Are HECM ‘foreclosures’ true to their name?
Plato said, “ a good decision is based on knowledge and not on numbers”. A fitting quote when we examine the number of purported ‘foreclosures’ that have raised the eyebrows and collective concern of lawmakers tasked with overseeing the The Department of Housing and Urban Development’s budget. Speaking before the House Appropriations Subcommittee on Transportation, Housing, and Urban Development last week, HUD Secretary Ben Carson credited the most recent HECM reforms for easing the strain on FHA’s Mutual Mortgage Insurance Fund.
In November 2017 the California Reinvestment Coalition claimed a 646% spike in HECM foreclosures in 2016. During the hearing, Florida’s Rep. Mario Diaz-Balart referenced the study in his opening remarks. Foreclosure is a loaded word and is largely misunderstood when it is used in the context of the federally-insured reverse mortgage or the Home Equity Conversion Mortgage. But just how accurate are the claims that alarmed lawmakers and consumer advocacy groups? Peter Bell, the president of the National Reverse Mortgage Lenders Association which represents HECM lenders said the vast majority of foreclosures do not reflect the actual number of senior homeowners being evicted, but most come from property transfers initiated upon the death of the last surviving borrower. Bell’s statement is reinforced by Reverse Market Insight which tracks reverse mortgage industry data. RMI reports that 62% of defaults or foreclosures between 2009-2017 arose from the death of the borrower while only 22% were initiated from non-payment of taxes and insurance. |
In his February 1st column, Reuters columnist Mark Miller cautions that a significant number of these foreclosures could be attributed to HUD’s requirement that…
Download the video transcript here.
5 Comments
First of all, foreclosure is simply a legal process caused by various failures of borrowers to meet the covenants contained in their mortgages. Yet not all evictions related to HECM come from a single source as commonly believed and incorrectly promoted by the industry.
So with what kind of defaults we find evictions? While everyone now seems aware of the default of payment of taxes and insurance, fewer are aware of the death of the last surviving borrower who use the home as their principal residence. Here the problem generally involves ineligible non-borrowing spouses, relatives who reside in the collateral and renters whose lease agreements are month to month. I had a borrower whose adult but extremely handicapped child lived with them and after careful explanations were fully aware that upon the death of the last surviving borrower, the child needed housing or was subject to eviction.
Then there is foreclosure due to abandonment of the home as a principal residence of the collateral for a period of more than six months or even with illness requiring the last surviving borrower to be out of the home for more than 12 months. Here not only are ineligible non-borrowing spouses to eviction but so are ELIGIBLE non-borrowing spouses. Again non-borrowing relatives and certain renters can also be subject to eviction.
As the final default type presented in this listing is lack of maintenance of the home comes into play. Again all non-borrowing spouses, relatives and certain renters are all subject to eviction.
Per the vlog, RMI states that 22% of HECMs involved defaults on the payment of taxes and insurance during fiscal years 2009-2017. With 22% of all foreclosures involving defaults on payment of taxes and insurance and at the same time understanding the high percentage of these foreclosures that result in evictions, it is hard to know what Dr. Guttentag means when he claims: “On HECM reverse mortgages, very few foreclosures involve evictions, which are rare….” His statement seems more based on anecdote than data.
What seems very true is that most HECM foreclosures do not result in eviction. Until we have eviction data, that is about the best that can be said in this regard.
I not only originate Reverse Mortgages, I have one myself. I think there are several gaps in the program that encourage foreclosures:
Top of the list is looking at Reverse Mortgages in isolation. I have not seen one article or comment that addresses how the Medicaid estate recovery process affects Reverse Mortgages. No one seem to look at the ability of a borrower to use up all the equity in a home with Medicaid claims, leaving nothing for the heirs. Net effect is that foreclosure is a prudent business decision for the borrower or the heirs regardless of the apparent equity left after the Reverse Mortgage is paid. Why probate and sell if all the money is going to Medicaid and the heirs net nothing?
Second issue is that the Reverse Mortgage application process only asks for a contact not living in the house, not the personal representative that will handle the estate or a POA to handle affairs if the borrower must move to memory care. The result is that no one is prepared to properly handle the property disposal. Foreclosure becomes the unnecessary default. This is particularly true for borrowers without children.
The people making decisions about this program need to stop looking at statistics and start looking at what is really happening to real people. I don’t think the people making the decisions understand who the borrowers really are, how this program affects their lives, how servicing needs to be handled, and how other government programs and policies affect HECM losses..
I agree with you Don, there need to be more options for the Seniors and the “what ifs” addressed in more detail by HUD.
Don,
I am not sure that reverse mortgage originators are properly educated to be Medicaid planners but that is another subject.
Your Medicaid suggestion seems once again like HECM originators attempting to practice outside of their licensed scope of authorized activities. Since we are salespeople making a commission on the sale of our product, we hardly appear to be unbiased or independent advisers.
Why would lenders want either a POA or the current names of future executors or executrices who may not ultimately serve as executor or executrix? Foreclosure through the trustee’s right to sell under a deed of trust seems far more efficient and manageable than what you are suggesting.
We are business people, not social workers. There is a legal procedure already in place to handle the transfer of the collateral. How is what you suggesting going to speed up the process or end in substantially less foreclosures?
Foreclosures will always be with the HECM program. We can’t escape it unless home value appreciation had a legally binding floor of 6% per annum.
Certainly servicing could be better but at what cost? Perhaps the cash needed to pay the increased costs of what you are proposing should be obtained through lower commissions to originators? Then there is the errors and omission insurance increase for advising on Medicaid planning.
Good response, Don, I wholeheartedly agree with you!