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Reverse Mortgages Can Be Hazardous

Foreclosures, substantial lender fees, program risks

Nov. 24, 2017

By CHARLES ELMORE The Palm Beach Post (Tribune News Service)

Actor and pitchman Tom Selleck, among others, has helped persuade more than 1 million seniors in markets like Palm Beach County, Florida, that reverse mortgages are not "too good to be true."

But a federal agency overseen by Department of Housing and Urban Development Secretary Ben Carson of Palm Beach Gardens says an insurance program backing reverse mortgages is "losing money and can no longer remain viable in its present form."

Foreclosures in reverse mortgages climbed to more than 3,600 a month last year, up from less than 500 a month in prior years, according to government data analyzed by nonprofit groups.

A 92-year-old Florida woman with a reverse mortgage faced a foreclosure filing because she owed 27 cents, a legal aid group said.

A couple, 75 and 78, was accused of not living in their home of almost 20 years, though they were served with lawsuit papers at the house itself, Jacksonville Area Legal Aid said. The bank sold the home and they lost their possessions, the group said.

The legal aid organization said in some instances it has helped win court orders to let seniors return to or stay in their homes, but the cases point to serious risks with reverse mortgages -- including aggressive tactics by mortgage servicers.

"Wrongful reverse mortgage foreclosures are at a crisis stage and there are very few, if any protections from the bad practices of the servicers," Jacksonville Area Legal Aid said in a statement.

The group criticized a "lack of meaningful oversight" from federal officials who are supposed to oversee foreclosure attempts.

HUD officials said the aim of the program is to let seniors stay in their homes, and 73,728 of 74,213 foreclosures from April 2009 to December 2016 were attributed to the death of borrowers. Other reasons included assertions the borrower no longer lived in the home, fell behind on taxes or insurance, transferred title to someone else or left the home in disrepair.

"The whole reason behind this program is to offer seniors a financing option that allows them to remain in their home for as long as they're able," said HUD spokesman Brian Sullivan. "While there are requirements of these senior borrowers, our primary interest is to preserve their homeownership."

In any case, the negative net worth of reverse mortgages in the fiscal-year year ended Sept. 30 has grown to $14.5 billion from $7.7 billion a year earlier, an annual report released this month says.

That is why, the Federal Housing Administration says, new rules that took effect in October have been necessary to boost the up-front insurance premiums most seniors pay and lower the borrowing limit. Some analysts predict that will make reverse mortgages less attractive.

"Our duty is clear -- we must make certain FHA remains financially viable so future generations can build wealth and climb the economic ladder of success," Carson said Nov. 15.

The president of the National Reverse Mortgage Lenders Association told The Palm Beach Post the industry sees reasons for optimism, but disagrees on the particulars of some recent government moves.

"We think what they did is overkill," said NRMLA's Peter Bell, whose father lives in Palm Beach Gardens.

His group notes the most usual cause for default is death of the last surviving borrower, so there is usually no eviction involved, and new underwriting standards imposed in 2015 are substantially reducing the risk of default for not paying insurance and taxes.

Reverse mortgages, familiar to most people through TV ads with celebrities like Selleck or parodies by late-night comics, were created in the late 1980s as a way to let seniors 62 and older tap equity in their homes without moving out of them -- to "age in place." Instead of making mortgage payments each month, seniors who have paid off or substantially paid down mortgages on their homes can get monthly or lump-sum payments without having to pay back the funds or sell the house, until they move out or die.

A key selling point: The reverse mortgage loans are backed by the government. Seniors with reverse mortgages and their heirs cannot be required to pay back more than the home is worth, whether the home value goes up or down. Borrowers pay insurance premiums to cover any shortfalls. This insurance also protects borrowers if lenders go out of business before paying out promised amounts.

But unless trends change, Congress could have to step in with taxpayer money to stabilize the program, a move rarely needed in the past, officials said. The single-family insurance program has been generally self-sustaining since 1934 with the exception of a $1.7 billion infusion in 2013, which was largely because of reverse mortgages, according to FHA.

Claims related to reverse mortgages backed by the federal government rose to $5 billion in fiscal-year 2017, up about 20 percent from $4.2 billion in one year, HUD said.

Reverse mortgages, also known as home-equity conversion mortgages, or HECMs, when backed by the government, raise concerns for taxpayers as well as holders of traditional or "forward" mortgages, according to FHA.

"Today, younger, lower-income homeowners with traditional FHA-insured 'forward mortgages' are routinely bailing out the HECM program through the mortgage insurance premiums they pay, placing a significant burden on the overall health of FHA's Mutual Mortgage Insurance Fund," according to a "fact sheet" from HUD. "We can no longer tolerate putting American taxpayers and future generations of seniors at risk. Quite simply, the HECM program is losing money and can no longer remain viable in its present form."

NRMLA's Bell said his group "shares Secretary Carson's optimism that recent policy changes will help sustain the HECM program, which more than a million senior households have used to supplement retirement savings and age in place."

Bell added, "We are still studying FHA's Actuarial Report to Congress to understand how the actuaries have modeled the projected valuation of the HECM portfolio. In the past, we've raised concerns that actuaries misunderstood the behavior of a HECM loan over time -- including how a loan is typically serviced and the home's value at time of disposition."

Bell said his group wants to study whether the HECM program should remain in the same fund with other kinds of mortgages, or be separated into its own insurance fund and evaluated on its own merits.

"This is a conversation we will be having with policy makers at the agency and on Capitol Hill, and with industry stakeholders," he said.

Consumer agencies and members of Congress have raised caution flags on several issues. One concerns a strategy of taking out a reverse mortgage in order to delay Social Security payments and, in theory, come out ahead by getting higher amounts at a later age.

"A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully," Consumer Financial Protection Bureau Director Richard Cordray said in August. "For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain."

Reverse mortgage proponents don't necessarily agree with that, but mortgage complaints of all kinds, including reverse mortgages, have accounted for 26 percent of complaints by consumers 62 or older filed with the agency since 2011. That's 10 percentage points higher than the proportion of complaints about mortgages from consumers under 62.

Besides concerns that lender fees can be substantial on a product not all seniors understand well, other issues have surfaced. One surrounds rules about whether surviving spouses not on the mortgage can lose the house when the homeowner dies, a subject of correspondence in recent months between Carson and lawmakers including Florida Republican U.S. Sen. Marco Rubio.

Another potential pitfall involves seniors who fall behind on paying taxes and insurance and risk going into default or being forced out of their homes.

More than 18 percent of reverse mortgages taken out from 2009 to June 2016 were expected to go into default because of unpaid taxes and insurance, a HUD report last year found. Nearly 90,000 reverse mortgage loans were reported at least 12 months behind in payment of taxes and insurance.

Federal officials have been revising rules for reverse mortgages in an effort to cut down on such problems, but HUD officials said this month the program must continue to be "closely monitored and managed."

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