HUD Issues Reverse Mortgage Default Guidance

The Department of Housing and Urban Development published new guidance for lenders to manage an estimated 13,000 HECM reverse mortgages in default from failure to pay taxes and insurance.

“We understand that some senior citizens have not paid their taxes or insurance for some time and may be at risk of losing their home,” said FHA Commissioner David H. Stevens. “Today’s guidance is designed to establish a clear framework that protects both the homeowner and the lender who participate in our reverse mortgage program.”

HUD regulations allow lenders to advance taxes and insurance payments for borrowers from available mortgage funds, but once the resources are exhausted, the lender must advance funds to protect FHA’s interest and obtain reimbursement from the borrower.  According to HUD, these unpaid debts and lender advances have resulted in an untenable situation that could put the FHA Insurance Fund at risk and result in foreclosure proceedings against delinquent seniors.


The mortgagee letter published by HUD provides a framework for lenders on how to manage the process when a lender or servicer advanced corporate funds to satisfy an unpaid property charge on behalf of the borrower.

“It is only after all applicable loss mitigation strategies have been exhausted that the mortgagee may submit a due and payable request to HUD,” said Steven in the letter.  “While it is HUD’s goal to avoid foreclosures as a result of unpaid property charges, mortgagors must comply with the terms of their mortgage, and mortgagees must comply with FHA requirements including the regulations as clarified in pertinent policy issuances.”

When a borrower fails to pay their taxes or insurance, the lender is required to notify the borrower within 30 days of the first missed payment and inform them that an obligation of the mortgage has not been performed and it’s not in compliance with FHA requirements.  Lenders are also required to offer loss mitigation options to allow the borrower to bring the loan into compliance.

Some of the options HUD suggests are establishing a realistic payment plan for the delinquent property charges; contacting a HUD approved counseling agency to receive free assistance in finding some viable resolution to their delinquency; refinancing the delinquent HECM into a new reverse mortgage if there is sufficient equity to satisfy the existing mortgage and outstanding property charges.

HUD is also providing nearly $3 million to housing counseling agencies to specifically help reverse mortgage borrowers facing this issue.  “Counselors will help elderly homeowners work with their servicer to create repayment plans that cure the outstanding balance. If keeping the home is no longer an option, the counselors will help the borrower transition to alternative housing,” said the agency.

Lenders have until February 28, 2011, to send all letters to borrowers with loans that are delinquent as of the date of the mortgagee letter. Thereafter, letters must be sent as soon as the mortgagee receives notice of a missed payment.

In addition, HUD is requiring that Mortgagees report all delinquent loans in their portfolio to HUD, including any loan where the borrower is on a repayment plan or in a deferred status.

For for more information, see here.

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  • As expressed below, this new policy brings the independence of counseling into real question. The amount of funds dedicated for this purpose looks far too high based on the estimates below and then comes the very sticky question of how the counseling agencies receiving these funds were selected and the basis of each allocation. There is no indication what fund will be charged for this new type of counseling cost.

    1. HUD’s financial interest in the outcome — Admin states: “According to HUD, these unpaid debts and lender advances have resulted in an untenable situation that could put the FHA Insurance Fund at risk….” This is a clear statement that HUD has an unmistakable financial stake in the outcome of these defaults and lender advances.

    2. The questionably high cost of counseling per affected mortgagor — Admin further points out: “HUD is also providing nearly $3 million to housing counseling agencies to specifically help reverse mortgage borrowers facing this issue.” At $3 million that is over $230 for each of the estimated 13,000 HECM mortgagors. Since this is a very specific type of counseling, it is odd to see the cost almost twice the normal cost of counseling.

    3. Will all affected mortgagors participate in this “voluntary” form of counseling — Item 2 on Page 2 of 5 of Mortgage Letter 2011-01 states that one option available to delinquent mortgagors is: “Contacting a HUD-approved Housing Counseling Agency (HCA) to receive free assistance in finding some viable resolution to their delinquency, or identifying local resources available to provide funds or homestead exemptions….” While many seniors may take this voluntary step, there is the potential many will not. So will the cost per participant be $230 or something much greater?

    Once a counseling agency accepts any of these allocated funds, its usefulness as an independent party is in question based on the correct standard HUD has used in the past – the appearance of a lack in independence, not the loss of independence itself. If the allocation turns out to be a multiple of the fees charged for origination counseling, the issue of providing impartial information only intensifies. Will counselors tell the delinquent mortgagors that they can press for a twenty-four month payback period? Will they encourage clients to do things which would put them at financial risk just to get the loan current?

    Of course, one can question the number of mortgagors in default as estimated by many throughout the industry, question if the $3,000,000 is intended to last through this first round of mortgagors or is a set but undeclared fee per participant or question some other issue. The point is HUD has established a policy and provided no information on how it intends on keeping counseling independent. Since the question is one first of the appearance of independence, HUD has lost that war at the very start of this new policy. One must ask if HUD legal counsel approved this mortgagee letter before its issuance.

  • It is odd that with the institution of a new form of counseling, there was no official counseling guideline published. In the last week there have been rumors from supposedly reliable sources about what this new form of counseling will include. HUD should issue their official guidelines as quickly as possible.

    As a senior advocate, I find the delay of the foreclosure policy to be deplorable. Foreclosures, which could have transpired when home values were at or near all time highs and home equities were far more substantial, were delayed in some cases for years. Like many things in life, timeliness is a virtue even when delay seems more beneficial to all parties. For perhaps several thousand seniors, the delay will prove far more harmful than if HUD had acted in a much more timely fashion.

    By this policy HUD has put off initial foreclosure decisions for months. Most of Mortgagee Letter 2011-01 is simply official accounting policies which should have been promulgated years ago. Within months the current situation should be reasonably summarized and that data should be forthcoming in early 2011.

    It seems as if foreclosures under this policy could begin as early as the second or third calendar quarter of this year. This first batch of mortgagors in default should be all but completely dealt with before mid 2013.

    If we felt the publicity was bad before, the anecdotes which will soon be plastered in the press because of this new policy should dwarf prior bad press. The industry has time to begin inoculating the public against the ill effects of what is ahead of us. What will we do with that time? This Mortgagee Letter starts the clock. How will we prepare the public for what is before us?

    Tick, tick, tick….

  • This comment results from a telephone call about my comment above which I received a few hours ago. Some do not know why the claim is made that HUD has a financial stake in the outcome of the HECMs now in “technical” default as to the amounts that are actually in default.

    Who really is at risk when it comes to the vast majority of the 13,000 “technical” defaults? The clear answer is Uncle Sam and Uncle Sam alone. It is Fannie Mae which is the investor in the vast majority of these defaults. Lenders have no contingent or other type of liability for “technical” defaults related to those HECMs which Fannie Mae purchased; HOWEVER, the lender situation is NOT the same with the Ginnie Mae HMBS program (a fairly recent phenomenon).

    HUD, as a department of the federal government, has either a direct or indirect (depending on one’s view of the issue) stake in the financial outcome of the Fannie Mae owned HECMs; that is because the federal government is currently paying Fannie Mae losses. It also has a direct interest in those HECMs in the HUD assignment pool which have “technical” defaults. This is why I strongly believe HUD has a financial stake in the outcome of most of the 13,000 or so HECMs in “technical” default.

    The default counseling which is needed on HECMs is materially no different than counseling needed for ANY mortgage which is in default for failure to pay insurance or taxes. HECMs are NOT unique in this regard. So why are HECM origination counselors really needed for this purpose? Why not hire state licensed financial advisors to provide this counseling and give them access to BCU if that is believed to be a real help in this regard?

    The point is, HUD has a real financial interest in the outcome. Hiring the same counseling agencies which do HECM origination counseling to do HECM default counseling makes all counseling appear to be less than independent. The problem is even the more exaggerated when it looks like the calculated cost per default participant [the alleged $3 million in payments divided into approximately 13,000 HECMs in technical default] is so much greater for default counseling than origination counseling — and that is before any reduction for how many will actually participate in default counseling since it is voluntary. The use of origination counseling agencies does not appear to be an issue that was thoroughly vetted at or by HUD. Has HUD abandoned the need for the appearance of no lack of independence in counseling? It seems they do not acknowledge that a total lack of independence with origination counseling agencies in HECM default counseling can “bleed” into origination counseling even though they subsidize both. They need to take another look at whom they will use to provide default counseling.

    As to the timing of the release of ML 2011-01 that is not a matter I want to openly speculate on but if one simply reads between the lines, my read on the situation should be somewhat apparent.

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