Almost 13,000 Reverse Mortgage Defaults Unknown To HUD
October 6th, 2010
- Reverse mortgage delinquencies trouble FHA program
- Reverse Mortgages & The Robo-Signing Mess
- Help for reverse loan borrowers behind on tax and insurance payments
- Escrow Accounts For Reverse Mortgages
- Can Reverse Credit Scoring Reduce Foreclosures?
A new audit report for HUD’s reverse mortgage program finds that, whoops, the government did not know that nearly 13,000 HECM borrowers were in default. The losses from known and unknown defaults could be as much as $1.4 billion.
According to an audit report by Gerald R. Kirkland, the Regional Inspector General for Audit, Fort Worth Region, HUD “could not identify the deferred or defaulted loans in the Single Family Data Warehouse and did not track the number of borrowers who were unable to pay their property taxes or insurance premiums.”
“As a result,” says Kirkland, “HUD did not know how many loans had principal amounts increasing because the servicer had added payments for taxes and insurance to the loan amount. Since unreported defaulted loans were only obtained from 4 of a total of 16 HECM servicers nationwide, more defaulted loans may exist. Further, as HUD could not track these loans, it did not know the potential claim amount. In the event of foreclosure of the 7,673 loans for which HUD was aware and 12,958 loans of which it was not aware, HUD could lose an estimated $1.4 billion upon sale of the properties.”
How did this happen?
For a long time HUD has had an informal foreclosure deferral policy. When the policy ended HUD did not instruct services how defaulted loans — loans typically where borrowers were not paying property taxes or insurance — were to be handled.
“As a result,” says Kirkland, “four servicers contacted were holding almost 13,000 defaulted loans with a maximum claim amount of more than $2.5 billion, and two of the four servicers said they were awaiting HUD guidance on how to handle them. Further, the servicers had paid taxes and insurance premiums totaling more than $35 million for these 12,958 borrowers and, if HUD does not take action, additional payments will occur in the next 12 months.”
The idea of a FHA reverse mortgages being in “default” is a little complicated. The problem is not that monthly payments for interest and principal have been missed because no such payments are required with a home equity conversion mortgage (HECM).
Instead the concern is different: If the borrower does not make tax and insurance payments then the property could be foreclosed by a local government because the taxes have not been paid and physical damage to the property may not be covered by insurance because the policy has lapsed. In the end, the lender would pay the taxes, the loan would be in default and HUD would owe the lender for any losses.
In practice, a reverse mortgage is a negatively-amortizing loan with a growing principal balance. It’s financing secured by a property which in many if not most cases has seen a declining value during the past few years. The result is that the taxes are not a big deal, it’s lender claims which could be enormous.
For those on Capitol Hill who are wary of the reverse mortgage program, the Kirkland report will not be re-assuring.