The federal government is proposing to make big changes to its reverse mortgage program early next year that should make the loans safer for seniors who use them to tap home equity.

Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development (HUD), which regulates these loans, will detail policy options that would create more conservative lending standards in testimony later this week before the Senate Committee on Banking, Housing and Urban Affairs.

Change is needed. Reverse mortgages can serve as financial lifelines by helping seniors leverage their equity without selling their homes. But the private loan industry has shifted in recent years toward encouraging large up-front lump sums rather than smaller lines of credit. These are more risky for borrowers as well as for the federal government, which insures them through the Federal Housing Administration (FHA) insurance fund.

Unlike a traditional 30-year mortgage, where you make monthly payments that increase your equity, a reverse mortgage pays out the equity already in your home as cash; your debt level rises and equity decreases. The loans are available only to homeowners age 62 and above.

But the reverse loan market has faced growing problems in recent years — the result of sinking post-crash home values and the industry’s shift toward riskier loan structures. Lending through the federally administered Home Equity Conversion Mortgage (HECM) program was down 25 percent in the fiscal 2012 year ended September 30. Just 54,591 loans were issued — the third straight year of falling loan volume and far below the peak year of 2009, when 115,000 loans were originated.

Learn more about the proposed changes in my column today at Reuters Money.

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