Despite New Protections, Some Say Reverse Mortgage Pitfalls Remain

Reverse mortgages may be safer loans now than they ever have been in the past, but certain pitfalls remain, says a recent article from the Detroit Free Press.

While the article acknowledges the tighter borrowing limits and stricter financial requirements that have occurred over the past year, the Detroit Free Press points to a “sticky subgroup of foreclosures” involving reverse mortgages across Detroit and the U.S.

“In Detroit, ‘the biggest problem we’re seeing with mortgages is the reverse mortgage problem,’ said Ted Phillips, executive director of the non-profit United Community Housing Network, which battles on behalf of homeowners facing foreclosure,” the article states.

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The Housing Network, along with its staff of of lawyers and advisors, helped to keep nearly 2,000 homes occupied by Detroit homeowners from being lost to foreclosure in 2015.

“After a borrower receives what fees like a windfall of free money from a reverse mortgage lender, ‘they still have to keep the taxes current, still have to maintain the house, and still have to pay the insurance, which is often off the charts in Detroit,'” the article attributes to Phillips.

Read the Detroit Free Press article.

Written by Jason Oliva

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  • Fascinating problem especially with Detroit being the home for Quicken Loans.

    The Windfall phenomenon is in few ways dissimilar to the lottery win scenario. Those who are cash poor and obtain a HECM feel as if the money is something that comes from heaven like manna almost as if they had won the lottery. This is why calling HECM proceeds income or retirement income and then double talking that in actuality it is not income does our seniors no favors. Calling the proceeds “cash whose source is a growing debt” is far more beneficial to the senior even if it makes HECMs less salable.

    There is not much that can be done for the borrowers of the past. Many cannot qualify for the current HECM. While the tendency is to forget about the mishaps, it is far better to learn from them and champion their cures.

  • “‘they still have to keep the taxes current, still have to maintain the house, and still have to pay the insurance”
    And this is a “pitfall” to be attributed to a reverse mortgage?

    The reverse mortgage provided the very funds for taxes, insurance and maintenance and the fact that a homeowner chose to spend the money on something else becomes the fault of the reverse?!?!

    • REVGUYJIM,

      A problem with the windfall syndrome is that one can become insular and less responsive to normal obligations. This is certainly not true with a majority of borrowers but it is of a small but significant minority.

      What the tone of the argument in the post is that people act differently to a large influx of money, not that there is something inherently wrong with reverse mortgages.

      If we hear the criticism constructively, then the industry should be exploring ways to help those who have this propensity. To achieve this goal might require even more restrictions on payouts from the line of credit. But at least for awhile we should observe how current borrowers do with the limitations that were implemented on 9/30/2013.

  • The Detroit Free Press and Ted Phillips of the non-profit United Community Housing Network don’t get it!

    One of the main reasons for the FA ruling was to help stop the flow of foreclosures due to the homeowner not paying their property charges. Yet, they, being Ted Philips and the Detroit Free Press by printing the article, still comes back with the following statement:

    “After a borrower receives what fees like a windfall of free money from a reverse mortgage lender, ‘they still have to keep the taxes current, still have to maintain the house, and still have to pay the insurance, which is often off the charts in Detroit,’” the article attributes to Phillips.”

    How can they say that “Reverse mortgage pitfalls still remain? By saying this, they are referring to the paragraph above.

    Naturally the borrower must still keep the taxes current, they still have to maintain the house, and still have to pay their homeowners insurance or what ever else may be included in their property charges.

    This is precisely why the FA ruling was put into effect, to help eliminate the pitfalls Ted Phillips is stating as still being the problem!

    Sure, the implementation of FA does not guarantee 100% that problems will not occur, they still will to a degree. It does not mean that every loan underwritten and approved without requiring a LESA will never face defaults on the property charges, there will be those that will. Yes, foreclosures will still occur because of this, nothing is fool proof! However, because of the implementation of FA, the percentage of foreclosures due to defaulting in payment of property charges will be reduced drastically!

    I am sorry but I feel Ted Phillips needs to go back to the drawing board, study the FA ruling and then come back and tell us all what he has learned!

    John A. Smaldone
    http://www.hanover-financial.com

    • John,

      What Ted is telling us is that the problem still remains and what you are saying is that Ted is not telling us how to improve on the steps we have already taken.

      What Ted is not saying is that people should not get HECMs. What Ted is saying is that LESAs cannot cure any HECM which was originated before 4/27/2015; there are almost 570,000 of those HECMs outstanding even if not all of them are active. Ted does not care when the case number was assigned. He is concerned with the high number of HECM foreclosures in Detroit.

      One thing all parties including you must realize is that NOT even the majority of foreclosures, short sales, and deeds in lieu of foreclosure of HECM collateral have been caused by defaults of not paying taxes or insurance as required. Many occur because the HECM is due and payable and there is very little, if any, equity in the home.

      Ted is focused on foreclosures from T & I defaults but that has not been the greatest source of HECM foreclosures in the last few years but he treats the situation as if all foreclosures have come from that single source. So until someone provides information on how many HECM foreclosures have occurred in Detroit by the category of the cause, it seems Ted’s arguments are overblown but we are defending based on Ted’s misinformation which is ridiculous.

      • I have been asking for detailed data for the foreclosures for years and I have never been able to find them. How many of them nationwide were actually caused by T & I defaults? I also believe that most were because they are due and there is very little if any equity. Why is it so hard to come up with these numbers when the reason we have FA is blamed on foreclosures?

      • EricSD,

        My knowledge comes from talking with executive officers of the largest HECM servicers in the country.

        Until the mortgage bust in the last part of the last decade, much fewer HECMs terminated in foreclosure, short sale, and deed-in-lieu of foreclosure (foreclosure and her cousins).

        Currently much of the country has fully recovered from low home prices but certainly not all. Some areas have recovered much faster than others and a few on the coasts are now where theoretically they would have been, had the mortgage bust never occurred.

        The foreclosure rate has slowed down to some degree but assignments are now speeding up.

  • Regardless of whether they have a reverse mortgage, a forward mortgage or even no mortgage they have to keep the taxes and insurance paid up. The Reverse Mortgage is the only one of the three that requires counseling which addresses this very issue.
    Having a hard time seeing how this is a pitfall for reverse mortgages.

    • Greg,

      This seems to be more a message of concern for those who are less capable of handling cash. While the newspaper discusses the problem, it does not provide a cure the industry can incorporate to lessen the impact of the perceived problem.

  • I find it positively maddening that the fact a homeowner has to pay their property taxes, insurance and maintain their home is a pitfall of the reverse mortgage!!! These are the same obligations with any mortgage and by the way, where do homeowners not pay property taxes?

    • jstults,

      The post is not about that. It is about a significant minority of borrowers who handle free cash poorly. I agree with the RMAdvisor that the industry should be cooperating with those who help people with this problem find a cure.

  • Exactly, this isn’t a pitfall of reverse mortgages, as it’s merely the continued responsibility home ownership.

    I suspect that most of these default cases are are from “the irresponsible,” inheriting property from their now deceased, responsible parents. And Mr. Phillips is protecting this irresponsible “entitlement class” from blame, by blaming reverse mortgages.

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