Unpaid tax, insurance bills boost reverse mortgage foreclosure risk
WASHINGTON — Here's a sobering message for anyone who has a federally insured reverse mortgage or plans to apply for one: If you don't pay your local property taxes or hazard insurance premiums, you should know that the risk of losing your house to foreclosure is about to increase.
Although the Federal Housing Administration, which runs the dominant reverse mortgage program, often had been lenient and forgiving in past years about tax and insurance delinquencies by senior borrowers, it's likely to take a more disciplined approach when it issues new guidelines this summer.
FHA is essentially under the budgetary gun to do so: Its reverse mortgage program suffered a $798 million estimated budget shortfall in the last fiscal year — its first ever loss — in part because of widespread declines in the values of the homes that secure its insured loans. It has cut maximum borrowing amounts available to seniors by 10 percent already, and is looking for other ways to bring the program back into profitability in an era of low home-appreciation rates. The agency has asked Congress for a $250 million subsidy, but so far it has not been funded.
Mortgage giant Fannie Mae also has begun instructing the companies who service its large portfolio of FHA reverse mortgages to toughen up their handling of tax and insurance delinquencies, moving to initiate foreclosure proceedings when borrowers have not paid their bills for extended periods and expose the company to losses.
What does all this mean to senior homeowners? In the words of David Certner, legislative policy director for the AARP, the national group representing seniors, "There is going to be more risk for people" who take out reverse mortgages but who don't have the capacity to make tax and insurance payments on time. In the past, said Certner, Fannie Mae and the FHA were "a lot more forbearing" when senior borrowers fell behind or stopped paying. "They didn't want bad headlines" suggesting that they had foreclosed on forgetful old folks — thrown them out on the street rather than be patient and wait for full repayment after the sale of the house.
But now they don't have the financial wiggle room to look the other way. Though neither FHA nor Fannie could provide statistics, mortgage industry experts say tax and insurance defaults are rising — in part because of the recession, and possibly in part because some seniors are not adequately counseled that foreclosure could be an endgame.
"This is definitely a growing problem" with reverse mortgages, said Joseph J. Kelly, a partner with New View Advisors, a New York consulting firm active in the reverse mortgage bond investment field.
"A lot of this is the economy," said Kelly, but "the program design itself is a contributing factor." Unlike standard mortgages, reverse mortgages require no monthly payments from the borrower and have no escrow accounts to cover property tax bills and insurance. Without escrows, some seniors may not keep track of property tax notices they receive — thereby exposing their houses to tax liens that take legal precedence over the mortgage lien.
They may also neglect to pay their hazard insurance premiums, leaving investors in their reverse mortgages with no coverage in the event of a fire or other major destructive event. Kelly and others in the industry believe that FHA needs to build in some sort of escrow or set-aside feature to its program, a concept federal officials say they are currently examining.
The reverse mortgage program, which is limited to those 62 and older, also has no rigorous upfront underwriting requirements other than sufficient borrower equity in the home. Unlike standard loans, minimal or no attention is given to the applicants' incomes or credit scores. Borrowers receive mandatory counseling before going to closing, but some critics say the FHA needs to look more seriously at borrowers' assets, income and long-term financial ability to pay the associated costs of keeping up the property.
Both FHA and Fannie Mae say they are working on solutions that will not only flag defaults on seniors' tax and insurance payments earlier, but also create a mandatory, step-by-step system to contact borrowers who are delinquent, determine the causes of the default, and if necessary refer them to charitable groups who can assist them and prevent foreclosure.
Vicki Bott, FHA deputy assistant secretary for single-family housing, said the forthcoming guidance this summer will emphasize a "curative approach" that allows seniors to "develop a plan to repay past tax and insurance delinquencies." However, if the plan doesn't pan out — and the borrowers simply lack the capacity to pay what they owe — FHA will be forced to pull the plug and foreclose.
Ken Harney can be reached at [email protected]