2 May, 2005, Revised January 27, 2010, July 27, 2012, May 25, 2015,
March 28, 2017
"I fear that some elderly homeowners who take out FHA reverse mortgages
will not receive all the payments to which they are entitled. FHA
insurance protects the lender, not the borrower. When you consider that
payments to the borrower must continue for life -- which can be forty
years or more -- there is a distinct possibility that some lenders will
just not be there to complete the payments. They will profit from the
shorter-lived borrowers, then default on those who live too long."
Not so, there is no way this will happen. The elderly homeowners who participate
in this program have the right to live in their house until they die or
voluntarily move out, and any annuities or draws against their credit
lines that they are due, are certain to be paid.
It is true that the FHA insurance, in the reverse mortgage program as
well as in all other FHA programs, protects the lender rather than the
borrower. In the event that the amount owed by the borrower exceeds the
value of the property, the loss to the lender will be covered by FHA.
But under the reverse mortgage program, any payments due the borrower
are also protected. HUD has a legal obligation to make such payments in
the event that the lender does not.
When the reverse mortgage loan balance gets to 98% or more of the
"maximum claim amount", which is the maximum amount that can be
collected, lenders are allowed to assign the loan to HUD and be paid the
balance. HUD then assumes responsibility for making any additional
payments that are due the borrower. HUD will also take over
responsibility if, for some reason, the lender cannot make the required
payments.
The upshot is that borrowers are fully protected. The only possible blip
in their lives arises from the transfer of servicing from the original
lender to a servicer working for HUD, and that should be
inconsequential.
"My mother has had an FHA Home Equity Conversion Mortgage for some time
and has reached her $70,000 credit limit. The lender has sent her a
letter saying that they are transferring the account to HUD. She is
worried she will lose her home…?"
Not to worry, the transfer of her account to HUD is routine.
Under HUD rules, a lender can assign a loan to HUD once the total amount
owed by the owner – the sum of all payments to her, upfront fees that
were financed and accumulated interest -- equals the "maximum claim
amount.” This is the largest amount the lender can collect – it is
$70,000 in your mother’s case.
On assignment, the lender is paid that amount and HUD becomes the owner.
HUD will appoint a servicer to handle the loan, who could be but
probably will not be the one your mother has been dealing with. The
switch to a new servicer is the only change your mother will notice.
"So there is no way that a senior who takes out an FHA reverse
mortgage can lose their home?"
True, provided that the borrower meets her obligations under the
HECM contract. These obligations include paying property taxes and home
owners insurance, which following the financial crisis many seniors were
letting slip. See
HECMs
Hit an Unexpected Snag: Property Tax Defaults. I have not heard of
any seniors getting dispossessed for this, but it could happen.
