When a borrower defaults on an FHA insured reverse mortgage the mortgagee bank that made the loan has to follow strict Department of Housing and Urban Development (HUD) guidelines to ensure that losses will be covered by FHA insurance. When an FHA borrower defaults on a loan, HUD requires that mortgagees (lenders) follow a foreclosure timeframe which ensures that the lender adheres to reasonable diligence in pursuing defaulted borrowers to limit insurance losses to HUD.
Due to the large number of defaults and foreclosure related to reverse mortgages HUD regulations require that a lender exercise reasonable diligence in prosecuting a foreclosure to completion including acquiring title and taking possession of the property.
As discussed in previous posts, most of the largest banks in the country have stopped underwriting reverse mortgages due to reputation risk related to the large number of defaults and subsequent foreclosures on reverse mortgages. When the borrower defaults on the terms of a reverse mortgage banks are likely to wind up looking like the bad guy when they are forced to foreclose on senior citizens.
The latest problem related to reverse mortgages arose when only the one who spouse signed for the reverse mortgage subsequently dies and the surviving spouse suddenly finds out that she must pay off the balance due or sell the house. Despite the requirement that all potential reverse mortgage borrowers complete mandated HUD counseling and sometimes state interviews as well regarding the terms of a reverse mortgage, the surviving spouse not on the mortgage usually claims ignorance as the lender is forced to foreclose on the property.
Due to the above issue, HUD has granted 60 day extensions to initiate foreclosure if the following conditions exist:
- The reverse mortgage becomes payable solely due to the death of the reverse mortgage borrower
- The property securing the reverse mortgage is the primary residence of a married surviving spouse who was not a borrower when the loan was made
- The property has not been sold to a third party.
Reverse mortgages may be of benefit to some senior citizens under certain conditions. Then again many products such as pay option ARM mortgages and subprime loans were once hailed as beneficial loan programs before they brought down the housing market and caused millions of foreclosures and a banking crisis. Reverse mortgages are being reviewed by regulators but as of yet, no major changes have been made to prevent senior borrowers from getting into a financial product they don’t understand and which could wind up causing financial ruin for both themselves and their heirs.
Note to Fred Thompson who has become a shill for the reverse mortgage industry that makes huge profits on reverse mortgages by enticing vulnerable senior citizens into a product they usually don’t understand – yes, Mr. Thompson, reverse mortgages do indeed have a catch and the program is “too good to be true.”