Reverse mortgages were created to help seniors stay in their homes by tapping the equity built up over the years. Now, a small but growing number of reverse mortgage borrowers find themselves at risk of losing their homes anyway.
That's because the number of reverse mortgages in default is growing, creating the possibility of a real nightmare: foreclosures, and even evictions of elderly homeowners.
At first blush, the problem makes no sense. Unlike a traditional "forward" mortgage or equity line of credit, repayment of a reverse mortgage typically isn't due until the homeowner sells the property or dies. So how can a reverse mortgage be in default?
The answer: While reverse mortgage borrowers aren't required to make monthly loan payments, they are required to keep up with property tax and insurance payments, and maintenance of the home.
A reverse delivers a large lump sum of cash that should -- in theory -- give strapped homeowners sufficient funds to cover those costs. But there's been an increase in the number of borrowers using reverse mortgages to retire their traditional "forward" mortgages or other debt obligations. As a result, these reverse borrowers remain cash-poor, leaving them without a cushion to deal with something unexpected that might come along, like a health emergency.
Nonperforming loans represent a small share of overall reverse mortgages, but their number has grown quickly in the past two years. About 5 percent of the 550,000 loans outstanding are in default or close to being in default, according to the National Council on Aging.
Reverse mortgages are available only to homeowners over age 62. The most popular loan type is the Home Equity Conversion Mortgage (HECM), which is administered by the U.S. Department of Housing and Urban Development (HUD); the current loan limit on a standard HECM is $625,500, although a new "saver" HECM was introduced last fall with lower loan limits and fees.
Reverse mortgage lenders typically advance tax or insurance bill payments in cases where borrowers haven't tapped their maximum loan amounts, adding those costs to the loan balances.
But in cases where loan amounts are exhausted, borrowers have been falling into a limbo of sorts, due to a lack of clear guidance from federal regulators on how lenders should handle defaulted loans. The number of loans in limbo rose 173 percent between May 2009 and March 2010, according to an audit by HUD's Inspector General's office.
The prospect of foreclosure and possible evictions of seniors has made HECM defaults a political hot potato for the federal agencies involved, which include HUD, the Federal Housing Administration and Fannie Mae. Until last year, Fannie purchased most HECM loans from issuers, but it has exited the market for reasons unrelated to defaults.
Early this month, HUD issued instructions to lenders on how it wants delinquent loans to be handled. Lenders will be contacting all delinquent borrowers by the end of April to lay out options including establishing repayment schedules, restructuring of loans or to offer assistance from a HUD-approved consumer counseling service.
HUD is stressing to lenders the importance of avoiding eviction of HECM borrowers who default. The agency has taken steps to beef up counseling that is required before consumers take out reverse mortgages. And earlier this month, HUD announced $3 million in new funding to housing counseling agencies to help them provide guidance to borrowers facing default.
HECM borrowers who are in default should expect to be contacted by their lenders soon by mail. The letters will offer options, including setting a repayment plan, refinancing the loan, or entering a HUD-approved loan counseling program.
Here are the five HUD-accredited counseling services for assistance and their toll free numbers: The National Council on Aging, 800-510-0301; CredAbility, 888-395-2664; Money Management International, 866-765-3328; National Foundation for Credit Counseling, 866-363-2227; and NeighborWorks America, 888-990-4326.
Mark Miller's Retire Smart column is carried by Tribune Media Services.