Loan Modification

FHA Reverse Mortgages: Foreclosure More Likely

By Gina Pogol

FHA’s reverse mortgage program, the Home Equity Conversion Mortgage (HECM), lost $798 million in 2009, and the agency wants to prevent a recurrance. This is the first time the HECM program incurred losses. To combat this, FHA has toughened up its enforcement of property tax and home maintenance requirements on seniors. They used to let you slide a bit if you didn’t pay your property taxes or let the property get scroungy. Today, you are far more likely to lose your home if you neglect to take care fo these things. Here’s why.

Why the big losses?

In normal times (remember those?), reverse mortgages are quite safe for lenders — the borrowers are allowed to take out much less than they are with traditional forward mortgages. For example, a 65-year old with a $400,000 home gets to borrow a lump sum of $196,480 (with a fixed-rate option, less the cost of the mortgage). That’s not even half of the home’s value. It’s also 10% less than previously allowed; FHA has made changes in an attempt to stop its losses.  In addition, FHA collects pretty steep mortgage insurance from HECM borrowers, 2% of the home’s value (up to the max FHA limit in the area), plus .5% of the mortgage balance each year.

So that borrower with the $400,000 home pays $8,000 upfront, plus $982.40 a year for insurance. With such a low maximum loan amount and such high insurance, how did FHA incur losses on this program? Housing market failures caused this — say a person took out the HECM in 2007, when property values were peaking, and got the old higher payout (about $218,000 on the $400,000 home), and property values dropped 30% each year for three years (think Arizona and Florida, two locations with high concentrations of retirees), and know that average HECM borrowers keep their loans about three years before vacating the property. So the $400,000 collateral is worth about $137,200 in 2010, more than $60,000 less than the mortgage payout.The borrower is not liable for more than the home’s value; FHA eats the difference. Hence the big losses.

Why pick on forgetful or cash-strapped seniors?

In the past, Fannie Mae and the FHA often looked the other way  when senior borrowers fell behind or stopped paying property taxes. This was lergely to avoid the potential bad publicity that would result if they threw old homeowners out on the street rather than be patient and wait for full repayment after the sale of the house.

But FHA can’t afford to do this anymore. Unlike traditional mortgages, HECMs have no escrow accounts, which automatically pay hazard insurance and property taxes for borrowers. Without escrows, some seniors may lose track of property tax, exposing their houses to tax liens that take legal precedence over the mortgage lien and weaken the lender’s position and the value of the collateral.

And if homeowners forget to pay their hazard insurance premiums, lenders have no coverage in the event of a fire or other major destructive event. So they are more likely to just take the home and sell it to avoid losses they can’t afford.

Avoid foreclosure on FHA reverse mortgages.

If you’re a senior and take out a reverse mortgage, and you think you might miss a payment (perhaps you travel extensively or just hate paperwork), consider setting up an automatic payment with your bank, getting a bookkeper to take care of your bills, or having a family member pay these items. You don’t want to come home from a stint in the hospital or a long cruise to find your home in foreclosure.

Full post as published by FHA Mortgage Guide on June 18, 2010 (boomark / email).