It’s important for seniors to have access to liquidity in retirement. However, issues stemming from servicing and a lack of loss mitigation options have prevented the reverse mortgage product from fulfilling its potential — and have led to reverse mortgages ending in foreclosure more often than they should, according to a report published by the National Consumer Law Center (NCLC).

According to the report, there are a number of suggested changes that should be made by the Federal Housing Administration (FHA) to prevent more home losses for seniors with reverse mortgages. These include allowing flexibility with property charge loss mitigation for borrowers under the home equity conversion mortgage (HECM) program and rescinding the due and payable status when loss mitigation is approved.

In addition, the report recommends allowing loans to be assigned to FHA while in an active loss mitigation plan and requiring a loss mitigation review. The report also suggests that the Consumer Financial Protection Bureau (CFPB) take a more active role in working with the FHA on effective reverse mortgage communications.

To get a better understanding of the report, its findings and recommendations, RMD spoke with the lead author of the report, Sarah Bolling Mancini, an NCLC attorney.

What led to the report

Mancini said the report is the culmination of numerous years worth of work.

“It has been an ongoing project, and we’ve been fortunate over the past few years to be able to really delve in deeply on reverse mortgage foreclosure issues because of generous support from the RRF Foundation for Aging that has been supporting our reverse mortgage advocacy work,” Mancini said. “So really, this report is the culmination of three years of intensive work trying to prevent reverse mortgage foreclosures, and then wanting to dig into what the underlying causes are.”

The report includes recommendations for policy changes to help reduce the number of reverse mortgages that end up in foreclosure while the borrower still resides in the home, she said.

In some cases, the issues highlighted in the report have been ongoing for several years, despite the FHA playing an active role in reshaping the HECM program and its governing policies. While there have been a number of product changes implemented by FHA over the years, Mancini said the ongoing issues may have been caused by the agency’s focus being elsewhere.

“I think that there’s a bit of a historical arc that got us to where we are now, with the property charge foreclosures especially, which is really a primary focus of this report,” she said. “They are really the largest category of what we consider to be preventable reverse mortgage foreclosures. Even when a borrower dies, there may be foreclosure alternatives that should be explored for the heirs. But certainly, with property charge defaults, that’s one of our major areas of concern.”

A ‘problematic’ policy for the FHA

In 2015, FHA actively cracked down on property charge defaults, Mancini said. This may have forced lenders to foreclose in some cases, since foreclosure was not previously required if a borrower defaulted on property charges.

“There was an OIG report that showed the potential scale of the problem, and I think FHA felt like they had to get their ducks in a row,” Mancini said. “So, the pendulum swung from one extreme to the other, from totally permissive to very strict foreclosure timelines and loss mitigation being optional. But really the emphasis changed to [FHA saying] ‘You better foreclose according to our timelines, or else you, the servicer, are going to be financially penalized.’”

NCLC characterizes this policy position by the FHA as problematic, Mancini said, especially when considered alongside the goal of the HECM program to keep older adults in their homes.

“There was a surge of property charge defaults and a large number of property charge foreclosures, and now we’ve come back down to a more reasonable level,” Mancini said. “We think it’s a good opportunity for the agency to take a step back and to reevaluate [whether or not] they need to have such a draconian policy about property charge foreclosures. [They should ask] if they can make the loss mitigation options broader, which is something the industry has pushed for as well.”

Impacts on minority homeowners

Historically, Black communities have had higher numbers of reverse borrowers, but HECM volume appears to be dropping in these communities due to new policies put into place, Mancini said — including a financial assessment and a requirement for property charges to be set aside.

According to the 2022 Annual Report to Congress by the FHA, Black reverse mortgage borrowers accounted for 6.07% of the total share of HECM endorsements in 2022.

However, while the policies may have reduced the number of Black borrowers being served by the HECM program, reverse mortgage foreclosures appear to be disproportionately concentrated in predominantly Black communities, according to the report.

“It concerns me a little bit that it may be reducing access to reverse mortgages for borrowers who are struggling the most financially, and especially for ones that are in neighborhoods where they’re not appraising as high due to a range of factors, including racial biases,” Mancini said. “It is interesting that [among] the reverse mortgage borrowers served in very recent years, it’s been less common for them to be Black borrowers. However, it is true that when you go back to the time period where many of these loans were being originated that are in foreclosure now, it was disproportionately loans that were being made to African Americans.”

The U.S. Department of Housing and Urban Development (HUD) and the FHA have recently spoken on efforts to curb appraisal bias by establishing a dedicated task force and certain policy changes.

Addressing appraisal bias issues could be useful in combating some of these trends, Mancini said.

“For the origination of reverse mortgages, if we can do more to address bias in appraisals, in theory, the appraisals should be more equitable,” she said. “And that should make reverse mortgages more accessible to people and communities of color, which I think would be a good thing because we still view reverse mortgages as a very important product for low-income homeowners.”