Reverse Mortgage Relief Costly for Industry, Dubious for Consumer
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The government's new foreclosure relief options for nonborrowing spouses of reverse mortgage customers will add to loan servicers' costs, and some question how many consumers they will actually help.
Under the new policy, the Federal Housing Administration is retroactively opening up eligibility for the foreclosure deferment to additional spouses who did not cosign the loans of deceased borrowers. The FHA leaves it to servicers' discretion whether to offer deferments, based in part on servicers' assessment of whether individual cases meet the criteria.
"It's falling on servicers to figure this out. These poor servicers keep getting dumped on, and nobody has increased their paycheck," said Alice Sorenson, senior vice president at LRES, a vendor offering appraisals and other services for the reverse mortgage industry.
There are mixed industry opinions on how much foreclosure relief the new policy will provide as a result. Some think that given how expensive foreclosures are, servicers will be happy to have another option where they can turn over responsibility for the loan to the Department of Housing and Urban Development if they run across consumers who meet eligibility standards. Others think the options' operational and financial costs for the industry and consumers, respectively, will outweigh their benefits.
"It should solve some isolated cases where the spouse is still living in the house but was not on the title," said Jeffrey Taylor, a consultant who previously ran Wells Fargo's reverse mortgage unit.
Atare Agbamu, president and chief executive of the advisory firm ThinkReverse LLC, says the new option will be too complicated and expensive for servicers to use it broadly.
"With all the hoops they have to jump through, the cost to lenders will be prohibitive," Agbamu said.
But at least one servicer appears to be at least in the early stages of using the new HUD policy to provide one of the options to a nonborrowing spouse facing foreclosure.
Jan Cooper of Anaheim, Calif., recently said her lender-servicer, OneWest Bank, had given her at least a 30-day reprieve. It was unclear whether the foreclosure relief would be permanent. OneWest, which is in the process of being acquired by CIT Group, confirmed that it has been delaying foreclosures based on the recent HUD servicing policy change for nonborrowing spouses.
HUD in most circumstances requires that the amount of equity the borrower has withdrawn from the home not exceed the amount that would have been justified had the spouse's age, as well as the borrower's, been considered in setting principal limits.
The department began requiring this last year, for most loans made since August. But most if not all non-borrowing spouse loans that existed prior to the change were made because lenders allowed the older spouse only to put his or her name on the loan to get more proceeds. (The idea did not originate with HUD, but HUD acknowledged and allowed it.)
As a result, these spouses would have to pay some additional amount to make up the difference in principal balance and qualify for foreclosure protection. And if consumers are facing foreclosure, they probably do not have the wherewithal to pay that amount, estimated to number of the tens of thousands of dollars.
"They've said lenders don't have to foreclose, but actually they do," Agbamu said.
HUD, which is in the throes of its budget process this week, considered a proposal that would have removed this financial hurdle. But housing officials said they ultimately ruled it out for the larger universe of borrowers because it "imposes a financial risk to the insurance funds that is simply too great," according to a court filing.
The plaintiffs in the litigation that sparked reform in this area and one other spouse who legally challenged a foreclosure are getting relief that is not contingent on surmounting the hurdle. But other spouses are more broadly still in danger of eventually losing their homes, Agbamu said. Dianne Riddick Barnes, the widowed spouse of a pastor in Virginia, is among them, he said.
Although plaintiffs in the litigation are getting the relief they sought, their legal team is disappointed that the principal limit hurdle was not removed more broadly for nonborrowing spouses whose partners had Home Equity Conversion Mortgages. The court had called for broad policy changes, citing language in the original legislation creating HECMs, which are government-insured reverse mortgages. But attempts to get class action status for the case have been unsuccessful. The legislation specifies that references to the borrower's right to the home include the borrower's spouse.
Virtually no one in the broader universe of spouses will qualify for the relief, according to Craig Briskin, an attorney at the Washington law firm Mehri & Skalet PLLC who is counseling plaintiffs.
"We were incredibly disappointed in HUD's action and we are considering our next steps," he said. HUD should have to quantify why the approach the plaintiffs favored would cost too much, Briskin said.