Foreclosures on reverse mortgages are not what you think
The headline on Bloomberg News as reported by National Mortgage News caught my eye. It read "Mnuchin's Reverse Mortgage Woes Blemish Record of Treasury Pick." As I read on, I realized that reverse mortgage-bashing by the media, which had almost disappeared in recent years, was now being revived to tarnish a Trump appointee. The article reports that reverse mortgages are an "icky" business in which celebrity spokespersons "set the stage for a potential foreclosure on an elderly widow or widower …"
What is the connection to Mnuchin? With several other investors, he had acquired the insolvent IndyMac in 2009 from FDIC, and with it Financial Freedom, a reverse mortgage lender owned by Indy Mac. Financial Freedom, according to Bloomberg, "has carried out 16,220 foreclosures since 2009, or about 39 percent of the country's reverse-mortgage foreclosures …" The "blemish" on Mnuchin seems to be his association with the heavy foreclosure volume by Financial Freedom.
I was immediately skeptical of the alleged 16,220 foreclosures by one firm, and searched at HUD for an industry total. I found it in a response HUD made to a Freedom of Information request from a consumer organization. Total foreclosures of HECM reverse mortgages, as reported by HUD for the period since April 2009, was 41,237. Considering the small size of the reverse mortgage industry, this is an eye-popping number. From the inception of the program through 2016, the total number of HECM reverse mortgage originations was 971,000, which means that foreclosures since April 2009 were 4.2 percent of all HECMs written since 1999. To me, this sounded more like the total number of reverse mortgage terminations.
So I asked HUD how the term "foreclosure" was defined in its record system. Its answer cleared up the problem.
"We use the term 'foreclosure' when title is transferred through a foreclosure proceeding - either judicial or nonjudicial. It does not always have an associated eviction. The most usual cause for default is death of the last surviving borrower so there is usually no eviction involved."
Thus, foreclosures on a reverse mortgage mean something entirely different from foreclosures on a forward mortgage. On a forward mortgage, foreclosure arises from failure of the borrower to make required monthly payments of principal and interest, and it almost always involves a forcible eviction. This is why most people view it with distaste, look askance at the lenders who execute it even as a last resort, and abhor lenders who execute more foreclosures than necessary for self-seeking reasons. But on reverse mortgages, there is no required payment of principal and interest, and while borrowers can be evicted for failure to pay property taxes or homeowners insurance, I have never seen or heard of one.
There have been evictions of persons residing with borrowers who died, including spouses who were not included in the loan contract, usually because they were not yet 62. In 2014, however, the rules were changed to protect non-borrowing spouses (NBSs) from being evicted following the death of HECM borrowers. If the surviving NBS assumes ownership of the house and meets other obligations of ownership including payment of property taxes, she can remain there indefinitely. Further, an NBS can be any age when the HECM is taken out, but the younger she is, the less the amount that the HECM borrower can draw.
Under this new rule, all spouses have their tenure protected. If they are 62 or older, they are co-borrowers, and if they are younger than 62 they are NBSs with protected tenure.
In sum, the word "foreclosure" is freighted with emotion because of its association with evictions of borrowers who have defaulted on their standard mortgages. On HECM reverse mortgages, very few foreclosures involve evictions, which are rare and becoming more so. It is long since time that HUD published data on reverse mortgage terminations, with a breakdown by cause.
• Contact Jack Guttentag via his website at mtgprofessor.com.
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