Loan Modification

FHA reverse mortgages: 1 in 20 in default? Really?!

By Gina Pogol

When seniors opt to take out Home Equity Conversion Mortgages (HECMs) against their homes, they are required to get reverse mortgage counseling from HUD-approved professionals before they can close the deal. And the loans are supposed to be safe — the lender pays you, after all, and any remaining mortgage must be retired before funds can be dispensed.  So how did an FHA audit discover that 5% of its reverse mortgages are in danger of foreclosure?

According to a letter sent last month to FHA lenders and mortgage servicers, advances made by lenders to cover unpaid taxes and insurance from homeowners with reverse mortgages are putting the FHA insurance fund at risk. So now  FHA is conducting an extensive national audit to determine the exact extent of the delinquent payments and will likely have to foreclose on the properties.

But doesn’t FHA have a policy designed to avoid reverse mortgage foreclosure? (Answer: yes)

On January 3rd, HUD issued guidance for lenders in its Home Equity Conversion Mortgage Property Charge Loss Mitigation letter. The letter states that if several missed payments occur, the lender may pay the property taxes, insurance, and other charges from the mortgage proceeds if available. However, once the available funds dry up,  the lender is obligated to advance its own corporate funds to protect HUD?s interest in the property. Then the lender is supposed to ask the borrower to reimburse it.

In any event, foreclosure cannot occur unless “all applicable loss mitigation strategies have been exhausted” and only then does the lender get to submit a claim to HUD. “While it is HUD?s goal to avoid foreclosures as a result of unpaid property charges, mortgagors must comply with the terms of their mortgage, and mortgagees must comply with FHA requirements including the regulations as clarified in pertinent policy issuances.” Mortgagor means the borrower, and mortgagee means the lender.

HUD is getting tough

According to preliminary numbers from a non-profit credit counseling group, about 5 percent of  reverse mortgages (about 30,000 total) are delinquent now. HUD may be realizing that foreclosure may be necessary in order to avoid putting the entire FHA program at risk.

Throwing Grandma out?

People with parents who have reverse mortgages should take note — if there is any chance that your parents could neglect to pay their property expenses and end up in trouble with the foreclosure police at FHA, encourage them to set up their loan so the taxes and insurance are escrowed; that is, paid by the lender from the proceeds so delinquency does not occur. Alternatively, pay the charges yourself or at least check with the county (in most cases public property tax records are available online) to verify that the taxes are being paid on time.

Full post as published by FHA Mortgage Guide on February 15, 2011 (boomark / email).