"Retirement accounts got hammered," Sullivan explained, "and TV commercials were telling people what a great thing these were."
Under HUD's new rules, borrowers can draw up to 60 percent of their initial principal limit in the first year of a loan, with some exceptions. In the past, some borrowers took out as much as they could up front and later found themselves with no capacity to cover critical expenses, including property taxes and homeowner's insurance.
Borrowers who don't pay their insurance and taxes on — or don't make necessary repairs to — their properties are considered in default on their loans and may face foreclosure.
Some borrowers "were taking out the maximum amount of equity they could in these big, lump-sum draws initially," explained Sullivan. "That exhausted all the equity available to senior borrowers and sometimes left them with little capacity to pay property taxes and insurance, which are an absolute condition" of reverse mortgages, he added.
"This program was created to give seniors access to an incremental, sustainable financial resource to allow them to age in place, not as an ATM machine," Sullivan said.
Under the new HUD rules, lenders are also required to do a financial assessment of borrowers to determine whether they have the means to sustain themselves in their homes. If potential borrowers fall short, they may still qualify for reverse mortgages, but they will have limited access to the equity in their homes, because a certain portion of it must be "set aside" to pay for taxes, insurance and other property-related charges, such as homeowners' association dues.