The government is moving to head off a growing problem with its reverse mortgage program. Large numbers of elderly borrowers—perhaps thousands—face possible evictions from their homes because they've stopped making property tax and home insurance payments. While homeowners with reverse mortgages are freed from mortgage payments after taking out the loans, they remain liable for property tax, home insurance, and maintenance expenses. Failure to make these payments can trigger foreclosure and possible eviction.
Most reverse mortgages are made by the Federal Housing Administration's (FHA) Home Equity Conversion Mortgage program (HECM). It provides insured protection of reverse mortgage loans made by private lenders, and is available where the youngest homeowner is at least 62 years old and has substantial equity in his or her home. The FHA is part of the U.S. Department of Housing and Urban Development (HUD). The volume of HECM loans has averaged about 100,000 a year recently but dropped last year as growing loan losses caused the FHA to tighten its loan underwriting standards. The most recent FHA report lists nearly 520,000 still-active reverse mortgages.
Lenders in the HECM program are responsible for keeping all tax and insurance payments current, in compliance with the government's rules for insuring the loans. 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.
However, the HECM insurance program has come under growing financial pressures because of the weakness in housing values and continued financial pressures on borrowers. While the problems are serious enough to have prompted FHA intervention, a HUD spokesman said the agency does not know how many loans currently are delinquent or the severity of delinquencies. It has ordered reverse mortgage lenders to provide the agency with detailed delinquency reports by February 7.
Up to 20 percent of HECM loans may be in some stage of non-compliance, according to unconfirmed industry reports cited by an executive at one of the counseling agencies that is working to help delinquent borrowers. Peter Bell, president of the National Reverse Mortgage Lenders Association, did not respond to repeated requests for comment. Reverse Market Insight, which works with many lenders to provide statistical reports on the reverse mortgage industry, did not respond to a request to comment on the extent of the delinquency problem.
In recognition of the problem, HUD issued rules last week to formalize the foreclosure process. The rules 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.
"Over time, however, 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," the press release said. "While the guidance ... is intended to help elderly homeowners avoid foreclosure, lenders may have no choice if these defaults are not cured."
The prospect of evicting 85-year-old widows from their homes is a looming human and public relations crisis, agrees Barbara Stucki, head of home equity initiatives for the National Council on Aging (NCOA), one of the consumer groups being funded by HUD. "No one wants this to happen."
"People are just really struggling to make ends meet," she explains. The extent of the problem won't really be known until the NCOA and other counseling agencies find out more about specific consumer problems. Counselors will work with lenders and consumers' other creditors to develop repayment plans allowing seniors to stay in their homes. There are, however, no funds available to help consumers repay missed tax and insurance payments.
"To avoid problems with unpaid property charges in the future, FHA recently enhanced the HECM program's pre-closing counseling requirements," the HUD press release said. "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 now employ a new financial tool which helps identify potential budget shortfalls."
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 only foreclose on loans as a last resort but noted that foreclosure decisions rest with the lenders, not the agency.
Stucki urged affected reverse mortgage customers to respond promptly when they receive their lender's delinquency letter. "What we're trying to do is not frighten people," she said. "But they [home occupants] do need to deal with it now and know that there is help out there for them to do this." HUD encouraged lenders to stagger their mailings but to begin getting letters out to borrowers well in advance of the April 29 deadline.