Here's a sobering message for anyone who has a federally insured reverse mortgage or plans to apply for one: If you don't pay your local property taxes or hazard-insurance premiums, you should know that the risk of losing your house to foreclosure is about to increase.
Although the Federal Housing Administration, which runs the dominant reverse mortgage program, often had been lenient and forgiving in past years about tax and insurance delinquencies by senior borrowers, it's likely to take a more disciplined approach when it issues new guidelines this summer.
FHA is essentially under the budgetary gun to do so: Its reverse-mortgage program suffered a $798 million estimated budget shortfall in the last fiscal year - its first-ever loss - in part because of widespread declines in the values of the homes that secure its insured loans.
It has cut maximum borrowing amounts available to seniors by 10 percent already, and is looking for other ways to bring the program back into profitability in an era of low home-appreciation rates. The agency has asked Congress for a $250 million subsidy, but so far it has not been funded.
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Mortgage giant Fannie Mae also has begun instructing the companies who service its large portfolio of FHA reverse mortgages to toughen up their handling of tax and insurance delinquencies, moving to initiate foreclosure proceedings when borrowers have not paid their bills for extended periods and expose the company to losses.
Unlike standard mortgages, reverse mortgages require no monthly payments from the borrower and have no escrow accounts to cover property-tax bills and insurance. Without escrows, some seniors may not keep track of property-tax notices they receive - thereby exposing their houses to tax liens that take legal precedence over the mortgage lien.
They may also neglect to pay their hazard-insurance premiums, leaving investors in their reverse mortgages with no coverage in the event of a fire or other major destructive event. Experts in the industry believe the FHA needs to build in some sort of escrow or set-aside feature - a concept federal officials say they are currently examining.
The reverse-mortgage program, which is limited to those 62 and older, also has no rigorous upfront underwriting requirements other than sufficient borrower equity in the home. Unlike standard loans, minimal or no attention is given to the applicants' incomes or credit scores. Borrowers receive mandatory counseling before going to closing, but some critics say the FHA needs to look more seriously at borrowers' assets, income and long-term financial ability to pay the associated costs of keeping up the property.
Both the FHA and Fannie Mae say they are working on solutions that will not only flag defaults on seniors' tax and insurance payments earlier, but also create a mandatory, step-by-step system to contact borrowers who are delinquent, determine the causes of the default, and if necessary refer them to charitable groups that can assist them and prevent foreclosure.
However, if the plan doesn't pan out - and the borrowers simply lack the capacity to pay what they owe - the FHA will be forced to pull the plug and foreclose.
Contact syndicated columnist Kenneth Harney at kenharney@earthlink.net