Strategic Defaults in the Reverse Mortgage World?

Like a virus, the growing number of “strategic defaults” in the forward mortgage world may be searching for an available host in the reverse sector. Once regarded as shameful, an eye-opening one-third of mortgaged householders today – typically underwater and owing more than the property is currently worth – are simply “walking away” from their housing debt. This compares with 22 percent a year ago, according to the Chicago Booth/Kellogg School Financial Trust Index.

Of course, having no monthly mortgage payment to evade would make it literally impossible to disregard such an obligation with a reverse mortgage. However, there are those “pesky” tax and insurance obligations that must be met on a reverse, so is it possible consumers would/could deliberately choose not to pay them? And, would that qualify as a conscious delinquency?

“There are some people who need all the money they take in their reverse mortgage,” says one servicer, “and they know they won’t have anything left over to pay taxes and insurance.” This company’s portfolio of loans includes about 5 percent defaulters, some one-third of which live in Florida where forced placed insurance puts an additional financial burden on these seniors.

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What could embolden someone to intentionally ignore their T&I obligations? For one thing, “borrowers are smart enough to know the public relations nightmare that would come from putting seniors on the street” for not paying their T&I bills, this person says.

Vicki Bott, HUD deputy assistant secretary for single family housing, tells RMD that her agency is “addressing the [T&I default] problem” by “working with the industry to make sure we have a very collaborative plan. The industry gave us feedback about what their main concerns were,” she says. “I think the focus [of a resolution] will be around reporting delinquencies and when a due-and-payable would/should be presented to HUD,” according to Bott.

The reverse mortgage servicer Celink has had “very rare instances where the borrower has the means to pay their taxes or insurance, but willingly chooses to strategically default on their T&I responsibilities,” according to Ryan LaRose, COO, who maintains that “most tax and insurance defaulted borrowers cannot pay because of financial difficulties, such as the loss of a spouse’s Social Security income, increase in the cost of living, etc.”

Kenneth Klawans, president, iReverse Home Loans, says lately “underwriters are taking a closer look [in advance] at whether borrowers have sufficient income after expenses to pay their insurance and tax bills. It wouldn’t surprise me,” says Klawans, “if we start seeing debt-to-income requirements in order to qualify for a reverse mortgage…similar to the forward markets.”

Written by Neil Morse

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  • I think ‘strategic’ default is a non issue. A more realistic one would be the inability of a borrower to remain current with their ‘T&I’ as is suggested. But to then resort to income verification for borrowers would hand the program another serious blow. Having no income/credit requirements has been a saving grace for seniors who need help and cannot qualify for conventional financing. As for those who may have trouble down the road meeting those expenses, we must find a different solution.

    • broshow,

      The million dollar question is, what is that solution? There is an old adage about not complaining unless you have a better one.

      A few of us believe that just like delaying foreclosures has done little to improve the housing situation, delaying foreclosures on “technical defaults” will not make the headline risk go down. In fact, deferring action may intensify that risk.

      Using income and credit tests to qualify new borrowers still leaves the current inventory of HECMs untouched. On many levels, that is not a good solution.

  • The article refers to the negative impact of foreclosing on a senior delinquent on their T&I. I know of a Senior Community that has experienced a high rate of HOA delinquency (ins. and maintenance for the complex) and they are proceeding with foreclosures. I am sure it is prevalent in the Senior Communities elsewhere also.

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