Gov’t Watchdog: Reverse Mortgages Present Benefits and Risks for Seniors

The Government Accountability Office (GAO) recently published a blog post on its “WatchBlog” devoted to providing additional information and context for seniors who may be considering a reverse mortgage transaction for themselves. The post — derived from a 2019 study on the product category by GAO and its director of financial markets and community investment Alicia Puente Cackley — aims to lay out the potential benefits and risks that a senior should be aware of before entering into a reverse mortgage loan.

“Reverse mortgages saw a surge in popularity during the last financial crisis (2007-2009),” the blog post reads. “Homeowners facing financial struggles under the current economic crisis caused by the coronavirus pandemic might also be considering a reverse mortgage to supplement their income. While they can be used as financial tools to allow older homeowners to stay in their homes, they come with risks.”

Detailing some of the key product features of a reverse mortgage including the lack of a requirement for the borrower to repay the loan while living in the property as long as taxes and insurance is maintained, the post points to risks by detailing an increase in defaults that took place between 2014 and 2018.

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“Reverse mortgage borrowers can default if they violate conditions of the mortgage,” the post reads. “For example, a borrower might fail to pay property taxes or homeowners insurance. A reverse mortgage might also default if the borrower no longer occupies the home as a primary residence or has not kept the home in good repair.”

Citing its 2019 report which made a series of recommendations for improving the HECM program, GAO cites the observed increases in defaults and the reasoning behind them.

“In a 2019 report, we found that defaults increased from 2% of loan terminations in 2014 to 18% in 2018, mostly due to borrowers failing to meet occupancy requirements or paying property taxes and insurance,” the blog post reads. “We also found that FHA’s data did not show the reason for a large number of terminations. In 2015, FHA allowed loan servicers to put borrowers who are behind on property charges onto repayment plans to help prevent foreclosures for these seniors. But only about 22% of these borrowers had received this option.”

GAO also restates its assertions from the report regarding FHA’s evaluation of the HECM program, and its oversight specifically of reverse mortgage servicing companies.

“We made 9 recommendations to improve FHA’s oversight of reverse mortgages and testified before Congress about our findings in September 2019,” the post reads.

Read the blog post at GAO’s “WatchBlog,” and RMD’s original coverage of the agency’s 2019 report on the HECM program and its recommendations.

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  • Once again, our industry has been victimized, this time the result of glaringly incomplete reporting by the GAO. While Cackley ‘sounds the alarm’ over the rising number of defaults among HECM loans terminating over the past 5 years, she makes absolutely no mention of the implementation of Financial Assessment in 2015, the positive effects of which in terms of reducing technical defaults are just beginning to be reflected in the numbers and which have been reported by RMD.

    I would wager that the great majority of loans terminating over the past 5 years and upon which her 18% default figure is based were originated PRIOR TO the implementation of FA. I hope NRMLA takes the time to point this out to her and the GAO.

  • The Government Accounting Office (GAO) states the following in its Mission Statement: “GAO exists to support the Congress in meeting its constitutional responsibilities and to help improve the performance and ensure the accountability of the federal government for the benefit of the American people.” The GAO is not a part of the Executive or Judiciary Branches of the government.

    Whether we like it or not, homes with mortgagescan go into foreclosure much easier than homes which are not collateral for debt or liens. First for homes with no mortgages, not paying insurance is not a violation of any contract that will result in a default. Even unpaid property taxes cannot result into foreclosure for a number of years in most states (for example, five years in California) . Failure to pay HOA dues and assessments are generally liens against the related property and generally are no different for properties with other liens and those without.

    What many originators do not realize is Mortgagee Letter 2013-27 which went into effect on September 30, 2013 (rather than October 1, 2013) radically eliminated many HECM foreclosures with 1) its elimination of the fiscal 2011 addition of Standards and Savers, 2) its limitations in the first year disbursement rules and related mandatory obligations, 3) its new Principal Limit Factors (PLFs) ended up more closely reflecting HECM Saver PLFs than Standard PLFs, 4) and its punitive initial MIP rate for HECMs with first year disbursements in excess of 60% of the initial Principal Limit.

    While financial assessment was needed, the form we have received went too far in its impact to HECM closings. But NO one should blame HUD for the form of financial assessment that was implemented on 4/27/2015. NRMLA was invited to participate in making recommendations for financial assessment but the letter to HUD was so filled with errors that was almost incomprehensible in part; the problem apparently resulted from poor time management from the NRMLA Committee responsible for the task..

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