The latest celebrity pitchman for Reverse Mortgages is none other than Henry Winkler, a.k.a. The Fonz. Reverse Mortgages aren’t new; they have been around for nearly thirty years. The Reverse Mortgage is a financial instrument which permits homeowners, 62 and older, to draw against the value of their homes, in a lump sum or through payments. This loan does not need to be paid back until the homeowner moves out – vertically or horizontally.
The Reverse Mortgage is a very expensive proposition for most seniors. The fees are exorbitant. The greatest concern, these days, is the fact that the typical borrower is getting younger. Years ago, the typical age of the Reverse Mortgage borrower was over 70. Today, with the boomers coming into retirement, the age of the borrower is getting younger and younger. This means that the years of compounding interest will eat away at any equity leaving little alternatives available to surviving spouses or heirs.
The bubble to which I refer is, specifically, the HECM loan. HECM is an acronym for Home Equity Conversion Mortgage and it is a government-insured loan. Since 1990 879,708 HECM loans have been written. In fiscal year [FY] 1990, there were 157 loans. The number of HECM loans peaked in FY2009 with 114,692 new loans. So far, for FY2014, there have been 40,534 new HECM loans written. The FY starts in October. Granted, the number of HECM loan originations has dropped precipitously since the peak of FY2009, however, the number of Reverse Mortgages that are underwater, according to an estimate by a New York City consulting firm, has increased to more than 13%. Even more startling is the number of Reverse Mortgage defaults is climbing. Latest statistics show that almost 10% of Reverse Mortgages are in default.
A Reverse Mortgage is generally in default when the borrower fails to pay property taxes, maintain insurance or vacates the home. A large portion of Reverse Mortgage borrowers are at risk of foreclosure due to non-payment of taxes and insurance. Many borrowers and their spouses don’t even realize that if the spouse of a borrower is not named as a co-borrower they are at risk of losing their home. If the borrowing spouse should die or need to leave the home, the non-borrowing spouse has little choice but to sell the house or find another way to pay off the Reverse Mortgage at that time. This is also the case with other family members who may be living with the Reverse Mortgage borrower.
Don’t get me wrong, there are isolated instances where a Reverse Mortgage may make perfect sense as a viable option. Be forewarned, though, that these instances are few and far between. A Reverse Mortgage, according to Consumer Financial Protection Bureau, CFPB, 2012, is a “complex product and difficult for consumers to understand.” There are several nuances with which the borrower may be unfamiliar and the protections put in place are inadequate, at best, to prevent a senior from making a critical financial error at a time of life when recovery is not likely or probable.
It is important to note, many of the bigger banks who were prominent in the heyday of Reverse Mortgages, such as Bank of America, WAMU, Wells Fargo, to name a few, seemed to have fled the business when the number of originations plummeted annually. It was no longer a viable business model and, perhaps, they saw the writing on the wall and realized the forthcoming bad publicity related to the inevitable foreclosures on the aging population would be bad for business. Left are the smaller companies who are not as sensitive to the potential negative ramifications of foreclosing on the elderly.
In terms of a bubble waiting to burst, this situation is multi-faceted. Unlike the shadow inventory related to forward loan foreclosures, this coming crisis will have different aspects. Seniors who have consigned their current and future equity in a property have little motivation to ensure the upkeep. Their contract with the bank requires that they maintain the homes but, more often than not, it simply doesn’t happen. Ultimately, this will result in a lower valuation when the time comes. Another aspect is the fact that the number of these Reverse Mortgages are underwater, despite the improving housing market, because of the compounding of the interest due on the loans, is rising fast. The valuation simply cannot keep up. Lastly, the climbing foreclosure rate, ten percent of over three-quarters of a million homes in the country, presently, with federally insured reverse mortgages means that there are more than 75,000 homes, many of which have not been maintained properly, being taken over by the lender.
If you, a family member, or someone you know has a reverse mortgage and it is underwater or nearly sinking, there are options. Many of the lenders don’t share these options with you. Many are simply fast to initiate foreclosure. The fact is that there are federal rules which state that the survivor is supposed to be able to have options available to settle the loan for a percentage of what is due. Most companies tend to ignore this and threaten the surviving spouse with foreclosure thus forcing them to make a poor decision.
It is a little known fact that a reverse mortgage can be short sale sold. A short sale is when a lender agrees to accept less than what is owed on the mortgage balance. Consult an attorney or a realtor knowledgeable in the area of short sales. Additionally, if you have a reverse mortgage and you fall behind on your property taxes and insurance you should contact your lender and ask for assistance in finding insurance coverage that costs less than your current premium and ask if you could make payment arrangements for the arrears due on the property taxes which were likely paid by the lender to prevent a tax sale or seizure.
The FHA’s current position is that properties subject to a reverse mortgage may be sold to anyone, including a borrower’s heir, for the lesser of the unpaid mortgage balance or 95 percent of the appraised value. This is crucially important to remember. It is also likely to eventually change. Consider this, 13% of 750,000 homes, or 97,500, homes presently federally insured are underwater with their reverse mortgage. More often than not, the amount underwater is substantial, easily in the tens of thousands and often in the hundreds of thousands. The federal government is on the hook to the lenders for the difference. The insurance premiums, collected in advance at issuance of the reverse mortgage, will prove to be inadequate to offset these catastrophic losses.
When these homes hit the market, and they will, they will do so as distressed properties and will drive down property values in an area until this new shadow inventory makes its way through the market. For investors, this is a potential boon coming your way. For those looking to sell, you have more to be concerned about in the not-too-distant future than the forward loan foreclosure market taking a chunk out of your selling price. As the proverbial pig moves through the snake, that vast segment that is the boomer generation, this challenge will become more noticeable and we will look back, banally, and declare, in hindsight, the scheme perpetrated on the aging and done so with the faces of trusted or fondly remembered celebrities like Tom Selleck, Robert Wagner, Fred Thompson, and Fonzi, Henry Winkler, this as the era of The Fonzi Scheme.
Cynthia McKenna is an Associate Broker and CEO of The McKenna Team at eXp Realty located in Hauppauge, New York. With a background in Financial Planning, Cynthia has more than 20 years in the real estate industry, with more than 18 years as a New York State Real Estate Broker. For more information feel free to contact Cynthia McKenna of The McKenna Team at eXp Realty at 631-278-6987 or by email at email@example.com.