I apologize for frightening you with the title of this post, but there’s no way to sugarcoat it; in a desperate attempt to shore up its finances, the FHA – which insures 95% of reverse mortgages – is authorizing reverse mortgage lenders to go ahead and foreclose on properties that warrant it.
The initiative is designed to target borrowers that aren’t paying property taxes and/or hazard insurance premiums, as well as those that aren’t properly maintaining their properties. Given the terms of FHA HECM reverse mortgages, it is only such borrowers who will be affected. That means that the vast majority of borrowers will be unaffected by this push and can rest assured.
It should be noted that not paying property taxes and homeowners insurance premiums has always constituted a violation of the reverse mortgage contract and thus is grounds for foreclosure. In practice, however, the FHA “Didn’t want bad headlines” and didn’t pressure lenders to foreclose.
That was the case when the solvency of the program was a given. Last year, it lost $800 million, and the FHA is struggling to close that gap. The issue is that those who don’t pay their property taxes could ultimately be subject to government tax liens, which would receive repayment priority over the reverse mortgage. With regard to not paying insurance premiums, the concern is that a flood, fire, or other disaster could destroy the collateral (aka the property) for the reverse mortgage. The same risk applies to properties that aren’t adequately maintained.
Apparently, cases of “technical default” or on the rise, due in no small part to the economic recession. In addition, the lack of a built-in escrow account for taxes, insurance premiums (distinct from the HECM insurance), and projected maintenance costs means the onus for monitoring such requisite expenditures is entirely on the borrower.
In short, for those with reverse mortgages understanding, as well as for those contemplating obtaining one, make sure that you honor the terms of your contract. The consequences of not doing so are now serious, and potentially devastating.