Surging Foreclosures & HECMs

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What do surging foreclosures mean for future HECM applicants?

Unemployment, foreclosures, and interest rates ultimately impact reverse mortgage lending. The point of today’s episode is not to dwell on the negative but to take an honest hard look at economic factors that can no longer be ignored amid a housing market and economy that frankly feel surreal. Presently, home prices remain frozen near their record highs despite mortgage rates doubling in two short years with a few notable exceptions. Also, the U.S. GPD continues to show robust economic output despite our national debt reaching unsustainable levels. What gives and what are the potential impacts on reverse mortgage lending?

A frozen housing market & foreclosures

 

First, let’s examine the housing market. Home sales have plummeted to record lows- what many refer to as a frozen housing market. The primary culprits are low inventory, high mortgage rates, and stubbornly high home prices that have pushed most would-be homebuyers to the sidelines. 

 

However, the housing market could thaw quickly should foreclosures continue to surge. Redfin reports foreclosures have steadily risen as interest rates increased. And a new report from ATTOM reveals an 8% increase in foreclosure filings. In addition, REO numbers in several states have reached levels seen since the Great Financial Crisis and Housing Crash of 2008. The annual increase in foreclosure filings in February jumped 51% in South Carolina, 50% in Missouri, 46% in Pennsylvania, and 7% in Texas. Despite this surge in foreclosures, 28 states saw a reduction in foreclosure activity. That would indicate the regional impact of employment or underemployment. 

 

With that in mind let’s look at the highest foreclosure rates for larger cities with a population over 200,000 residents. In February there were 1,367 foreclosure starts in New York City, 998 in Houston, 808 in Los Angeles, 792 in Chicago, and 777 in Miami. Keep in mind the long-term ripple effect that continues from the expiration of foreclosure moratoriums and evictions. 

 

The annual uptick in U.S. foreclosure activity hints at shifting dynamics within the housing market,” said Rob Barber, CEO at ATTOM, in a press release about the report. “These trends could signify evolving financial landscapes for homeowners, prompting adjustments in market strategies and lending practices”…which really doesn’t tell us anything. Underlying those shifting dynamics are the unemployment rate, interest rates, and economic conditions. More importantly, increased foreclosures whether locally or nationwide increase inventory and push down home values. This would impact potential reverse mortgage borrowers in affected areas. 

Unemployment and the national debt

 

Bloomberg Economics ran a million forecast simulations on the US debt outlook. 88% of them show borrowing on an unsustainable path.  Bloomberg reports the Congressional Budget Office’s latest projections show US federal government debt is on a path from 97% of GDP last year to 116% by 2034 — higher even than in World War II. 

 

This should come as no surprise with spendthrift lawmakers in both parties in Washington DC spending away the future of coming generations. The trick is we enjoy the benefits of deficit spending in the short term and Congress knows this as it keeps them in good standing with voters. However, as debt levels continue to rise creditors and those buying U.S. treasuries will begin demanding higher returns to offset the risk. Reduced demand for U.S. Treasuries would push interest rates up even further, slow the economy, and lessen the value of the dollar. All of these factors will contribute to further downward pressure on home values. Should the government continue to print money to mitigate the impacts of a burgeoning debt then inflation would accelerate once again.

 

The bottom line is home prices are likely to soften in several metropolitan areas across the country. A nationwide housing depression is highly unlikely barring any unforeseen black swan event. In the meantime, all we can do is be observant of national and local economic trends and continue to search for older homeowners who could use some financial relief that a reverse mortgage could provide. 

 
 
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‘More reverse mortgage servicing protections needed’

reverse mortgage foreclosure

The NCLC recommends the CFPB & the FHA create these reverse mortgage servicing protections

After several years of servicing issues for both borrowers and their heirs reverse mortgage originators and lenders alike welcomed the news in March 2022 that Celink had been awarded the servicing of HECM loans held in assignment by the Federal Housing Administration. However, a history of previous servicing shortfalls from numerous servicers has led some to call for increased oversight and protections to prevent unnecessary foreclosures of HECM loans.

On February 6th the National Consumer Law Center published an article by Sarah Bolling Mancini entitled, “Unmet Promise: Reverse Mortgage Servicing Challenges and How to Preserve Housing Stability for Older Adults”. Mancini outlines several servicing shortfalls that may have led to avoidable foreclosures. 

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“There are roughly 480,000 reverse mortgages currently outstanding in the United States.”, writes Mancini who notes this number will likely grow as baby boomers age. More importantly, she notes HECM borrowers who are delinquent on their property charge payments face hurdles in accessing the resources needed to satisfy the overdue charges to avoid a technical default and foreclosure. Mancini notes, “The crisis of preventable reverse mortgage foreclosures does not impact all communities equally. Historically, people of color have been more likely to take out reverse mortgages, due to the legacy of discrimination and policies that limited their wealth-building opportunities, and they are also more likely to end up in reverse mortgage foreclosure.”. 

The NCLS’s full report (which we’ve included a link to in today’s show notes) provided several examples of where servicing failed HECM borrowers. Here’s one. Jean Reese, a 76-year-old African-American woman living in Philadelphia, fell behind on her property taxes during the Covid-19 pandemic. She made a payment arrangement with the city and also kept in regular contact with her HECM loan servicer. Despite these efforts in December 2019, the servicer paid the remaining property taxes she had arranged to pay with the city and also paid her future 2020 taxes. It’s a lengthy and complex story but in the end, Reese had to obtain legal assistance to conclude the matter and avoid foreclosure. 

Drawing on their findings in the report, Mancini and the NCLC made four recommendations for FHA and the Consumer Financial Protection Bureau to help prevent avoidable foreclosures. The recommendations for the FHA include (1) Allowing flexibility with property charge loss mitigation policies, (2) Rescinding the due and payable status when loss mitigation is approved, (3) Allowing loans to be assigned to FHA while in an active loss mitigation plan, and (4) require a loss mitigation review.  The recommendations to the CFPB include (1) the inclusion of reverse mortgages in the RESPA mortgage servicing rules, (2) working with FHA on effective reverse mortgage communications, (3) prioritizing reverse mortgage servicer supervision and enforcement, and (4) requiring prompt payoff statements.

The NCLC conducted a nationwide survey of senior advocates who handle reverse mortgage cases. Some of the more notable responses said that some servicers declared a homeowner was still in default despite them being already enrolled in a state or local tax deferral or repayment program.

Addressing the servicing issues outlined in the report only stands to strengthen the reputation of the reverse mortgage among older homeowners, senior advocates, and professionals. Or has Mancini put it to ‘fulfill the promise’ of the loan to help older homeowners age in place. What are your thoughts on the NCLC’s recommendations? Do you think these servicing reforms need to

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