A recent headline caught my eye. It read "Mnuchin's Reverse-Mortgage Woes Blemish Record of Treasury Pick."
As I read on, I realized that reverse mortgage bashing by the media, which had almost disappeared in recent years, was now being revived to tarnish a Cabinet pick of President-elect Donald Trump. The article quoted a researcher describing reverse mortgages as an "icky" business and discussed the use of celebrity spokespeople in "setting the stage for a potential foreclosure on an elderly widow or widower."
What, you may wonder, is the connection to Steven Mnuchin?
In 2009, with several other investors, he acquired from the Federal Deposit Insurance Corp. the insolvent IndyMac and a reverse mortgage lender it owned, Financial Freedom, the Bloomberg article explained. Financial Freedom "has carried out 16,220 foreclosures since 2009, or about 39 percent of the country's reverse-mortgage foreclosures," the article stated, implying the blemish on Mnuchin's record was his association with the firm.
I was immediately skeptical that one firm could have carried out 16,220 foreclosures and began searching through U.S. Department of Housing and Urban Development statistics for an industry total. I found it in a response HUD made to a Freedom of Information request from a consumer organization.
Foreclosures of home equity conversion mortgages, or HECMS _ which is what reverse mortgages insured by the federal government are called _ numbered 41,237 since April 2009, according to HUD.
Considering the small size of the reverse mortgage industry, this is an eye-popping number. From the inception of the program through 2016, the total number of HECM originations was 971,000, which means that 4.2 percent of all HECMs written since 1999 ended in foreclosure. To me, it seemed more likely that this figure represented not foreclosures but the total number of reverse mortgage terminations. There is an important difference.
So I asked HUD how the term "foreclosure" was defined in its record system. Its answer cleared up the problem.
"We use the term 'foreclosure' when title is transferred through a foreclosure proceeding _ either judicial or non-judicial," a HUD representative told me. "It does not always have an associated eviction. The most usual cause for default is death of the last surviving borrower so there is usually no eviction involved."
Thus, foreclosure on a reverse mortgage means something entirely different than foreclosure on a forward mortgage.
On a forward mortgage, foreclosure arises from failure of the borrower to make required monthly payments of principal and interest and almost always involves a forcible eviction. This is why most people view foreclosures with distaste, looking askance at the lenders that execute them even as a last resort and with abhorrence at lenders that execute more foreclosures than necessary for self-seeking reasons. But on reverse mortgages, there is no required payment of principal and interest, and while borrowers can be evicted for failure to pay property taxes or homeowners insurance, I have never seen or heard of such a case.
There have been evictions of people residing with borrowers who died, including spouses who were not included in the loan contract, usually because they were not yet 62. In 2014, however, the rules were changed to protect non-borrowing spouses, or NBSs, from being evicted following the death of HECM borrowers. If the surviving NBS assumes ownership of the house and meets other obligations of ownership, including payment of property taxes, she can remain there indefinitely. Further, an NBS can be any age when the HECM is taken out, but the younger she is, the less the amount that the HECM borrower can draw.
Under this new rule, all spouses have their tenure protected. If they are 62 or older, they are co-borrowers, and if they are younger than 62, they are NBSs with protected tenure.
In sum, the word "foreclosure" is freighted with emotion because of its association with evictions of borrowers who have defaulted on their standard mortgages. On HECM reverse mortgages, very few foreclosures involve evictions, which are rare and becoming more so. It is long since time that HUD published data on reverse mortgage terminations with a breakdown by cause.
