What do you do if you're on a fixed income and are earning next to nothing on your savings?
If you're a senior (62 years of age or older) and you own a house, you might get a reverse mortgage, which would allow you receive a stream of income or a lump sum of equity from your home (or eliminate any mortgage payments you have), bringing in more cash to pay your bills or fix up your property.
But even with a reverse mortgage, seniors still have some expenses associated with the property, including homeowners insurance premiums, real estate property taxes, and maintenance.
Here's the problem: Seniors are so strapped thanks to the recession, that some have stopped paying their insurance premiums and taxes. And, some are claiming that despite having reverse mortgage education before signing on the dotted line, they didn't understand that they still had to pay these expenses. So, they didn't.
As a result, their homes are subject to foreclosure, which is making the Federal Housing Administration (FHA) (which guarantees virtually all reverse mortgages) nervous.
Now, FHA is advising seniors and lenders to be more careful with their reverse mortgages.
While the Department of Housing and Urban Development is working to establish new rules for reverse mortgagors and lenders facing outstanding debts, the FHA released guidance yesterday for borrowers and lenders who have delinquent housing and insurance payments.
"We understand that some seniors have not paid their taxes or insurance for some time and may be at risk of losing their home. Today's guidance is designed to establish a clear framework that protects both the homeowner and the lender who participate in our reverse mortgage program," said FHA Commissioner David H. Stevens
The guidance comes with the warning that homeowners will face foreclosure if they do not pay their insurance premiums and real estate taxes. Although the warning may seem harsh for seniors, the FHA is actually focusing its efforts on lenders.
By creating a more specific Mortgagee Letter, the FHA is showing lenders how to handle-and collect-missed payments on reverse mortgage (also known as HECM) loans.
According to the FHA, lenders provide realistic solutions for the borrower, including specific repayment plans or even refinancing the delinquent loan. The new standards require that lenders mail these warning letters to any borrower who had an unpaid property tax balance for an extended period, recently missed a property tax payment, or have a significant unpaid property tax balance. Lenders have until February 28 to get the letters out.
To avoid future problems, the FHA also up'ed its counseling standards on HECM loans. Counselors now have to stress to the borrowers how important timely payment is and fully explain the consequences of missed payments. In addition, reverse mortgage counselors are now using a tool that can predict budget shortfalls.
In a similar effort, HUD is giving $3 million to housing counseling agencies specifically to help homeowners who have delinquent reverse mortgages.
These counselors will be responsible for creating repayment plans. In the event that keeping the home is no longer an option, the counselors must help seniors transition into alternative housing. HUD will soon release its own proposed rule, which will increase consumer protection and add preventative measures to the existing HCEM regulations.
Do you think the new FHA regulations will help or hurt seniors with reverse mortgages? And, is the reverse mortgage crisis the next phase of the housing crisis?
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Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and The Equifax Personal Finance Blog, and is Chief Content Strategist at RealtyJoin.com, a community for real estate investors.