When it comes to pending foreclosures for mortgages in forbearance younger Americans are not alone. Many older homeowners are facing the specter of losing their homes.
Foreclosure moratoriums are ending
A Harvard University housing report warns that over 2 million American homeowners who have delinquent mortgages are at risk of foreclosure. As the Covid-19 pandemic ebbs a new contagion of housing insecurity is preparing to spread creating a wave of evictions.
Over 7 million American homeowners were placed under the protection of a foreclosure moratorium as a result of the Coronavirus Aid, Relief, and Economic Security Act (CARES) last spring. The Biden administration extended the moratorium as millions seek a way to modify their loans or find a way to save their homes.
Numerous deadlines have passed and been extended by both federal, state, and local governments. This myriad of ever-changing expiration dates has left many confused and uncertain. However, one thing is clear. The federal government is determined to prevent a wave of foreclosures and evictions as evidenced by a foreclosure moratorium on all federally-insured mortgages until July 31st, 2021.
However, Financial Reg News reports that the Federal Housing Finance Agency (FHFA) is offering borrowers protections after moratoriums end. “FHFA officials announced that Fannie Mae and Freddie Mac servicers would not be permitted to make the first notice or filing for foreclosure that would be prohibited by the Consumer Financial Protection Bureau’s (CFPB) Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA), Regulation X Final Rule before the CFPB rule takes effect.” This rule prevents any move to foreclose before December 31, 2021.
When it comes to senior homeowners facing potential foreclosure there’s little if any data. However, it’s no leap of logic to conclude that there are thousands, perhaps tens of thousands of older homeowners who don’t know how to save their homes. And yes, surprisingly, some may not be aware that a reverse mortgage could in fact save the very roof over their head.
Mortgage forbearances are being extended. How will home values and borrowers be impacted once they end?
It’s compassionate and pragmatic. Mortgage forbearance allows borrowers to suspend or reduce their monthly payments, however, delinquent payments must be repaid. The good news is homeowners with a federally or GSE-backed mortgage (FHA, VA, USDA, Fannie & Freddie) are protected from a lender initiating foreclosure until December 31st of this year thanks to the CARES Act. FHA-insured Home Equity Conversion Mortgage borrowers are protected under this provision.
However, there is a less-publicized provision of the Coronavirus Aid Relief & Economic Safety act; a provision that is certain to have a major impact on the housing market and home values.That provision is the right for the aforementioned homeowners to apply for up to six months and if desired another extension for up to 360 days. No documentation of financial hardship is required to qualify. Basically, that means millions of American homeowners will not be making a payment for up to one year. In essence, our government has attempted to stem a tidal wave of foreclosures and slow damage to our fragile economy delaying the inevitable. The silver lining is home values should remain relatively stable during this temporary calm. That’s a win for reverse mortgage originators who can offer more borrowing power with high home values and low interest rates. Home sales slowed to a crawl in this spring as the first waves of COVID-19 hit our shores. Then the summer months brought record-breaking home sales volumes
as a flood of pent up demand hit the market.
But what happens after mortgage forbearances work their way through the system? Some housing analysts predict 1.9 million or 40% of those in forbearance will end up defaulting. That’s a sobering number but nowhere close to the 3.1 million foreclosure filings seen in the 2008 housing crisis which created a glut of housing inventory driving prices down. A correction in housing values is assured in a cyclical real market but it’s unlikely we’ll see home values plummet immediately. The hope is the air will be released slowly from the housing bubble we find ourselves in today. However, eventually, a toll will be extracted from the housing market for the unprecedented shutdown of our national economy.
Housing prices are marching to the beat of a different drum and seniors are part of the new rhythm which is further constraining housing inventory. “Seniors are scaling down at a far slower rate than in the previous, additional constraining supply. “We were predicting that baby boomers, like past generations at their age, would move into apartments, condos, or to their second homes en masse,” says Ed Pinto- Director of the American Enterprise Institute in a recent Fortune Magazine column. “That isn’t occurring. The main reason they aren’t moving is that their adult children move back in and work from the home they grew up in.”
Two things will mitigate and deflation in housing prices. Housing demand and employment. As more Americans regain employment they are more likely to voluntarily decline further mortgage forbearance and resume making payments. All things considered, a gradual deflation is preferable to a sudden bursting of a housing bubble.
Older homeowners have a myriad of mortgage choices. Is a 30-year mortgage really a smart move or should they declare mortgage independence?
In part two of our exclusive interview with New York Financial advisor Robert Intelisano, we cover the risks of a 30-year mortgage refinance for older homeowners and why partnering with other mortgage and financial professionals may the most effective means to reach distressed homeowners.
Heirs attempting to payoff reverse mortgages face hurdles or accelerated foreclosures
Losing a parent is truly a heart-wrenching experience. One that many of you our viewers, and myself have endured. Compounding the grief is the frustration in settling the financial affairs of your loved one. According to a recent column in USA Today last week, some reverse mortgage heirs are finding themselves thwarted in their attempts to purchase their parents home facing conflicting notices, bureaucratic red tape, and foreclosure- even when the family has the means to pay off the loan. Each delay driving up the ultimate loan balance payoff.
Servicing issues are not a new phenomenon. On this show, we have reported on some of the challenges of loans serviced by HUD’s chosen contractors…
If there’s one fault most salespeople share it is this- a lack of follow up with the borrower after the sale. While many may contact the homeowner after the loan funds, or call to explain the first monthly loan statement- few stay in regular contact with the borrower. A lack of communication or no longer being easily accessible is fertile ground for misunderstanding, frustration, and yes even litigation. Consider for a moment the perception of an elderly borrower who may be panicked over some innocuous notice, or even worse a notice to remedy a delinquent property tax installment. Like most, they cannot easily locate their loan paperwork, just as most 30-year-olds cannot quickly locate their closing documents or even the folder they received from their mortgage broker. An older homeowner is fraught with worry, their adult children may be angry, and most importantly- a situation that may have been quickly remedied gets out of control.
The infamous USA Today expose on reverse mortgages included one instance of a homeowner having their loan called due and payable for a two-dollar deficiency on their property taxes. Two-dollars! Sure, they could reach their servicer- but what if they don’t? Who has egg on their face? The lender, loan officer, and the industry as a whole.
“As an industry overall, we need to do a better job of communicating with our clients. We need to make it easy for them to contact us and reach a live person knowledgeable enough to answer their questions and provide appropriate guidance. This needs to be done at every stage of a loan, from origination thru final disposition”, said NRMLA President and CEO Peter Bell in NRMLA’s publication Reverse Mortgage Magazine. Timely words of wisdom indeed.
The media often overlooks the risks inherent in any mortgage: froward or reverse
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We see many national media headlines on how risky a reverse mortgage can be for older homeowners. Risky? This week we briefly touch on the most common risks that can be found in traditional and reverse mortgages and how most risks can be avoided.
Spending the kids inheritance.
Many formal complaints filed on a federally-insured reverse mortgage are from the adult children or heirs of a borrower. Many are unpleasantly surprised that mom or dad took out the loan only to learn that some or all of the home’s equity has been consumed. In many instances the parents could not cover their daily living expenses and chose a HECM to maintain a sense of financial independence. Often the adult children who are expecting to inherit the home were unable to financially assist their parents financially. While heirs may worry their inheritance is being spent, their parents often face real and more pressing and immediate financial concerns in their non-working years. If the parents were unable to keep their traditional mortgage payments current and lost the home to foreclosure, any remaining equity would be lost for both the parents and children alike…
The following was originally published in November 2011. Despite much of the recent negative news coverage reverse mortgages have helped countless older homeowners avoid inevitable foreclosure and eviction.
Personal success stories are a powerful vehicle to imprint the value of a product or service in potential clients’ minds. The following true tale will brighten your prospects’ holiday season.
Reverse Mortgage To Prevent Foreclosure
A reverse mortgage was a lifesaver for 77-year-old Isidoro, who had been in foreclosure due to the current economy. By the time he contacted Security One Lending, Isidoro was on the verge of losing his home to foreclosure within a few months. He was faced with moving out of his home and trying to find a rental somewhere on a Social Security income of just $800 a month, which would have left him with precious little money for food and other necessities. Security One’s loan advisor quickly realized that the home’s value was in decline — something many Americans are experiencing now. Chase Bank had tried for the better part of a year to “short sale” the home, with no offers. Fortunately, the bank has a program to accept a reverse mortgage in lieu of a short sale.
Security One Lending negotiated with Chase Bank over several months — and several foreclosure extensions — to ultimately shave a whopping $182,000 from the principal note balance. Additionally, the loan agent was able to drastically reduce the reverse mortgage loan fees to allow the client to qualify, and have his existing Chase Bank loan paid off in full — which kept him from losing his home.
Isidoro retains full title to his home, and can never lose the house due to non-payment. That’s a true holiday gift!
As a mortgage professional, I worked nights and weekends as a housing counselor during the financial crisis. Foreclosures are scary and heartbreaking, and I will admit to crying with clients when their only option was to pick up boxes behind the grocery store and find any friend with a truck. No, these were not reverse mortgage borrowers. They were homeowners with subprime loans, option arms, and even traditional 30-year fixed-rate mortgages. In fact, it was the reverse mortgage that prevented innumerable foreclosures and bankruptcies during this difficult time. The experience of saving countless homeowners from this misery changed my life forever.
The cases mentioned in the recent USA Today article were tragic. However, the article fails to recognize that not all foreclosures are equal, and there are no easy solutions when retirees need to access housing wealth to survive.
So, can a foreclosure occur with a reverse mortgage?
The short answer is yes. ANY homeowner or estate can lose a home for various reasons. While the media sensationalizes this as “news,” they haven’t taken the time to understand reverse. But as ridiculous as this sounds to the novice, there are ACCEPTABLE foreclosures from the borrowers’ (and the heirs’) point of view.
Consider Susan, who after theafter the death of her father decided to “walk away” from the property she inherited. That’s okay. Susan is protected by the “non-recourse” feature that guarantees her right to do this… with no recourse, even if the loan balance far exceeds the value of the property. While this type of foreclosure is often vilified by the media, it was a very favorable financial transaction for Susan’s father, and a non-recourse foreclosure was ACCEPTABLE to Susan.
When we think of foreclosure, we naturally think of the most common reason traditional (forward) loans end in foreclosure – failure to make the required monthly mortgage payment. Of course, that wouldn’t make sense with a reverse mortgage that carries no monthly repayment obligation. So, it’s understandable why homeowners, their heirs, and the media are often confused when they see that reverse mortgage foreclosures happen from time to time.
WHY WOULD A REVERSE FORECLOSURE OCCUR?
USA Today’s recent expose overlooks the true reasons behind reverse mortgage ‘foreclosures’.
While reverse mortgages don’t require a monthly principal and interest mortgage payment during the life of the loan, there are other borrower obligations contained in the reverse mortgage loan agreement. The borrower has agreed to occupy and maintain the home, as well as pay all property-related charges. Failure to do these things will cause the loan to mature. When a loan maturity event happens, the borrower (or their heirs) will often sell the home to pay off the loan balance.
For example, when the last surviving borrower leaves the home for 12 consecutive months for mental or physical incapacity (e.g. nursing home or assisted living), that is a maturity event. The borrower or their heirs will often notify the lender of their intentions to sell the property. The lender will then allow them 6 months to sell the home and HUD generally approves two 3-month extensions for up to one year.
If no action is taken to sell the home, the lender will need to foreclosure on the home, handling the sale themselves so that the loan can be repaid.
The following are two common reasons reverse foreclosures occur:
No equity remains at loan maturity
When the loan balance exceeds any reasonable sales price of the home, the estate has no economic incentive to sell the home on their own. Fortunately, all reverse mortgages are “non-recourse” loans. Nevertheless, foreclosure is the mechanism that conveys title to HUD (or the Lender) so the home can be sold to pay off at least a portion of the loan balance.
A property tax default occurs
Failure to pay property taxes will almost always result in foreclosure. This is true whether the homeowner has a reverse mortgage, a traditional mortgage, or no mortgage at all. However, the lender is the major lien-holder on the home and is required by federal guidelines to foreclose on the property for most reverse mortgages.
Keep in mind, a reverse mortgage naturally allows the homeowner access to funds, which should theoretically REDUCE the likelihood that a borrower will default on their obligations. But with the increased financial pressures of retirement, we cannot always guarantee that homeowners will keep funds in reserve.
PROPERTY CHARGE FORECLOSURES ARE DOWN DRAMATICALLY!
While nothing can be done to keep people from the grave, two measures were implemented by HUD over the last six years that have been helpful in reducing the numbers of foreclosures caused by tax defaults – InitialDisbursement Limits and Financial Assessment.
Initial disbursement limits were implemented that restrict the consumption of proceeds for the first year of the loan. Unless the borrower has large mortgage payoffs that necessitate higher draws, the borrower may be initially limited to 60% of their funds. As a result, borrowers now keep a portion of their proceeds in a growing line-of-credit available for future emergencies.
Financial Assessment requires the lender to examine the credit history, property charge history, and residual income for one primary reason – to determine whether the reverse mortgage is a sustainable solution for the borrower. To ensure sustainability, some borrowers are now required to set-aside a portion of the proceeds to pay property charges.
These two changes have reduced the number of reverse mortgages nationwide but has also reduced the number of foreclosures.
Yes. Foreclosures can happen, and they will continue to occur. Remember, Susan walked away because her father consumed more available funds during his retirement than the home was eventually worth. For more information on all forms of reverse mortgage product offerings, consider buying the reverse mortgage resource consumers and finance professionals use – Understanding Reverse.
Dan Hultquist, MBA, CRMP
Dan Hultquist is Vice President of Organizational Development at Finance of America Reverse (FAR), the largest wholesale provider of reverse mortgages. He has spoken nationally on the topic of Reverse Mortgages, and his training sessions have exceeded 25,000 in attendance over the last decade. He is a Certified Reverse Mortgage Professional (CRMP), and co-chairs the Education Committee for the National Reverse Mortgage Lenders Association (NRMLA). He also teaches continuing education courses that serve as annual requirements for CRMPs. Dan is a Penn State graduate and obtained an MBA from Kennesaw State University. He lives outside Atlanta with his wife and 3 children.
If there’s one fault most salespeople share it is this- a lack of follow up with the borrower after the sale. While many may contact the homeowner after the loan funds, or call to explain the first monthly loan statement- few stay in regular contact with the borrower. A lack of communication or no longer being easily accessible is fertile ground for misunderstanding, frustration, and yes even litigation. Consider for a moment the perception of an elderly borrower who may be panicked over some innocuous notice, or even worse a notice to remedy a delinquent property tax installment. Like most, they cannot easily locate their loan paperwork, just as most 30-year-olds cannot quickly locate their closing documents or even the folder they received from their mortgage broker. An older homeowner is fraught with worry, their adult children may be angry, and most importantly- a situation that may have been quickly remedied gets out of control.
