02/10/2011 03:39 pm ET | Updated May 25, 2011

Brewing Nightmare: Foreclosures on Seniors' Reverse Mortgages

Reverse mortgage loans, which allow seniors to convert home equity into cash, have become more popular in recent years. But now the reverse mortgage industry and government regulators are dealing with a potential nightmare: a growing number of loan defaults that could lead to foreclosures, and even evictions of elderly homeowners in some cases.

Non-performing loans represent a small share of overall reverse mortgages, but their number has grown quickly in the past two years. (Borrowers aren't required to make monthly mortgage payments, but can end up with a loan in default if they fall behind on their property taxes and insurance payments.) The spate of non-performing loans has raised concerns about the prospect of seniors losing their homes, and also about the risk of losses for the Federal Housing Administration Insurance Fund, which insures the loans.

Reverse mortgages are available only to homeowners over age 62. They allow seniors who need cash to tap home equity while staying in their homes. Unlike an equity line of credit, repayment of a reverse mortgage typically isn't due until the homeowner sells the property or dies. Reverse mortgages have been criticized for high upfront fees, which can total five percent of a home's value.

The most popular loan type is the Home Equity Conversion Mortgage (HECM), which is administered by the U.S. Department of Housing and Urban Development (HUD); the current loan limit on a standard HECM is $625,500, although a new "saver" HECM was introduced last fall with lower loan limits and fees.

HECMs have no monthly loan payments, but it's still possible for borrowers to default, because loan terms require them to continue paying property taxes, hazard insurance and any required maintenance on their property. About five percent of the 550,000 loans outstanding are non-performing under those terms, according to Barbara Stucki, vice president of home equity initiatives at the National Council on Aging (NCOA).

Get the full story at Reuters Prism Money.