Foreclosures and Reverse Mortgage

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Foreclosure is probably one of the few terms that made it among the household names after its increased rates in 2006-2007 that led to the economic crisis in 2008. While foreclosure rates in all U.S. homes are dropping, the actual number is still in millions.

As of August 2012, 1.3 million homes were in some stage of a foreclosure process. States with the highest percentage of mortgaged home in some stage of foreclosure include Florida, New Jersey, New York, Illinois and Nevada.

Like the forward mortgage industry, reverse mortgage is not immune to foreclosures. For the Home Equity Conversion Mortgage (HECM), popularly known as reverse mortgage, an estimated 54,000 are in technical default in February 2012.

HECM allows homeowners 62 and older to loan against their housing property's equity.

While an HECM is considered a loan and comes due when the senior-borrower dies, moves or sells the home, it goes into default due to nonpayment of taxes and/or insurance. When this happens, the borrower can lose the property to foreclosure.

The good news, however, is not all senior-borrowers who get into the foreclosure process lost their properties. Some are able to get current on their loans or negotiate a short sale. AARP reported that around 60 percent of the troubled reverse mortgage loans are in repayment plans.

The number of reverse mortgage borrowers going in technical default due to non-compliance of their tax and insurance obligations sent the Consumer Financial Protection Bureau (CFPB) scouting for more areas needing government intervention. To the CFPB, the move will help senior-borrowers compare products, understand costs and risks, and evaluate tradeoffs.

While done in good faith, regulatory measures have hurt the industry in the past. Wanting to ensure more control over the lending process, nationally chartered lenders like MetLife and Wells Fargo exited the reverse mortgage business and decided to move away from brokered loans.

The National Association of Federal Credit Unions (NAFCU) called on the CFPB to target problem lenders rather than implement another set of regulations, pushing even the responsible lenders committed to providing ethically-originated reverse mortgage for seniors away from the industry needing them most.

Dillon Shea, NAFCU's regulatory affair counsel, said the CFPB has yet to finish implementing the set of housing regulations required by the Dodd Frank Act and given the small size of the current reverse mortgage market, another set of regulations will only chase responsible lenders out of the industry.

Currently, only around 3 percent of the reverse mortgage market takes out the loan. CFPB's scrutiny came as more financial planners and researchers project reverse mortgage's potential to become a prominent part of the retirement planning landscape in the coming decades.

 
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