Wednesday, August 30, 2017

Special Home Mortgages For Seniors Experience High Default Rates, Despite Terms Requiring No Periodic Loan Repayments

From a recent story in The Washington Post:
  • [A]cross the nation, an increasing number of seniors are facing foreclosure after taking out reverse mortgages, either because they fell behind on property charges or failed to meet other requirements of the complex mortgage loans, according to federal data and interviews with consumer and housing specialists.

    “Folks who had expected to age in place and live for the rest of their lives in their home are now having to scramble to find a new place to live,” said Odette Williamson, a staff attorney with the Boston-based National Consumer Law Center, which advocates for consumer justice for low-income people. “People just don’t know where to turn. It’s heartbreaking.”

    The federal Department of Housing and Urban Development, which insures most reverse mortgages in the country, says it lacks detailed data on how many homeowners have lost their homes or are facing foreclosure in the program, which was launched in 1989 and covers about 636,000 loans. Nationstar declined to comment for this article.

    But a HUD report issued last fall found that nearly 90,000 reverse mortgage loans held by seniors were at least 12 months behind in payment of taxes and insurance and were expected to end in “involuntary termination” in fiscal 2017. That’s more than double the number the year before.

    Losses in the senior mortgage program have been a drain on the Federal Housing Administration’s mortgage insurance fund that supports all single-family loan programs, including traditional forward mortgages and reverse mortgages.

    HUD spokesman Brian Sullivan said the agency has tightened the requirements to reduce defaults for new loans going forward. It’s a necessary measure as its reverse mortgage portfolio — whose value can go down with defaults or home prices and property values if homes fall into disrepair — was valued last fall at negative $7.7 billion.

    Still, he said, reverse mortgages are “a critical resource for seniors who wish to access their accumulated home equity and age in place.”

    Before 2015, the only thing homeowners ages 62 and older needed to qualify for a reverse mortgage was equity in their home; lenders weren’t required to determine whether they could afford to maintain their homes or cover tax and insurance payments in the future. Some homeowners used the funds to pay off the original mortgages or ran out of money after covering living expenses over many years. Now HUD requires all borrowers to undergo a financial assessment to qualify, to make sure they will be able to pay their taxes and insurance.

    But tens of thousands of troubled loans remain. More than 18 percent of reverse mortgage loans taken out from 2009 to June 2016 are expected to go into default because of unpaid taxes and insurance, according to the HUD report. That compares with less than 3 percent of federally insured loans that are considered seriously delinquent in the traditional mortgage market.

    Joanne Savage, an attorney with AARP’s Legal Counsel for the Elderly, said that seniors [] are the victims of a past system. She joins other advocates who argue that HUD and lenders should work harder to help troubled borrowers facing displacement for relatively small debts compared with the value of their homes.

    “There needs to be a little more mercy,’’ Savage said. “We are going to have a steady stream of these clients for five to 10 years.”
    ***
    Borrowers can receive 50 percent to 66 percent of the value of their equity, depending on their age and the interest rate, generally set at about 5 percent. For example, a 73-year-old with a home worth $100,000 and no current mortgage could receive a loan in a lump sum or monthly installments, or a line of credit, of up to $57,900, not including closing costs, according to HUD.

    The debt increases each month with interest on the loan, and in many cases fees to the servicer and an insurance payment to HUD, which guarantees to take over the debt from the lender when it grows bigger than the value of the house. The loan comes due when the borrower dies, moves or violates loan requirements. At that point, owners or their heirs who want to keep the home can pay the debt or 95 percent of appraised value of the property — whichever is less. Or they can walk away from the house.

    [...]

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