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Reverse Mortgages...the next waive of foreclosures?

Posted Jun 19 2010 11:45am

Reverse Mortgages are very simple to get. A 62 year old homeowner taking out a reverse mortgage doesn't face the kind of scrutiny as someone taking out a first mortgage to purchase a home. There isn't any check for monthly income, or even a credit check! The primary condition is the age of the homeowner, and the equity in the home. Unfortunately, there are a couple of factors that have left FHA with a budgetary short-fall (first time in history) with reverse mortgages.

First, Reverse Mortgages have been marketed as "non-recourse" loans. For example, when the homeowner with a reverse mortgage on their home dies, and if he/she can't sell the house for what is owed on the property (think short sale) This is a pretty compelling feature for seniors and their families--especially with what has happened to property values the last few years. 

Second, there are some senior homeowners that have either forgotten, neglected, or can't afford their hazard insurance or property taxes. This poses a risk to the investors on the loan leaving them with no coverage in the event of a fire, or other damage to the home.

With this becoming a growing problem, FHA and Fannie Mae will likely look for ways to ensure seniors with reverse mortgages have paid their hazard insurance and property taxes. Since this is a term of the loan, they do have the ability to foreclose on seniors who aren't following through.

From the Washington Post : Vicki Bott, FHA deputy assistant secretary for single-family housing, said the new guidance this summer will emphasize a "curative approach" that allows seniors to "develop a plan to repay past tax and insurance delinquencies." However, if the plan doesn't pan out -- and the borrowers simply lack the capacity to pay what they owe -- FHA will be forced to pull the plug and foreclose.

We haven't traditionally thought of reverse mortgages as forclose-able. But the world of financing and banking is changing, and that effects our seniors as well.

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