The reverse mortgage industry has been wrestling for months with the problem of tax and insurance (T&I) defaults, and new evidence demonstrates the depth and tenacity of the problem.

Reverse mortgages allow senior borrowers to tap into the built-up equity in their homes while continuing to live in them, with the mortgage paid off only when the homeowner dies or moves. Homeowners are obligated to keep up with the other responsibilities of homeownership, including property maintenance, keeping the home insured and paying property taxes. But in this tough economic climate, an increasing number of seniors have struggled with those obligations.

During a presentation at the National Reverse Mortgage Lending Association’s (NRMLA) annual meeting in Boston recently, Colin Cushman, an economist at the department of Housing and Urban Development (HUD) revealed that 46,000 reverse mortgage loans nationwide – 8.1 percent of HUD’s total portfolio – are currently in default.

New data from a pilot counseling program launched jointly by the industry and HUD has further highlighted the problem’s scope and depth.

‘Extremely Fragile’

Sue Hunt, director of housing counseling for CredAbility, an Atlanta-based counseling agency which has counseled 1,300 defaulted borrowers, said her organization has found several important differences between the average reverse mortgage borrower and those at risk of default.

The average home value for defaulting borrowers was about $62,000 less than the average value for pre-loan borrowers, Hunt said. More than half said they had gotten behind on their taxes because of medical costs or disability.

Rising property insurance costs were a significant problem in the Gulf states and other coastal areas, leading to higher than usual rates of default in those locales. That was also true of places with high property taxes, like New Haven County in Connecticut.

Over the past several years, the financial situations of the clientele seeking reverse mortgage loans has become more precarious, Hunt said, with 22 percent of recent borrowers not able to cover their monthly expenses – even after the income from the reverse was accounted for.

“So the day that they closed on their loan, the next month their situation was better but still in deficit,” she told the conference. “These were extremely fragile people.”

With clients’ budgets stretched tighter, there’s usually little left over for default repayment, even after a counselor helps them restructure their budgets, she explained.

“On average they have about $26 a month left over, after accounting for all expenses, to put toward a repayment plan,” she said.

About 16 percent of the defaulted borrowers her agency has counseled would be able to repay their tax and insurance debts within two years, Hunt said, although that number could be increased to 39 percent if repayment terms were extended to three years. Other borrowers could begin repayments if they received some additional aid and had a few months to get back on track.

For homeowners in Massachusetts, there are some available resources. Seniors can obtain tax deferments, and may be eligible for funds from veterans organizations and other social services, said Laura Schaefer, executive director of the Plymouth Redevelopment Authority and a reverse mortgage counselor in Plymouth.

“As part of our counseling, we talk about aging in place and senior benefits,” though it can be tough to get people to accept help, Schaefer told Banker & Tradesman. “Some [senior homeowners] are paying for health care when they could be on MassHealth or Commonwealth Care and substantially reduce their payments there, so we try and talk about these things.”

Prevention The Best Cure

But a substantial number of borrowers simply don’t have enough income to cover their debts – a basic problem with no simple solution.

It is these borrowers counselors are struggling to find solutions for.

“For many of those people, that means moving out of their homes,” Hunt said. “Counselors hear all the time: ‘Maybe I’ll just stay here and I’ll die before they throw me out.’”

The industry has been extremely reluctant to proceed with foreclosure in such cases, worried that it could damage the reputation of the reverse mortgage product. Many lenders have advanced payments to borrowers to cover tax and insurance defaults in order to prevent this.

But as a clearer picture of the scope of the problem has emerged, servicers are now beginning that process. For most, that requires first obtaining permission from HUD, as the vast majority of reverse mortgages are federally insured.

“My understanding is that there’s roughly 1,000” cases across the country where reverse mortgage foreclosure permission has been granted, said Peter Bell, president of the NRMLA. “And so now the servicer will begin the process of giving the notice to vacate and beginning foreclosure.”

It is not yet clear how many, if any, of those thousand foreclosure cases were in Massachusetts.

The industry is proceeding with caution. Bell points out that the number of people in default is a moving target.

“If property values stabilize and start growing slightly, that changes the amount of people who can be helped,” he said. According to Cushman, 42 percent of currently defaulted borrowers owe less than $2,000 on their taxes and insurance.

But the best solution to the default problem may be prevention.

Until now, the only qualifications for eligibility for a reverse mortgage were age and equity. But as data emerges that enable lenders to better assess the risk of default, lenders may start screening borrowers before making loans.

Recently, NRMLA announced new guidelines to aid lenders in starting limited underwriting on reverse mortgages.