NRMLA Op-Ed Explains Reverse Mortgage Foreclosure

The Hill newspaper, a widely read Capitol Hill news source, published the following opinion editorial from NRMLA President and CEO Peter Bell on January 17, 2017. The original article is posted on TheHill.com.

The real story on Trump’s Treasury pick and reverse mortgages
By Peter Bell, Opinion Contributor

In the reverse mortgage industry, foreclosure and eviction are not synonymous. In fact, foreclosure—but not eviction—is a common resolution for a reverse mortgage loan.

Yet, little distinction has been made between the two terms in news coverage of Treasury Secretary nominee Steven Mnuchin’s leadership of OneWest Bank and Financial Freedom, which foreclosed on tens of thousands of mortgages, including more than 16,000 reverse mortgage loans during his tenure.

Headlines such as, “Trump’s Treasury pick excelled at kicking elderly people out of their homes,” belie the facts when the story doesn’t explain that most reverse mortgage foreclosures don’t displace the borrower. Without taking a position on his appointment, we want to clarify false impressions about reverse mortgage foreclosures because they are unfair to Mnuchin, the industry and the reputation of this loan product that more than 1 million homeowners have used to age in place.

Jack Guttentag, a professor of finance emeritus at the Wharton School, recently penned a column explaining that foreclosure means something different in the reverse mortgage industry than it does for a typical mortgage. He reached out to the Department of Housing and Urban Development (HUD), the agency responsible for the Home Equity Conversion Mortgage Program, which backs federally insured reverse mortgages, for more clarity on their use of the term foreclosure for reverse mortgages

HUD responded, “We use the term ‘foreclosure’ when title is transferred through a foreclosure proceeding—either judicial or non-judicial. 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.”

Reverse mortgage loans were created to help older homeowners, typically aged 62 and older, convert a portion of their home equity into cash that could be used to supplement a fixed retirement income and pay for medical and other daily expenses. Over time and with the help of financial planning experts, we’ve also learned that reverse mortgage loans are a versatile and beneficial tool in a comprehensive retirement income plan.

With a reverse mortgage, a lender loans a homeowner an amount of money equal to a portion of their home equity while expecting repayment with interest once the home is sold. In the case of home equity conversion reverse mortgages, the loans are non-recourse, meaning that even if the house sells for less than the balance of the loan, the lender will not seek to recoup the difference from the borrower or the borrower’s estate.

When a reverse mortgage loan borrower passes away, the loan becomes due and payable. At this point, the heirs or estate have the options to sell the house, purchase the home for 95 percent of its appraised value, sign a deed in lieu of foreclosure, or do nothing and let the lender take possession of the property through the foreclosure process, which does not include eviction of the borrower.

But, if the borrower died with neither heirs nor an estate, it is up to the lender to take possession of the property through foreclosure, without an eviction, and then sell it. Lenders and loan servicers are required to begin the foreclosure process within six months of the last remaining borrower’s date of death, but will seek to resolve the due and payable loan with willing heirs whenever possible.

A reverse mortgage loan will become due if the borrower fails to meet the obligations of the loan, which include timely payment of property taxes, insurance and any homeowners association fees, and maintaining the property. If the borrower is delinquent on payments, a loan servicer must advance its own funds to cover taxes, insurance and homeowners association fees, and then work with the borrower to come up with a repayment plan. If the terms of the repayment plan are unmet, the servicer may seek permission from the Federal Housing Administration (FHA) to accelerate the note, declare the loan due and payable, foreclose on the property, and sell it.

This type of foreclosure, typically called a “tax and insurance default” is the most unfortunate outcome of a reverse mortgage loan and can displace borrowers. However, research by Stephanie Moulton from Ohio State University, and others, projects that a combination of policies implemented in 2013 and 2015 to prevent borrowers from missing payments will decrease tax and insurance defaults by as much as 50 percent.

To help explain what happens when it is time for the loan to be repaid, the National Reverse Mortgage Lenders Association developed a free consumer guide.

As members of the Senate gather information about Treasury Secretary nominee Steven Mnuchin and come across data on reverse mortgage foreclosures, we urge them to consider the context for the numbers and the fact that with these loans, foreclosure and eviction are not synonymous.

Peter Bell is president and chief executive officer of the National Reverse Mortgage Lenders Association (NRMLA), an industry association that serves as an educational resource, policy advocate and public affairs center for lenders and related professionals.