The government-insured reverse mortgage program is struggling with a host of serious problems. The loans, available only to homeowners at least 62 years old, are designed to help people use the equity in their home to pay off any mortgage debt, tap a portion of any remaining equity, and live mortgage-free in their home for the rest of their life, should they choose.
Reverse mortgages have been controversial, however, due to high loan and insurance fees and because some lenders convinced seniors several years ago to spend loan proceeds on inappropriate investments.
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The Federal Housing Administration (FHA) reverse mortgage is called the Home Equity Conversion Mortgage (HECM). It insures lenders against losses and guarantees seniors that they will not lose access to any funds promised as part of their loans. The agency created a program of mandatory consumer counseling before a reverse mortgage loan can be approved with a participating lender. It also instituted a lower-cost loan last year, called HECM Saver, to reduce high fees and make it easier for seniors to take out reverse mortgages.
However, even though the program frees seniors from making mortgage payments, thousands of seniors have fallen behind on property taxes and home insurance premiums for their homes. Under current rules, lenders are not allowed to determine if borrowers will have enough money to pay taxes and insurance. Lenders are seeking rule changes that would allow them to include tests of prospective borrowers' ability to afford these payments.
The FHA required lenders to report on problem loans so it could fashion better oversight rules. But those reports, due more than four months ago, have been delayed and the agency says it still does not have an accurate picture on loans in default. Accordingly, a spokesman said, it still hasn't issued the rules sought by industry lenders.
This continued delay contributed to the announcement by Wells Fargo last week that it would stop making reverse mortgages. Wells Fargo is the nation's largest reverse mortgage lender with more than a 26 percent share of all activity as of April, according to statistics assembled by industry data provider Reverse Market Insight. Earlier in the year, the industry's second leading lender, Bank of America, said it would exit the business as well.
The volume of HECM loans averaged about 110,000 a year from 2007 through 2009, according to government reports. It dropped to less than 79,000 in 2010 and has continued at this lower pace in 2011. As of April—seven months into the government's fiscal year—there were slightly more than 45,000 HECM loans taken out.
Beyond reduced loan volume, borrowers in many older HECM loans have run into financial problems in recent years. An estimated 20,000 to 25,000 of 550,000 active HECM loans are in default because of non-payment of taxes and insurance premiums, according to government and industry projections.
To date, lenders have not foreclosed on these loans, says Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA). There is a long foreclosure process, he notes, which may include up to two years for borrowers to solve their default problems. "It's not until you've exhausted all opportunities" that the lender would then ask HUD to classify a loan as immediately due and payable, he says. "As far as I know, few if any cases have gotten to that point."
Bell's organization has worked with the FHA to fashion new financial eligibility requirements for HECM borrowers. The process is complex, he says, because retirement income sources extend beyond paychecks to include Social Security, pensions, and retirement savings. Despite the obstacles, lenders are pushing the government for more guidance and clarification.
"Our official position here is that we're hoping that Wells's decision to depart [the HECM program] becomes a call to action," Bell says.
Reverse mortgage lenders have funded a pilot counseling program to see if borrowers in default can solve their problems by working with credit counseling agencies. "Even among those borrowers with the most challenging problems, we're finding that many of these cases are able to be resolved," says Barbara Stucki, vice president for home equity initiatives with the National Council on Aging.
The pilot program has involved only 26 reverse mortgage borrowers, however, so extending its intensive counseling support a thousand-fold would be a major undertaking. "I think it's absolutely possible to scale up," Stucki says. The costs, while substantial, are "clearly much, much less" than it would cost a lender and the FHA to go through a foreclosure. "Plus," she adds, "no one wants to force seniors to move out of their homes."