These days, the media has been harping on foreclosure, but very little of the attention is being directed towards reverse mortgages. While newspapers and TV newscasts have been filled with reports of foreclosure “victims,” one has to search long and hard for victims of reverse mortgage foreclosure. This is probably for good reason, since the fraction of conventional mortgages that have slid into foreclosure is significantly higher than the corresponding proportion of reverse mortgages.

Unfortunately, this could change soon, as Reverse-Mortgage-Daily recently reported that “HUD has given lenders approval to foreclose on seniors whose properties have gone into ‘technical’ or other default.” The news posting goes on to argue that foreclosures would be bad for the reverse mortgage industry (mainly from a PR standpoint), and that specific guidelines will be issued later this spring.

Regardless of what HUD decides, foreclosures in reverse mortgages will remain rare. That’s because reverse mortgage contracts (as mandated by HUD) are written in such a way as to preclude foreclosure in all cases except where the borrower has failed to pay property taxes, homeowners insurance, and/or failed to adequately maintained the property. There are also a handful of contingencies in which the loan can be called (namely when the borrower dies or moves out), which also results in the lender taking control of the property unless the balance of the loan is immediately repaid.

In practice, technical default remains rare, in part because the reverse mortgage itself represents a source of funds which can be used to pay taxes, insurance, etc. In addition, lenders remain reluctant to foreclose on reverse mortgages (even when they may be legally justified to do so) not only because of the negative PR but also because there is no incentive to do so. That’s because reverse mortgages are insured, and lenders can be assured (in most cases) of collecting the full balance of the loan when it comes due, including back-taxes and homeowners insurance.

Even if the value of the home declines dramatically, a foreclosure would still not be justified. That’s because the home is only appraised when the reverse mortgage is first issued and if/when the borrower wants to refinance or extend the loan term. If the home depreciates in the interim, even to the point that the balance of the loan exceeds the value of the home, HUD (not the borrower) must remunerate the borrower using funds from its insurance reserves.

In short, this change in policy probably won’t amount to much. It’s a reasonable attempt by HUD to make sure that its HECM reverse mortgage program remains viable. Unfortunately, the biggest threat to its solvency is not borrowers not paying property taxes, but rather, a continued decline in home prices. And there is very little HUD can do to mitigate this possibility (except to further increase insurance premiums for borrowers) without fundamentally altering the current structure of reverse mortgages.

3 Responses to “Reverse Mortgages and Foreclosure”

  1. Sally Homfeldt Says:

    My father passed away 6/25 of this year. The house was appraised at $155,000 in 2007(before mortgages plummeted). My 61 year old brother lived with him(my dad was 84) and he suffers from depression, no stomach and has to use cathaters all the time. We offered to sing over the deed in lieu of forclosure and they said fine. Then they sent someone out to appraise the property again(in August) and charged us $450.00 added to the reverse mortgage fees. My dad passed aways in the house he worked all his life for and now my brother has to move 40 miles away from his doctors because they are foreclosing. The lender is BANK OF AMERICA!!!!!!!!!!

  2. Roy W Mills Says:

    I reading this article am I to understand that if I plan to move, and sell my home for less that the reverse mortage balance that Hud will pay the lender the balance of the difference in the sale price and the note?

    Thank you for your answer.
    Roy W Mills

  3. cynthia Says:

    They are foreclosing on home owners whose spouse has died Putting 70 on up age people on the street. I know they are foreclosing on me!
    They make sure the youngest not on the loan.
    The statutes clearly state against this So whos above the law here???

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