Reverse Mortgages Puts Confused Homeowners at Risk of Foreclosure

The Consumer Financial Protection Bureau (CFPB) released a report Thursday showing that although reverse mortgages are meant to help borrowers in retirement, they are in fact causing problems for many who don’t fully understand them.

A reverse mortgage is a type of home loan that lets older homeowners access the equity they have built up on their homes and defer loan payment until they sell the home, move out, or pass away. The original purpose of reverse mortgages was to allow these homeowners to convert home equity into an income stream or line or credit to use in retirement. Borrowers were largely expected to age in place with their loans, living in their current homes until they passed or needed skilled care.

Reverse mortgages require no monthly mortgage payments, but borrowers must still pay property taxes and homeowner’s insurance. The report showed that nearly 10 percent of reverse mortgage borrowers are at risk of foreclosure because they failed to pay those costs.

“Reverse mortgages are complex and have the potential to become a much more pervasive product in the coming years as the baby boomer generation enters retirement,” said CFPB director Richard Cordray. “With one in ten reverse mortgages already in default, it is important that consumers understand what they are signing up for and that it is the right product for them.”

The report found that many reverse mortgage borrowers do not understand how their loan balance will rise and their home equity will fall over time. In addition, the influx of new choices brought on by innovations and policy changes have made the matter too complex for many homeowners. The bureau further found that the tools currently available to help consumers understand the risks and tradeoffs are not enough. The report called for improved methods for housing counselors to help consumers understand their choices.

There are many other problems with reverse mortgages as they currently stand, the report pointed out. Many consumers are getting reverse mortgages before the age of 70 (with the most common age for a new borrower being 62, the first age at which reverse mortgages are available), and some are even getting them before retiring.

“These borrowers will have fewer resources to pay for everyday and major expenses later in life and may find themselves without the financial resources to finance a future move-whether due to health or other reasons,” said the report.

Another problem is that 70 percent of borrowers are taking out the full amount of proceeds as a single lump sum instead of treating the payment as an income stream. As a result, these borrowers have fewer available financial resources later in life. They may not be able to continue paying taxes and insurance on their homes, leading to potential foreclosure. The report found that borrowers who save or invest their money may earn less on the savings than they spend paying interest on the loan.

Finally, the bureau addressed the issue of deceptive or misleading marketing materials about reverse mortgages. The report cited examples of mailers that depict reverse mortgages as a government benefit or entitlement program in the vein of Medicare and use images resembling government seals to entice consumers. It can be difficult for consumers to tell that a reverse mortgage is a financial product, not a government benefit.

In order to address these issues and help consumers better understand reverse mortgages, the CFPB has released a request for information.

Principal Reduction Most Effective Type of Mod: Amherst

Amherst Securities recently released a report declaring that principal reduction modifications, without question, are the most effective form of modification.

Between three types of modifications – principal, rate, and capitalization – the controversial and much-debated principal reduction mod was found to be the most effective based when it comes to its 12-month re-default rate.

The report, which was co-authored by housing analyst Laurie Goodman, counted principal modifications as mods involving a balance reduction, rate mods involved an interest rate reduction, and a capitalization mod involves neither action and is when the delinquent amount owed gets added to the principal balance without charging the interest rate.

Although the FHFA does not permit Fannie Mae and Freddie Mac to apply principal reduction modifications to their loans, the report revealed that in 2012, principal modifications now account for almost 40 percent of total modifications, up from 25 percent in 2011 and 11 percent in 2010.

For 2011 modifications, the re-default rate after 12 months for principal modifications was 12 percent compared to 23 percent for rate modifications and 30 percent for capitalization modifications, according to the report.

Other factors leading to a successful modification also include more significant payment reductions, modifications made earlier in the delinquency process, and mods that are better tailored to borrower characteristics.

The report backed claims of pay relief as means for a successful mod by pointing to data on 2011 modifications, which showed that mods with pay relief less than or equal to 20 percent had a 12 month re-default rate of 30 percent, while those with pay relief greater than 60 percent had a re-default rate of 12 percent.

Timing – while not everything – was also named as an important factor.

“If a borrower is offered a 30% pay reduction immediately upon becoming delinquent, that person is apt to feel very good about the new modification – he is getting a ‘deal.’ Offering the same modification after a 15 month period of mortgage non-payment-is going to appear less attractive,” the report stated.

In 2011, close to 30 percent of borrowers who were 12 months or more delinquent when modified re-defaulted after about a year of getting modified, while less than 20 percent of those who received a mod while delinquent by two months or less re-defaulted after a 12-month period.

Interestingly, the report notes that the earlier a HAMP mod is completed, the more compensation a servicer receives from Treasury.

For example, if a modification is done for a borrower who is less than 120 days delinquent, Treasury gives the servicer $1,600; for borrowers 120–210 days delinquent, servicers received $1,200; and for borrowers who are 210 days delinquent or more, the servicer gets $400. Prior to this incentive structure introduced in July 2011, servicers once received $1,000 on all completed modifications.

Even with the incentives, the trend over the years is for modifications to be given at higher levels of default. In 2008, about 5 percent of borrowers received modifications when they were 12 months or more delinquent, but in 2012, the number is about 40 percent.

That report noted that FICO credit scores are also related to the success of a modification. In general, borrowers with lower credit scores had higher rates of re-default.

When comparing the effects of a principal modification versus a rate modification on borrowers according to their credit score, the report showed that principal mods were more effective than rate mods for all credit scores.

In 2011, borrowers with FICO scores higher than 740 and with a principal mod had a 12-month re-default rate of about 5 percent while the rate was close to 15 percent for those who received a rate mod.

The number of modifications from borrowers who are receiving their second mod is also rising. In 2008, 5 percent of borrowers had a second mod, while in 2012, 35 percent received second mods.

Although Fannie Mae and Freddie Mac loans are not eligible for principal reduction, the report projects more principal mods to come for two reasons.

Through the $25 billion robo-signing settlement, the five largest banks – Bank of America Corp, J.P. Morgan Chase, Wells Fargo, Citicorp, and Ally Financial – must offer $10 billion in principal reduction for underwater borrowers. Treasury has also tripled its incentives for Principal Reduction Alternative (PRA) mods. PRA was introduced in October 2010 and are offered through HAMP.

New Guideline Will Make Short Sales Easier for Military Homeowners

Under a new guideline, military members with Fannie Mae or Freddie Mac loans will now have an easier time with short sales.

Federal Housing Finance Agency (FHFA) Acting Director Edward J. DeMarco announced in a release Thursday that military homeowners who receive Permanent Change of Station (PCS) orders can sell their homes via short sale without having to go into default first.

“It is in everyone’s interest for the men and women serving in our armed forces to focus on the important job they are doing defending our country, rather than worry about the maintenance and leasing of a property in another jurisdiction,” said DeMarco in a release. “These Fannie Mae and Freddie Mac policy changes, in combination with related guidance last fall, should now provide military homeowners with access to the immediate and automatic full range of foreclosure alternatives.”

Last year, Fannie Mae and Freddie Mac issued guidance to servicers to have PCS orders count as a hardship for military members seeking relief.

The new policy takes an even greater step forward and will allow military members with PCS orders to sell a primary residence purchased on or before June 30, 2012 for less than the balance on their mortgages even when current on their payments. Short sales transactions typically require homeowners to be delinquent on their mortgage.

The GSEs also won’t pursue a deficiency judgment or a contribution under the new policy. Typically, borrowers contribute to closing costs and can also be pursued for the remaining balance after a short sale is completed.

Since PCS orders require military members to relocate, they can create a hardship, especially at a time when millions are underwater and can’t sell their home due to negative equity. This led many service members to be stuck with two residences or to default on their mortgage.

In response to the new guideline, Freddie Mac’s Interim Head of Single Family Business and Information Technology Paul Mullings said, “We look forward to working with our servicers on this new short sale policy. Together we can help ease the challenge of relocation for military families when Permanent Change of Station orders are received.”

The guideline was issued by the Consumer Financial Protection Bureau, Fed’s board, FDIC, National Credit Union Administration, and the OCC.

The new rule is only applicable to military homeowners with a GSE-backed mortgage; this information can be checked by visiting Fannie Mae or Freddie Mac online.

Foreclosure Review Deadline Extended, Nearly 200K Requests So Far

The deadline to request a free, independent foreclosure review has been extended for another two months, and so far, nearly 200,000 people have requested a foreclosure review, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board announced Thursday.

The new deadline to request an independent foreclosure review is getting pushed back from July 31 to September 30, 2012. The review is for those who believe they have suffered financial harm as result of servicing errors during a foreclosure process between 2009 and 2010. The property must be the borrower’s primary residence and serviced by a participating servicer to be eligible.

The OCC first issued consent orders for the reviews on April 13, 2011 against 12 mortgage servicers, and so far, about 193,630 people have requested a free review. In addition, independent consultants have reviewed servicers’ portfolios and selected 144,817 files to review.

Currently there are 156,826 files under review, and 11,939 files have been completed, according to the OCC.

If financial harm did occur as a result of a faulty foreclosure process, relief may be available in the form of lump-sum payments, rescission of a foreclosure, a modification, or corrections on credit reports, deficiency amounts, and records.

Efforts from the OCC to reach out to borrowers have included 4.4 million letters sent to those who may be eligible for a review, and the agency also required servicers to pay for advertising announcing the review.

The website has been visited 600,386 times, and 7,948 borrowers have submitted requests for review online as of May 31. The toll-free number, 1-888-952-9105, has received 241,048 calls, and 25,752 people have requested forms.

The independent foreclosure review is separate from the $25 billion servicing settlement reached between federal and state officials and five of the largest servicers.

As part of OCC’s agreements, four banks – Bank of America, Citibank, JPMorgan Chase, and Wells Fargo – received penalties totaling $394 million.

Examples of servicer actions that could lead to relief include Servicemembers Civil Relief Act violations; modifications that were not approved but should have been, lack of proper notification during the foreclosure process, and errors that did not result in foreclosure, but still led to financial injury.