Loan Modification

FHA Reverse Mortgage Loans: Agency Evaluating Risks

By Karen Lawson

FHA insured reverse mortgage loans, also called Home Equity Conversion Loans (HECM), are coming under scrutiny as delinquency rates for property taxes on these loans are increasing. Although FHA faces a potential public relations nightmare if it authorizes more foreclosures reverse mortgage loans, there are genuine risks stemming from reverse mortgage borrowers failing to pay property taxes and hazard insurance. Here’s why.

FHA Exposed to Risk of Tax Sales

Mortgage lenders typically collect and pay amounts needed for paying property taxes and hazard insurance for traditional mortgage loans with loan-to value ratios in excess of 80%, but reverse mortgages require borrowers to pay these expenses directly. If property taxes aren’t paid, they accumulate penalties, and eventually, the taxing authority will place a lien against the property for which taxes are due. Continued tax defaults can lead to a tax sale, which allows the taxing authority to sell the property to recoup delinquent taxes and other costs. When a tax sale is held, existing mortgage loans are typically wiped out. This prevents the mortgage lender from from foreclosing to protect its interest.

FHA May Strengthen Enforcement of Reverse Mortgage Terms

The Washington Post reports that The US Department of Housing and Urban Development is considering increasing its previously lenient enforcement of reverse mortgage terms requiring borrowers to pay property taxes and hazard insurance premiums when due. A potential change in FHA guidelines could occur soon due to diminished FHA reserves, which have fallen well below legally required minimums in recent months.  The problem of delinquent property taxes has larger consequences than the violation of mortgage loan terms. Local governments, typically counties and cities, rely on property tax revenue for providing public services and maintaining infrastructure. As property values have fallen, so have tax revenues. An added burden of homeowners failing to pay property taxes only causes more problems for cash-strapped communities.

FHA Guidelines: Should FHA Lenders Foreclose for Delinquent Taxes?

There should be no need to intimidate reverse mortgage borrowers by threatening foreclosure if they don’t pay their property taxes on time. Instead, educating community advocates and developing educational resources may help with informing reverse mortgage borrowers of their obligation to keep tax and insurance payments current. FHA lenders already have legal recourse for paying taxes and insurance, and foreclosing. This seems drastic in most cases, but establishing and publishing time lines for pursuing defaults on taxes and insurance could help with standardizing enforcement requirements. Borrowers of FHA reverse mortgage loans are required to attend housing counseling; addressing the responsibility for paying taxes and insurance in these sessions could help with reducing tax and insurance defaults and the need for “foreclosing on grandma.”

 FHA Offers Housing Counseling Help

If you or a family member have a reverse mortgage, and need information about paying taxes and insurance, contact a HUD approved housing counselor for help.

Full post as published by FHA Mortgage Guide on June 22, 2010 (boomark / email).