New Policy on Foreclosures and Defaults Intended to be Preventive says FHA

Reflecting the extreme sensitivity of the issue, explanations, retrenchments, and denials are being voiced in response to an RMD story earlier this week about HUD’s intent – or not – to foreclose on seniors whose properties have gone into “technical” or other default.

“There will be some policy forthcoming on foreclosures and defaults, intended to be preventative,” according to Meg Burns, director, FHA Office of Single Family Program Development, speaking with RMD prior to leaving for a Central American trip next week. While refusing to say when the policy would be issued, Burns said it would be “before the end of the summer.” She noted that HUD will invite industry, lender and consumer representatives “to talk through” the problem of defaults, prior to issuing the policy.

On Tuesday this week, a HUD spokesman said any reports that HUD would be permitting foreclosures on reverse mortgage holders in arrears on taxes, insurance or mandated repair work were “not true.” He stated that “FHA regulations do permit a lender to advance funds to cover tax and insurance costs, to protect FHA’s interests in the lien – on either a forward or a reverse mortgage. When lenders make these payments, FHA will reimburse them for these expenses through the claim process. There is no policy proposal that would change the nature of the existing regulations.”

But, even this statement was deemed “murky” by one reverse mortgage servicing professional, who said the industry has been trying to solve this issue “for years. Nobody wants to be first one to foreclose on a senior,” he explained, adding that the government should keep picking up default costs “indefinitely, because it solves a gargantuan dilemma,” meaning if they did not, seniors “could be thrown out on the street.”

There is some talk in the industry, he went on, that HUD may seek to “split the difference” in an upcoming ruling on the matter, allowing one or two advances for defaulted payments, but not a third. “I believe in certain instances they will allow a foreclosure where there are certain levels of severity.”

Acknowledging the current HUD policy, another servicer said, “HUD allows a lender to add tax and/or insurance advancements to the loan balance. However, if the loan is in default it cannot be assigned to HUD and this is the issue.” Things get a lot more complicated, she went on, “with [Ginne Mae] as the investor instead of [Fannie Mae],” because Fannie “handled a lot more of the back-end responsibilities that Ginnie requires the lender to [now] handle.”

Written by Neil Morse

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