THE BABY BOOM GENERATION STARTED REACHING the traditional retirement age of 65 in 2011. The reverse mortgage industry had long been preparing for a dramatic increase in demand in long-anticipated wave of new retirees. But just as Boomers were beginning to retire, Wells Fargo, Bank of America and MetLife Bank — the top three reverse mortgage lenders — closed down their reverse mortgage operations.

What happened to dull the bright future for reverse mortgages, and will reverse mortgages ever become a mainstream product, as so many in the industry believe?

The nature of a reverse mortgage is that the borrower does not have to make any monthly payments on the loan. Instead, the interest charged accumulates and is added to the loan balance each month. To protect the lender, a borrower typically can only borrow about 50 percent of the value of their property. This would normally allow plenty of equity in reserve to cover the interest accumulation over the life of the borrower.

In 2011, the nation was still reeling from the Great Recession — billions of dollars in home equity had evaporated. Millions of homeowners suddenly owed more on their mortgages than their homes were worth. However, reverse mortgage borrowers who had lost equity had nothing to fear, as they did not have to make any payments — and in the end, if they owed more than the home was worth after they deceased, it didn’t matter as the bank would be taking the loss. Ultimately, though, most of these loans are government insured, so it would be HUD, and the taxpayer, taking the loss.

Add to this scenario a dirty little secret of the reverse mortgage industry that suddenly loomed as a big ticket issue: technical defaults. A homeowner with a reverse mortgage does not have to make any mortgage payments, but they do however have to pay their property taxes and homeowner’s insurance and maintain the property. If the borrower fails to pay their taxes or maintain their insurance, they are technically in default under the terms of the loan and could be subject to foreclosure.

Nobody wanted to foreclose on senior citizens, so lenders never actually foreclosed on seniors who either could not or would not keep their obligations under the agreement.

So, for many years the issue of technical defaults had been simmering in relation to the increased level of reverse mortgage activity. For years lenders simply advanced the money and paid the taxes and insurance and added the costs to the amounts the borrower would have to pay at the end of their loans. Since properties were generally appreciating, once a homeowner passed on there was still plenty of equity to cover the added expenses, and the reverse mortgage insurance program at HUD was actually making money for the taxpayer.

All this started to change as home values plummeted, and in 2010 HUD started notifying lenders that they would have to address the issue of technical defaults — and the specter of foreclosing on senior citizens became very real.

We all know how quickly our government moves, so it should be no surprise that it has taken HUD almost five years to come up with a solution to address the problem of technical defaults. After years of study and after some lenders have already put measures in place, HUD has finally announced what many have anticipated for years. Beginning in March of next year, lenders will have to complete a borrower assessment that amounts to a limited underwriting review of a borrower’s ability and willingness to pay their obligations.

The review will assess a borrower’s income and obligations and review their credit history. Lenders, when reviewing credit histories, will have the ability to determine whether there were mitigating circumstances, such as a sudden illness. Seniors who can’t pass the financial assessment may still have the opportunity to receive a reverse mortgage, if they have sufficient equity for the lender to set aside funds from the reverse mortgage to pay the tax and insurance bills as they come due over the life of the loan.

The reverse mortgage is an excellent solution for many seniors. The unfortunate truth is that some seniors simply don’t have the ability to keep their obligations current even when they don’t have a monthly mortgage payment. The financial assessment is a good step in the right direction for senior citizens, and for the industry, too.

Guy Benjamin (CAL BRE License #01014834, NMLS 887909) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or guyb@fairwaymc.com.height=”150″ />

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