“If it bleeds it leads”. This phrase gives the general public a peek behind the curtain of print and television journalism’s choice of what’s ‘news’ and how it is presented (slanted). Fear-based news has become even more profitable with the advent of online news sites seeking salacious headlines using fear to garner more clicks, site traffic and ultimately advertising dollars. The Washington Post’s recent article, “More seniors are taking loans against their homes- and it’s costing them” is actually more fair-minded than the headline, yet overlooks one most important caveat.
Any senior who is displaced from their home can fairly be described as a true American tragedy, each warranting an examination of the underlying unique causes that ultimately led to foreclosure. Truthfully, some reverse mortgages should have never been written for seniors who would unlikely be able to afford to make the required ongoing property payments for taxes and homeowner’s insurance. Those at greatest risk of future foreclosure often had little existing income, a history of poor money management, and no limitations on how quickly they exhausted their available loan proceeds. I recall the sense of dread and frustration that washed over me years ago as I pulled up to my applicant’s home only to see a newly-purchased RV in the driveway. The loan had not even funded and substantial hurdles remained.
“Tens of thousands of troubled loans remain. More than 18 percent of reverse mortgage loans taken out from 2009 to June 2016 are expected to go into default because of unpaid taxes and insurance, according to the HUD report”, the Post dutifully reports. With this in mind, it should come as no surprise that HUD may have intentionally shifted the Home Equity Conversion Mortgage further from the cash-strapped ‘needs-based-borrower’ and into the hands of the more affluent borrower with the Financial Assessment. In fact a recent report from HECM counselors confirms that fewer needs-based borrowers are entering counseling. With mounting projected losses from technical defaults there was little choice but the rein in default rates and payouts from FHA’s insurance fund which backs HECM loans.
While well-researched the Post’s article fails to mention one key detail, both traditional mortgage and reverse mortgage loans require the borrower to keep their property taxes and insurance paid up or risk the ensuing foreclosure and displacement from the home. In this respect, the reverse mortgage has become the all to convenient scapegoat for the financial woes of senior homeowners facing a loan default.
A number of factors can contribute to HECM borrower’s losing their home due to nonpayment of property obligations.
- Spendthrifts. Homeowners who quickly spend the money they’ve never had before, not considering the future financial impact and risks.
- Bad habits. A significant number of seniors who took a reverse mortgage needed one to bail them out of a financial mess. Bad habits and poor financial decision making do not stop once they get a reverse mortgage.
- Suitability. Before the Financial Assessment, many older homeowners only postponed the foreclosure of their home refinancing their existing mortgage, with little residual cash flow remaining after the elimination of monthly mortgage payments. A short term solution with an unhappy ending.
- Financial abuse. The inconvenient truth is the vast majority of financial crimes committed against elders are done by the adult children and relatives of the borrower. There are many documented cases of children or caregivers misusing funds intended to pay taxes and insurance.
- Financial Shocks: Despite the best-laid plans, the unexpected death of a spouse or a medical crisis can sink the financial ship of even the most cautious HECM borrower.
Despite the claims of false advertising, it is true that a reverse mortgage allows borrowers to remain in their home without ever making another payment- mortgage payment that is. That said, the new requirements of disclosing required property charge payments (something traditional mortgages should disclose), the Financial Assessment, and the move toward more affluent borrowers have already dramatically reduced the number of HECM defaults.
Until the risky loans of yesteryear are terminated, the reverse mortgage may remain a tempting scapegoat of mortgage lending in eyes of the media. Just be sure to remind them of what Paul Harvey so famously said was ‘the rest of the story’.
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