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.