A rising wave of seniors unable or unwilling to pay taxes and insurance due on their reverse mortgaged properties is rattling the industry, opening up the possibility that lenders will be forced to foreclose on some elderly borrowers.

Reverse mortgages allow elderly residents to tap into the equity of their home while still living in them. When marketing the product, many lenders emphasize their inability to foreclose even if a senior has used up all the equity in the home.

There are, however, a few exceptions to this rule. Seniors are obliged to pay taxes and insurance and maintain their properties, and failure to do so makes it possible for them to be foreclosed on in order to protect the value of the asset.

But although such foreclosures are theoretically possible, none have taken place – yet.

Contingency Plans

The vast majority of reverse mortgages are federally-backed Home Equity Conversion Mortgages (HECM). HECM loans are underwritten by the Federal Housing Administration, which insures them against default, and supervised by the Department of Housing and Urban Development. Servicers must seek HUD’s permission in order to begin the foreclosure process.

But HUD “had never given them permission,” said Barbara Stucki, vice president of home equity initiatives for the National Council on Aging.

Instead, if a senior failed to pay their taxes and insurance, servicers were authorized to pay the fees for them out of the reverse funds. If the reverse funds were tapped out, they were to add any additional funds required to the loan balance. If, when it came time to sell the property, the sale price didn’t cover the mortgage and fees, the HUD insurance fund would make up the balance, making the servicer whole.

Prior to the recent economic downturn, such instances were rare. Even in the event of a lapse on the part of the homeowner, there was usually ample surplus equity in the homes at the time of sale to cover the amount owed.

But that’s changing.

With housing prices falling in much of the country, and other sources of retirement income also threatened, more seniors are falling behind on tax and insurance payments. A spike in these kinds of technical defaults has raised the specter of the HUD insurance fund – designed to protect both lenders and borrowers – becoming depleted.

As a contingency, earlier this month, the FHA issued new guidelines for servicers on how to begin a foreclosure process and alert homeowners to their options.

Laura Schaefer, executive director of the Plymouth Redevelopment Authority and a longtime reverse mortgage counselor, says she’s noticed the increase in her area. A spike in medical costs or a dip in retirement funds can cause a senior’s income to unexpectedly decline. And while elderly citizens themselves may not have to worry about job losses, they can be impacted by tough times among friends or family – Schaefer had a client who tapped a reverse line of equity in order to help a struggling daughter.

Where once it may have been possible for a senior to refinance a reverse mortgage as their home’s value increased, that’s virtually impossible today, said Schaefer, due to HUD’s tightened underwriting.

Working Together

It’s difficult to know exactly how many loans may be in danger of technical default, particularly as servicers usually step in before liens are placed on a property. But an analysis of data provided by The Warren Group, publisher of Banker & Tradesman, found at least 36 distressed properties statewide with reverse mortgages, mnay with outstanding state and federal tax liens. More than 40 percent of those have foreclosure petitions already filed against them.

A HUD audit conducted this summer pointed to more than 13,000 loans nationwide already in default, an increase of 176 percent over 2009. A recent piece in U.S. News and World Report speculated that up to 20 percent of the approximately half-million outstanding loans in question may be at risk of technical default.

The possibility of foreclosures on reverse mortgaged properties going forward has the industry nervous, and some feel the issue has been overblown.

“The majority of these technical defaults are for less than $5,000,” said George Downey, founder of Harbor Mortgage Solutions in Braintree and a reverse mortgage specialist. That means that foreclosures are a tool of last resort, he suggested.

The industry has attempted to get out in front of the problem. Earlier this month, the National Reverse Mortgage Lending Association partnered with the National Council on Aging and HUD to launch a $3 million program aimed at seniors who have been in default the longest and who are therefore most at risk of foreclosure.

The program will involve one-on-one counseling to help determine if the senior can be made current on the loan and if not, identify resources which will help them transition into other housing. It will launch first in Miami, Houston, Detroit and Los Angeles, and the group said it intends for the pilot efforts in those cities to help develop a national counseling protocol.

“If in the end, everybody ends up somewhere that suits their needs, whether that’s staying in their homes or finding affordable housing, I think that’s a good example of government and private industry working in partnership together,” said Peter Bell, president of the NRMLA.