, you would effectively eliminate this as a possibility. This doesn’t mean that you have to spend this money immediately; rather, you could simply transfer the funds from your reverse mortgage line of credit to a savings account with another bank. The only downside is that these funds will probably accrue interest at a lower rate than your line of credit, which would otherwise grow every year by your reverse mortgage interest rate.
While all of this is bad news for taxpayers (and perhaps future reverse mortgage borrowers), it shouldn’t affect your approach to managing your reverse mortgage. When you initially obtained the loan, its (maximum) size was determined by (among other factors) the appraised value of your home at that time. Regardless of what your home is worth now, or in the future, you are entitled to every cent that the lender promised you and is printed in the loan agreement.