Since reverse mortgages are set up to pay the home occupant each month, it’s rare to find homeowners faced with foreclosure and eviction. But that appears to be the case with some seniors -- potentially thousands -- who have reverse mortgages but have fallen behind on their property taxes or homeowners insurance.
According to the Federal Housing Administration (FHA) which provides insured protection for most reverse mortgages through its Home Equity Conversion Mortgage Program (HECM), lenders in the HECM program are responsible for keeping all tax and insurance payments current. But if homeowners stop making payments, lenders are allowed to access any remaining home equity to pay taxes and insurance premiums. Once homeowner funds are exhausted, lenders are legally required to advance their own funds for such payments and seek reimbursement from homeowners.
Fund at risk
FHA, part of the U.S. Department of Housing and Urban Development (HUD), said in arecent press release “these unpaid debts and lender advances have resulted in an untenable situation that could put the FHA Insurance Fund at risk and result in foreclosure proceedings against delinquent seniors.”
While the volume of HECM loans has averaged about 100,000 a year, that number dropped last year as growing loan losses prompted the FHA to tighten its loan underwriting standards. Currently, FHA says there are nearly 520,000 still-active reverse mortgages on its books.
In a letter to reverse mortgage lenders, HUD has ordered them to provide the agency with detailed delinquency reports by February 7. According to CNN-Money, which referred to unconfirmed industry reports, up to 20 percent of HECM loans may be in some stage of non-compliance. A HUD spokesman refused to provide any number.
Senior owners on notice
Meanwhile, HUD rules issued recently to formalize the foreclosure process direct lenders to notify all delinquent customers by April 29 of their need to take steps to solve their problem or face foreclosure. The agency also said it's providing nearly $3 million to several consumer groups to offer stepped-up counseling to troubled borrowers.
"We understand that some senior citizens have not paid their taxes or insurance for some time and may be at risk of losing their home," FHA Commissioner David H. Stevens said in a press release explaining the new policy. “While the guidance is intended to help elderly homeowners avoid foreclosure, lenders may have no choice if these defaults are not cured."
To avoid problems with unpaid property charges in the future, FHA recently enhanced the HECM program's pre-closing counseling requirements. "Counselors must now place a greater focus on educating borrowers on how important it is that they fulfill the terms of the mortgage, including the requirement that borrowers make timely tax and insurance payments. In addition, counselors can now employ a new financial tool which helps identify potential budget shortfalls," the press release said.
According to the HUD letter to lenders, some consumers may have up to two years to repay tax and insurance funds to their lenders. The agency is urging lenders to foreclose on loans only as a last resort, but noted that foreclosure decisions rest with the lenders, not the agency.
