About 30,000 seniors will receive tough "dun" letters from their reverse mortgage lenders. This largest batch of mortgage delinquency notices in U.S. history will demand payments in 30 days and threaten foreclosures of the homes.
These 30,000 homeowners over age 62 are behind on property taxes or have not paid homeowners' insurance. Both overdue items violate terms of the reverse mortgages and trigger foreclosure.
Lenders are required to mail the letters to the seniors between now and April 29, 2011. The massive collection effort was ordered by the Federal Housing Administration (FHA) which insures most reverse mortgages under its "HECM" program - Home Equity Conversion Mortgage.
The requirement that mortgage holders stay current with property taxes and home insurance is not unique to reverse mortgages. Almost all mortgages have the same requirement and would become delinquent if property taxes and homeowners' insurance were not paid. In traditional mortgages, the homeowner makes monthly payments that include principal, interest, taxes and insurance. A homeowner almost cannot get behind on just the taxes or insurance because his monthly payments include them. When you pay the one, you pay the other.
Reverse mortgages do not require monthly payments or any periodic payments. The lender is paid in full at closing if the owner later decides to sell or when the estate of a deceased homeowner sells the home, which must be done within a year of the homeowner's death. For a married couple, the balance is due a year after the death of the last spouse to die.
It is the legal responsibility of the homeowner to pay insurance and taxes. With no monthly payments on reverse mortgages, the system for semi-automatically paying the taxes and insurance is not there, and for 30,000 seniors, they got behind. Now dun letters are coming for the first time ever.
These 30,000 homeowners over age 62 are behind on property taxes or have not paid homeowners' insurance. Both overdue items violate terms of the reverse mortgages and trigger foreclosure.
Lenders are required to mail the letters to the seniors between now and April 29, 2011. The massive collection effort was ordered by the Federal Housing Administration (FHA) which insures most reverse mortgages under its "HECM" program - Home Equity Conversion Mortgage.
The requirement that mortgage holders stay current with property taxes and home insurance is not unique to reverse mortgages. Almost all mortgages have the same requirement and would become delinquent if property taxes and homeowners' insurance were not paid. In traditional mortgages, the homeowner makes monthly payments that include principal, interest, taxes and insurance. A homeowner almost cannot get behind on just the taxes or insurance because his monthly payments include them. When you pay the one, you pay the other.
Reverse mortgages do not require monthly payments or any periodic payments. The lender is paid in full at closing if the owner later decides to sell or when the estate of a deceased homeowner sells the home, which must be done within a year of the homeowner's death. For a married couple, the balance is due a year after the death of the last spouse to die.
It is the legal responsibility of the homeowner to pay insurance and taxes. With no monthly payments on reverse mortgages, the system for semi-automatically paying the taxes and insurance is not there, and for 30,000 seniors, they got behind. Now dun letters are coming for the first time ever.
A homeowner over age 62 can take the money from a reverse mortgage as a line of credit from which he can draw at any time, one lump sum, income for a period certain, a guaranteed life-long income, or a combination of any of these. Proceeds can be used for any purpose.
Reverse mortgages are a relatively new financial instrument. They are becoming increasingly popular to supplement the monthly income of seniors on tight budgets and to fund long-term care and pre-need funeral arrangements.
A model collection letter was written for the reverse mortgage lenders by FHA officials, and the wording could scare the Dickens out of seniors and families, raising worries about losing the home. If you know folks who have these reverse mortgages, it is best to alert them of the possibility, and prepare them for the decisions they may have to make.
There are numerous ways reverse mortgage holders can cure delinquencies and prevent foreclosure:
- Line of credit. 60% of seniors who get a reverse mortgage take the funds as a line of credit (like a home equity line of credit, only with no monthly payments). If there is still money in the reverse mortgage credit line, the senior can simply take from Peter to pay Paul and pay the delinquent taxes and insurance from the credit line. Although this leaves the senior with less of a safety net, it prevent foreclosure of the home, and potential loss of what may be the senior's most valuable asset: the home.
- Payment plan. FHA is requiring lenders to negotiate with delinquent seniors for monthly payment plans to retire the back-due taxes and to get homeowners insurance into effect. A senior should aggressively pursue settlement before foreclosure, in order to avoid the legal costs and expenses of the foreclosure, which costs and expenses are ultimately the senior's responsibility.
- Re-writing the reverse mortgage. If the senior is now older or has seen home property appraisal values rise, the lenders can re-negotiate a new reverse mortgage which will pay off the delinquencies and establish a line of credit to keep delinquencies from occurring in the future.
These are just a few of many opportunities that may exist to resolve the foreclosure.
Seniors who fail to get a delinquency satisfied within 30 days of receiving the notice face foreclosure. With home sales prices somewhat depressed, lenders would prefer not to foreclose. Foreclosure costs can be high and delays slow the process. Lawyers get involved. Seniors are best advised to quickly seek resolution or settlement of the matter so as to not become responsible for additional legal fees and expenses.
Attorneys may be the only winners from this development; they could sign up thousands of new clients between now and April 29 as a result of these letters of delinquency and their resulting aftermath. Of course, if you receive such a letter, and do not know your options, you will need to consult with an attorney or financial planner.
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