Lenders, feds move to address reverse mortgage defaults

January 21, 2011

Aida Lemus, 70, cries as she is evicted from her foreclosed condominium in Anaheim, California, June 23, 2009.  REUTERS/Lucy Nicholson 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).

Reverse mortgage lenders typically advance tax or insurance bill payments in cases where borrowers haven’t tapped their maximum loan amounts, adding those costs to the loan balances. But in cases where loan amonts are exhausted, borrowers have been falling into a limbo of sorts, due to a lack of clear guidance from federal regulators on how lenders should handle defaulted loans. The number of loans in limbo rose 173 percent between May 2009 and March 2010, according to an audit by the Inspector General’s office of the U.S. Department of Housing and Urban Development (HUD).

The prospect of foreclosure and possible evictions of seniors has made HECM default a political hot potato for the federal agencies involved, which include HUD, the Federal Housing Administration and Fannie Mae. Until last year, Fannie purchased most HECM loans from issuers, but it has exited the market for reasons unrelated to defaults.

None of the agencies wanted to take the lead in clarifying how to handle defaults, so a backlog of cases built up in recent years, according to Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA). “For years, Fannie was the loan owner and HUD was the insurer,” he said. “The loan servicer would advance the taxes for the borrower, but at some point they’d go to HUD and ask for permission to call the loan. No one wanted to make that call, because it could lead to a foreclosure process. Ultimately, if the borrower doesn’t pay they’d have to move to [foreclosure.]”

But earlier this month HUD issued instructions to lenders on how it wants delinquent loans to be handled. Lenders will be contacting all delinquent borrowers by the end of April to lay out options including establishing re-payment schedules, restructuring of loans or to offer assistance from a HUD-approved consumer counseling service.

HECMs deliver large lump sums that should – in theory – give strapped homeowners sufficient funds to cover annual property tax and hazard insurance bills. But “the reasons people are strapped are changing,” says Stucki of NCOA, which is one of five HUD-accredited counseling services.

Older Americans are saddled with increasing debt loads; 63 percent of people in their late 50s and early 60s are carrying a traditional mortgage and home-equity debt, up from just 49 percent in 1989, according to the Joint Center for Housing Studies at Harvard University. And NCOA has seen an increase in the number of borrowers using HECMs to retire a traditional mortgage.

“It used to be that HECMs were used by people who didn’t have enough money to get by each month, and used small amounts from the loan to supplement Social Security” Stucki says. “Now, the biggest growth is in the under-seventy population. They are entering retirement with mortgages, and using the HECM to defer their debt obligation and get rid of monthly payments. That leaves some of them without much of a cushion to deal with something unexpected that might come along, like a health care emergency. That’s where we’re seeing people get into trouble.”

HUD is stressing to lenders the importance of avoiding eviction of HECM borrowers who default. Could evictions of seniors happen? “It’s possible,” says Stucki, “although no foreclosure proceedings can begin unless HUD approves them.”

Peter Bell of NRMLA said he doubts many HECM borrowers will face eviction. “Seventy percent of the delinquent loans have balances under $5,000,” he said. “The counseling process will stress looking for alternative ways to make the loans current,” he said. “There might be charitable sources, or families might decide to step in and pay the bill. Even if cases to do to court, I doubt very many judges are going to let lenders throw seniors out of their homes over a $5,000 liability. Courts may impose some settlements.”

In my next post, I’ll discuss several recent studies that have been critical of HECM marketing and counseling practices.

Comments

The HECM program is not an entitlement program- when a senior homeowner takes the mandatory HUD housing counseling session they make sure the borrower understands taxes, insurance and upkeep are REQUIRED. Can’t follow the rules, you’re not qualified to have this type of loan.

When the borrower signs the application there is more than one document that clearly indicate insurance must remain current or the lender has the right to provide Lender Placed insurance coverage at the borrowers expense. If taxes are not paid the loan will be in default and the lender may use any available collection remedies, up to and including foreclosure. Even without the reverse mortgage, a homeowner with no mortgage at all is required to maintain property taxes at minimum or face losing the property to local tax sale.

These are documents the borrower signs to secure the loan and must be honored like any other stipulation attached as part of an agreement to borrow money. What the industry does not need is a new regulation that treats these folks like little children that can’t understand the ramifications. At some point people are going to have to honor their agreements. There are no free rides. The reverse mortgage is a wonderful financial vehicle created to allow a senior homeowner the ability to tap back into the equity they built over years of paying the mortgage (on time)- but it has its limits if not properly used and education of its merits are dearly needed across the financial spectrum.

Posted by tobinsmith | Report as abusive
 

Gee, what happens to a person who has no mortgage at all and doesn’t pay his taxes? He will lose the property to a local tax sale. I don’t see why a reverse mortgage is even mentioned in the same paragraph with this problem. One has nothing to do with the other.

Posted by cantorjanice | Report as abusive
 

Cantorjanice – good question. Answer: what’s different here is that reverse mortgages are intended to help keep seniors who might be financially strapped (e.g., trouble paying for things like insurance and taxes) in their homes. Instead, defaults are taking place because the funds generated by the reverse are gone, in many cases to pay off a traditional forward mortgage.

Mark Miller

 

Reverse Mortgages are not only for those who are in the low income category I was reading on this site http://www.reversemortgagelendersdirect. com/ and there was an article where a couple had a home worth $3 Million paid off but they needed money in order to pay the maintenance, taxes etc for property , they should increase the limit for people in this category, right now the limit is $625,000

Posted by JohnVeram | Report as abusive
 

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