While reverse mortgages allow older homeowners the opportunity to draw on home equity with minimal risk, problems arising from flaws in program structure are causing headaches for borrowers and issuers alike, according to recent reports.
Miscommunication and misunderstandings about the rules surrounding the Federal Housing Administration’s home equity conversion mortgage, or HECM program, are leading to defaults, the National Consumer Law Center found. The FHA has provided borrowers some relief since 2020 but problems remain.
Unclear instructions provided to loan servicers in the past have also resulted in confusion, sometimes pushing them to foreclose on borrowers without providing the information and maximum assistance they might be eligible to receive.
“The FHA reverse mortgage program has not lived up to its full potential,” said Sarah Bolling Mancini, a NCLC staff attorney and primary author of its report.
While HECMs are meant to benefit older homeowners with limited finances outside of their property’s equity and include mandatory counseling, several advocates for distressed borrowers, including attorneys, said some borrowers were unknowingly defaulting.
Policies were not clear to many receiving loans, believing they would be “payment free” as ads described, even though homeowner association fees, taxes and insurance were still owed. When lenders advanced those missed payments according to FHA policy, some borrowers unable to repay later found themselves in default and foreclosure.
Additionally, servicers had limited loss mitigation options to offer if defaults occurred due to missed property charge payments, and the FHA does not require them to offer such assistance for reverse mortgages. Only about a quarter of reverse mortgage borrowers in default on property charges have obtained any form of loss mitigation, the NCLC said.
Reverse mortgage servicers reported approximately 27,000 HECM borrowers were in default on property charges as of April 2021, the NCLC found. Approximately 64,489 loans were issued in fiscal year 2022. In total, close to 479,000 active FHA-insured reverse mortgages were listed as outstanding at the end of the last fiscal year.
Scattered guidance about foreclosure timelines for reverse mortgages between 2007 and 2015 compounded servicing issues. But current policies require servicers to move quickly or face financial penalties, giving them little incentive to assist borrowers. FHA recordkeeping regarding servicing of distressed reverse mortgages has also been inconsistent, a concern the U.S. Government Accountability Office has noted.
Representatives of the reverse mortgage industry said it was committed to improving outcomes for their borrowers.
“NRMLA recognizes there are opportunities to further improve loss mitigation options for those borrowers, who may have challenges meeting their loan obligations. We will continue to advocate for such program improvements,” said Steve Irwin, president of National Reverse Mortgage Lenders Association in a statement sent to National Mortgage News.
Communication issues between servicers and borrowers have also plagued the HECM program. The NCLC cited instances of servicers foreclosing based on supposed non-occupancy when the borrower was still residing in their home.
At the same time, delinquent payments are also behind some recent headlines coming out of the HECM industry, an Urban Institute report said, putting lender liquidity issues in the spotlight.
“The recent bankruptcy of one of the program’s largest servicers, Reverse Mortgage Funding, has exposed a weakness in the program that will undermine it if left unchecked,” wrote Urban Institute researchers.
Although Ginnie Mae secures HECMs, removing credit risk, lenders keep the mortgages on their books until they reach a 98% loan-to-value ratio. At that point, they are required to buy out the HECMs from the Ginnie Mae pool and assign them to the FHA. But as the agency cannot accept 20% of HECM loans with delinquent taxes or insurance charges owed or when the borrower has passed away, the servicer remains responsible for payments until a resolution is reached, which may take years.
As RMF had a portfolio of loans borrowers had drawn from dating as far back as 2006, a high number were near their maximum LTV ratio, putting it “on a course to incur considerable costs over the coming years, a burden that it would not be able to bear,” Urban Institute found.
With several servicers owning portfolios with originated loans from the same period, they present a potential looming liquidity issue for the industry.
“The key to making HECM sustainable will be reducing the number of loans that cannot be assigned to the FHA upon buyout,” Urban Institute said.
To reduce the degree of delinquent payments among HECM borrowers, NCLC also made several recommendations to the FHA, including allowing greater flexibility to offer loss-mitigation for loans with property charges. The organization said the Consumer Financial Protection needed to work with the FHA to develope more effective communications and prioritize servicer supervision and enforcement.
