Government housing officials report that 46,000 reverse-mortgage borrowers under the government's insured loan program were delinquent on their loans as of July. This total is more than 50 percent higher than earlier industry projections and represents 8 percent of all outstanding loans under the Federal Housing Administration's home equity conversion mortgage (HECM) program.
HECM loans provide access to home equity for homeowners who are at least 62 years old. Most HECM borrowers owe little or no money on their existing mortgages, which must be paid off before any home-equity proceeds are available to borrowers. While borrowers no longer need to make mortgage payments, they are responsible for paying property taxes and home insurance premiums on their residences. Failure to make these payments is the cause for the delinquencies, FHA officials said in making the agency's first public release of detailed HECM delinquency information exclusively to U.S. News.
FHA rules require taxes and insurance to be current in order for lenders to maintain FHA insurance on HECM loans. If a borrower's HECM loan still has available funds, they must be used to make the payments. If those funds have been used up, lenders are on the hook for making these payments while they work on repayment plans with delinquent borrowers. As of July, the FHA says, lenders had advanced roughly $250 million on delinquent loans and about $40 million had been repaid by borrowers. About 60 percent of the delinquent borrowers have entered into some type of repayment plan with their lenders, officials say.
Many delinquencies are for relatively small amounts. More than 40 percent of delinquent borrowers owe less than $2,000. Only 5,300 loans have delinquencies greater than $10,000, although these loans have outstanding lender advances of $91 million—an average of nearly $17,200 per loan.
Earlier reports from reverse mortgage lender groups had attributed the delinquency problem largely to older borrowers. HECMs are most commonly recommended as a last-resort loan for seniors who need to tap the equity in their homes for income to pay basic living expenses. After using up these funds, it was thought that many older HECM borrowers had simply been unable to maintain their insurance and tax payments.
FHA officials, however, say the bulk of the delinquency problem has been caused not by long-time older borrowers but by more recent, younger borrowers. In a trend they attribute to the recession, they say younger borrowers—ages 62 to 65—have been heavier users of the HECM program in recent years. This group is also more likely to be delinquent than older borrowers, with most delinquencies occurring in the first four years of the loan.
In response to delinquency problems, the FHA has been working with lenders to devise ways to help current borrowers and reduce the odds that new borrowers will become delinquent on their loans. Consumer counseling is required for new HECM borrowers and a special counseling program was started for delinquent borrowers. However, government counseling funds were cut as part of federal deficit reductions, and very few delinquent borrowers have participated in repayment counseling sessions.
"Maybe only about 10 percent of those [delinquent borrowers] have gone through counseling," says Barbara Stucki, vice president for home equity initiatives with the National Council of Aging, one of several organizations providing the special counseling to delinquent borrowers.
Many HECM borrowers have developed repayment plans, Stucki says. But it's not clear how successful this effort will be. "There's a lot of factors that can make it difficult for people to repay these loans," she says. "These people are on fixed incomes. The reason they took out a reverse mortgage in the first place is because they were facing financial challenges."
Neither the government nor lenders are eager to foreclose on older homeowners with limited housing options should they be forced out of their homes. Under FHA guidelines, lenders are required to give borrowers up to two years to repair their delinquencies. And the agency must approve any lender request for a delinquent HECM loan to be moved into a foreclosure process.
The FHA and lenders say there have been few foreclosures of delinquent HECM loans. The agency said it would provide details on HECM foreclosures, but still had not done so a week after first providing the overall delinquency information to U.S. News.
The agency and lenders have been working to develop new qualification standards for HECM borrowers, in part to reduce the odds that new borrowers might later become delinquent on their property taxes and insurance payments. Historically, HECM borrowers did not have to prove that they could pay taxes and insurance to qualify for a loan, and needed only to have sufficient equity in their homes to qualify for the program.
Under the evolving new standards, borrowers will be required to demonstrate the ability to make such payments. The standards are being voluntarily introduced by some HECM lenders and the FHA is working on industry-wide guidance for future lending rules. It's expected the new rules will cause some would-be borrowers to be rejected for the program. But with rising numbers of seniors expected to use reverse mortgages in the future, creating a more sustainable lending process has become a priority.