from AARP’s Press Release:

The plaintiffs, from Indiana, New York, and Maryland, are represented by AARP Foundation Litigation and the Washington, DC law firm of Mehri & Skalet, PLLC.  The lawsuit, filed in U.S. District Court for the District of Columbia, seeks an injunction prohibiting HUD from abandoning long-standing rules and from illegally foreclosing on surviving spouses.  These arbitrary changes allow lenders to initiate foreclosure and eviction actions against the plaintiffs.

The case will have broad national implications, because the outcome will determine whether spouses will be able to stay in homes that are now “underwater” as a result of the housing downturn, a possibility that reverse mortgage borrowers have always paid insurance premiums to protect against.

Growing reverse-mortgage defaults put homeowners at risk of foreclosure

Thousands of older homeowners in Florida who tapped the equity in their paid-off homes to boost their income now face the possibility of foreclosure as the number of defaults on such “reverse mortgages” skyrockets.

More than 30,000 U.S. homeowners are in “technical default” on their reverse mortgages and could lose their homes because they have failed to pay their property taxes or property-insurance premiums, according to a new research report based on the latest government data.

Florida leads the country in terms of the number of defaults, with nearly 5,300, or about 18 percent of the U.S. total, according to the CredAbility Group, a nonprofit consumer-credit counseling service based in Atlanta.

Florida’s reverse-mortgage-default rate stands at about 8 percent, compared with a nationwide rate of 5 percent.

June 6th, 2010  |  by Neil Published in Reverse Mortgage Daily

Against the backdrop of a recent New York Times story about borrowers in the forward mortgage world electing to stop paying their debt – and living sometimes for years cost-free – concerns in the reverse world about prolonged defaults is drawing more attention, and some official government action.

To wit: Fannie Mae (NYSE:FNM) reportedly has been reminding reverse servicers they must follow HUD guidelines regarding tax and insurance defaults for HECM customers. In the past, Fannie has elected not to have servicers follow these established guidelines – that is, beginning foreclosure when taxes, insurance or maintenance are not current – because of so-called “headline risk.”

Now, however, servicers have been instructed to submit troubled loans to HUD to get approval to start the foreclosure process. Once approved, a demand letter is sent to the borrower(s) who has six months to cure the default. After that, the servicer must start the foreclosure process – one exception is when a borrower refuses to take necessary curative action, at which time the foreclosure process begins immediately.

“Tax and insurance defaults have gone up dramatically in the last few years,” says one servicer, who believes reactive changes now “would turn us into collection agencies.”

At the moment, the industry is waiting for HUD to issue a promised Mortgagee Letter regarding tax and insurance (T&I) defaults. An agency spokesman told RMD: “FHA is working closely with Fannie Mae and servicers of reverse mortgages to develop a plan to notify seniors of the delinquency and provide the necessary support and outreach to these seniors to find solutions to bring delinquent taxes and insurance current.”

Considering low default balances

According to Ryan LaRose, chief operating officer of Celink – a reverse mortgage servicer – an industry committee “presented HUD with a white paper awhile back that included industry recommendations for how to deal with the existing T&I default population. It included an analysis of the loan’s LTV [loan-to-value] and took into consideration those borrowers with a low default balance and put them into a ‘monitoring’ program,” according to LaRose, who is a member of that committee.

“If FHA is smart,” says another servicer, “they will approve foreclosing on high claim amounts because [if they don’t] the situation will come back to haunt us,” he warns, adding: “Fannie wants more loans assigned to HUD.” What’s missing in all this, he says, “is that the industry has no real loss mit program for seniors.”

In the aggregate, T&I defaults are relatively small. HUD’s Erica Jessup puts the current number at less than 2 percent of all reverse mortgages extant. Cheryl MacNally, national sales manager, senior products group, Wells Fargo Home Mortgage, puts a finer point on those numbers: “If we have someone in T&I default for only $500, we don’t want to foreclose [especially] if they have a 700 FICO score – we don’t torture them” with foreclosure threats. However, MacNally predicted that as more full draws are taken on reverse mortgage balances, “T&I defaults will increase.”

As to the aforementioned headline risk, John LaRose, CEO of Celink, expresses concern “over the possibility of thousands of senior homeowners being placed into foreclosure by the end of the year. The timing could not be worse,” he declared, because “those who have a proclivity for making negative comments about our industry could be energized to be even more aggressive in their attacks on us,” said LaRose.

Written by Neil Morse