Curing reverse mortgage woes
February 23rd, 2011
- Help for reverse loan borrowers behind on tax and insurance payments
- LIBOR FHA Reverse Mortgages Coming In August
- Reverse Mortgages & The Robo-Signing Mess
- U.S. Consumers Still Face Financial Woes
- Why Reverse Mortgages Provide Safety In A Down Turn
As we reported last year, more than 20,000 reverse mortgage borrowers are behind on taxes, insurance or both.
Steven Stark, Chief Operating Officer of A New Horizon, a nonprofit credit counseling firm based in Fort Lauderdale, explains that “although a reverse mortgage permits a homeowner to withdraw equity value from their house through payments by the bank, many seniors first obtain reverse mortgages because they’re struggling with their finances.”
Although seniors with reverse mortgages do not make payments on their loans, says Stark, they can face “technical foreclosure” when financial difficulties cause them to fall behind on paying their property insurance premiums or property taxes. In Florida, where property insurance rates have skyrocketed, up to 8 percent of homeowners with reverse mortgages are now delinquent according to Stark.
These numbers raise a serious issue: Are reverse mortgage guidelines out of date?
Right now to get a reverse mortgage you basically need to be age 62 or older, have real estate equity in your prime residence and have the capacity to enter into a contract. Notice that you do not need to show income or other assets beyond the home.
Reverse mortgage underwriting, largely for home equity conversion mortgages or HECMs insured by the FHA, generally made sense when home values were rising and employment was fairly robust.
But those conditions no longer exist. Today we have high unemployment — certainly higher than official government statistics. The result is that we also have high rates of underemployment — people being less than they would get in a better market and people not seeking higher wages for fear of unemployment.
As well, an equally important, we have seen home values plummet since 2007.
In October “the U.S. index is 14.9 percent below its April 2007 peak and roughly the
same as the August 2004 index level,” says the Federal Housing Finance Agency.
Because home values have fallen, it means that HUD is likely to face claims with large numbers of reverse mortgages. The reason is that a reverse mortgage is a negatively-amortizing loan — interest is added to the loan balance each month. When the borrower sells, moves or passes away that amount due can be larger than the equity in the home, meaning the lender can bill HUD for the shortage.
The fact that home values have fallen is not the fault of HUD or the reverse mortgage program. It is, instead, largely a by-product of terrible lending practices which have impacted virtually all homeowners — and their mortgage insurers.
At the very least it hardly seems unfair to escrow funds each month for taxes and insurance with reverse mortgage borrowers. Yes, this would mean that reverse mortgages would have an actual and visible cost but it would also mean that tens of thousands of borrowers would not face the mention of foreclosure.