For the third straight year, the volume of government-insured reverse mortgages has fallen. According to a recent report from the U.S. Department of Housing and Urban Development (HUD), there were 50.993 Home Equity Conversion Mortgage (HECM) loans in the fiscal year ended September 30. That was down sharply from 73,093 in fiscal year 2011, 78,758 in fiscal 2010, and 114,639 in fiscal 2009—the peak year for the government's 20-year-old program.

For most of those 20 years, reverse mortgages have been touted as a potential retirement godsend to help seniors access the equity in their homes to meet living and other essential expenses. Because borrowers are being lent money from their own assets, lenders historically have not required borrowers to satisfy any financial repayment requirements. So, the loans have been easy to obtain. At the same time, borrowers don't have to make any monthly repayments. Lenders receive their payments, plus interest, from the borrower's own equity in their home.

Borrowers who stay in their homes a long time will probably rack up accumulated payment and interest charges greater than the amount of their home equity. Even this may not pose a problem to homeowners. Reverse mortgages are what's called "non-recourse" loans. This means lenders cannot come after borrowers for additional payments. So seniors can age in place and continue to live in their homes as long as they wish. When they die or decide to leave the home, their families have the choice of paying any accumulated charges on the reverse mortgage or simply turning over the keys to the lender and walking away from the home with no further financial obligations.

Despite this potential, loan volumes have been modest and the concept has never caught fire with consumers. The loans are complicated in the first place, and have carried high fees for much of their history. They have also been subject to financial abuse , as overly aggressive marketers convinced seniors to take out loans that were not in their best interest. Repeated efforts by the industry and the government to improve the practice and image of the business have not turned things around, as judged by falling loan volumes.

Several of the leading reverse-mortgage lenders have turned to celebrity spokesmen to build better bonds of trust with consumers. Pat Boone, Fred Thompson, Robert Wagner, and even the Fonz, Henry Winkler, are all extolling the virtues of reverse mortgages these days.

Consumer groups have not been fans of reverse mortgages. That includes the government's insured HECMs, which require consumer counseling and offer lower fees and other safeguards. The U.S. Consumer Finance Protection Bureau (CFPB) issued a tough report on the industry last June. It found the products are still too complex, poorly explained to consumers, and still subject to marketing abuses.

Rather than using HECM loan funds to pay needed expenses, the agency said, borrowers tend to take lump-sum payments at relatively young ages (HECM borrowers must be at least 62) and could be sacrificing future financial benefits in the process.

The lack of financial accountability standards for borrowers has also come back to bite the industry through rising loan delinquencies .

A growing percentage of older borrowers has fallen behind on paying property taxes and property insurance premiums on their homes. These payments must be maintained as a condition of HECM loans. But financially strapped seniors don't always have the funds to stay current on such payments. Nearly 10 percent of outstanding HECM borrowers were behind on these payments last March, the most recent date of publicly reported activity.

These property tax and insurance delinquencies are not talked about much by industry or government executives. But they are a growing problem and have led to an evolving set of "ability to pay" standards that will be required of new HECM borrowers. In the meantime, several major lenders have left the reverse-mortgage business in the past two years.

Despite these problems, HECM loans could and should be a tool for seniors to carefully consider. Economist Alicia Munnell, a leading retirement expert and head of the Center for Retirement Research at Boston College, stated the case well in a commentary article after the CFPB report was issued:

"Americans are going to need reverse mortgages," she wrote. "Most households are going to find that their retirement incomes fall short of their retirement needs and will experience a decline in living standards. Being able to tap their home equity—often their single largest asset—provides a source of income that could supplement Social Security and the income generated by their meager 401(k) balances."

"To the extent that flaws exist in the reverse mortgage market, they need to be fixed," she advised. "But a future without reverse mortgages would be a very grim one indeed."

Twitter: @PhilMoeller

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