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New FHA guidelines for defaulted reverse mortgage loans

by Karen Lawson
January 13th, 2011

Addressing concerns about increasing default rates for reverse mortgage loans, FHA has issued new guidelines for servicing reverse mortgages, which HUD calls home equity conversion (HECM) loans. If you’re wondering how a mortgage loan that pays homeowners can go delinquent, the answer involves homeowners failing to pay property taxes and hazard insurance premiums as required in mortgage loan documents.  This represents a mortgage default as it puts the mortgage lender and FHA at increased risk. Taxing authorities can pursue collection remedies including auctioning off homes for recouping delinquent property taxes owed. If hazard insurance is allowed to lapse, FHA lenders, and ultimately FHA risk losses in the event of  fire or other catastrophic event.

In its first mortgagee letter of 2011, HUD provides guidelines for servicing these defaulted mortgage loans and resolving delinquent tax and insurance issues. HUD suggests three loss mitigation solutions for FHA lenders to use. Lenders are required to advance funds as necessary to avoid foreclosure by a taxing authority or allowing hazard insurance to lapse. FHA lenders may use the following methods of resolving defaults of reverse mortgages:

Establish a repayment plan for homeowners: FHA lenders advance payment of delinquent property charges and or insurance premiums, and establish a repayment agreement with homeowners. HUD allows FHA lenders to establish repayment schedules of three months to two years depending on the amount owed. In all cases, amounts advanced for paying taxes, insurance and other “property charges” such as space rents or special assessments, must be repaid by homeowners within two years.

Refer homeowners to HUD approved counseling agencies: These counseling agencies work with homeowners to resolve budget problems or other issues leading to mortgage defaults. Assistance is offered by non-profit counseling agencies at low or no cost to borrowers, depending on their financial circumstances.

Refinance HECM mortgage loans to new HECM mortgage loans:  In cases where there is sufficient home home equity, homeowners may refinance their existing HECM mortgage to a new mortgage for an amount sufficient to pay off the existing mortgage and pay any defaults of taxes, property charges, or hazard insurance premiums. This option is less preferable as the cost of refinancing can further diminish available home equity, but it is favorable to foreclosure.

FHA Guidelines: “Foreclosure is and must remain a measure of last resort”

The mortgagee letter clearly states that foreclosing reverse mortgage loans for delinquent taxes, property charges, and insurance is a measure of last resort. FHA expects mortgage lenders to fully inform homeowners of relief options and to extend every effort in preventing foreclosure of reverse mortgage loans within specified time frames.

HUD and FHA are clarifying their preference for FHA lenders to extend every opportunity to senior homeowners for repaying  tax and insurance defaults while remaining in their homes. We’re hoping that FHA will be vigilant in verifying that appropriate loss mitigation efforts are made before defaulted reverse mortgage loans are referred to foreclosure attorneys or agents.

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