Number of Delinquent Mortgages Rises in May. Prime Mortgages Disproportionately Affected.

The housing crisis is not over for many borrowers. According to an article in the Wall Street Journal, the percentage of mortgages 60 days or more late rose to 5.65% in May, up from 5.48% in April. It is the highest level on record. In addition, the number of homes in the foreclosure process jumped, after remaining stagnant for a few months due to several moratoria. Around 257,000 homes entered the foreclosure process in May, up 5.7% from April, and 34% from a year ago.

What is perhaps most interesting about these statistics is that the number of subprime mortgages going into foreclosure has decreased 16% from a year ago. Yet the number of prime mortgages going into foreclosure is up 83%. This change may reflect the effect the recession has had on middle and upper-middle class borrowers. While many of these borrowers may have had the salaries and credit scores to qualify for a prime mortgage in the past, the market has shed many white collar jobs in recent months, affecting these borrowers, many of whom had money invested in the stock market and did not see this coming. Even so, these statistics are quite sobering.

It is important to remember that reverse mortgages can be one way for senior borrowers in these situations avoid foreclosure. For more information, see Foreclosure Prevention.

And let’s hope that next month’s numbers are better than these!

A Neighbor's Foreclosure Affects Home Value

Many prospective reverse mortgage borrowers have questions about appraisals, and while statistics show that consumers’ valuations of their homes are beginning to fall more in line with the reality, there is still generally a gap between what a borrower thinks their home is worth and what an apparaiser thinks it is worth.

The NYTimes wrote an article on Friday highlighting how a neighbor’s foreclosure can dramatically affect home values. The article cites a report from the Center for Responsible Lending in Durham, NC, stating that about 69.5 million homes will have their home values decline this year due to the foreclosure of a neighbor. These homes will lose an average of $7,200, leading to a suspected loss of over $500 billion nationwide. Meanwhile, Credit Suisse projected that about 9 million homes will go into foreclosure from 2009-2011, leading to a ripple effect of declining prices on neighboring homes.

As Bill Tennant pointed out two weeks ago in his blog post on appraisals, one of the leading factors in an appariser’s valuation of a home is the recent sales of comparable homes in the vicinity. As the Center for Responsible Lending’s report shows, many borrowers are likely to take a greater hit due to the foreclosure crisis than they expected on the value of their homes. The Center for Responsible Lending predicted that borrowers will face a drop of 1.3% of their home’s value if they live within 300 ft. of a foreclosed home, and 0.6% of its value if they live between 300 and 500 ft.

US Regulator Worries Proprietary Reverse Mortgages Could Be Next Subprime Product; Encourages More Regulation

John Dugan

In a story that made headlines yesterday, top US bank regulator John Dugan announced that he is concerned that reverse mortgages could be the next subprime mortgage product to experience rapid growth. Like subprime mortgages, reverse mortgages are complicated loans that appeal to a vulnerable segment of the population. However, Dugan’s concerns are not centered on the 90% of loans secured by Fannie Mae. Rather, he is concerned about proprietary products, sensing an opening for those who wish to prey on seniors.

The Regulator’s remarks were partly to encourage other regulators to set standards for proprietary reverse mortgages. He also encouraged the regulators to be vigilant in cracking down on misleading marketing materials and lenders engaging in cross-selling. Dugan added that the Office of the Comptroller and Currency, where he is the top regulator, is prepared to step in should additional measures be needed.

As a result, Dugan’s comments should not be viewed in such a negative light. His point was that by acting early, regulators can hopefully prevent the next subprime crisis. His comments are in line with much of the state legislation that we have seen in recent months. Therefore, rather than scare people away from reverse mortgages, the Regulator’s fears should help skew prospective borrowers towards the FHA products, and otherwise help ensure that the proprietary market is regulated so that all reverse mortgage borrowers are protected.

Financial Counseling May Help Homeowners Avoid Foreclosure

A recent New York Times article focuses on Fannie Mae’s HomeSaver Advance Program, a now-deemphasized program that gave borrowers up to 15,000 in unsecured personal loans to cover missed mortgage payments. However, 70% of the borrowers who took out these loans defaulted. This instance helps highlight the importance of financial counseling. The article closes with the example of a New York City program that makes foreclosure avoidance loans available to borrowers who have undergone counseling. This program has given out 15 loans so far, none of which have defaulted.

Reverse mortgage counseling has come under fire recently, and several states have been debating whether to pass legislation requiring counseling before all reverse mortgage transactions. It is often argued that counseling is necessary in order to ensure that the senior borrower understands the reverse mortgage transaction, but if one looks closely, it appears that counseling has the potential to do a lot more than that. As counselors at the NRMLA Orlando Road Show explained, the purpose of counseling is partly to make sure that the borrower will still have enough money to live on after the reverse mortgage. The financial counseling portion of the reverse mortgage counseling process is perhaps underestimated, but it articles such as the one referenced above help show that financial counseling may be another way to help homeowners avoid foreclosure–and ensure that the steps they take in the short term will not penalize them in the long run.

15 year Fixed Rate Mortgages Become More Popular

A NYTimes graph displaying traditional forward mortgage rates for the NY region

Although reverse mortgages require no mortgage payments, many homeowners still have traditional forward mortgages. It is in the context of this traditional market that the following information applies:

The New York Times reported this weekend that 15 year fixed rate mortgages have surged in popularity recently. The number of 15 year fixed rate mortgages increased 56.6% from January to February. While these mortgages may seem attractive, sometimes saving borrowers tens of thousands of dollars in interest payments, lenders counsel that with higher payments, those with 15 year mortgages are more likely to have trouble making payments should they lose their job or encounter another financial emergency. One lender in the article proposed getting a 30 year mortgage and making the payments to pay it off in 15 years, but that way if there were an emergency, the borrower would have a cushion.

I do think that unorthodox thinking appears to be one of the best ways to get through the recession and through nearly any crisis. It is unsurprising that borrowers are looking for low rates (rates on the 15 year fixed rate mortgage are the lowest they’ve been since June 2003). In addition, being able to pay off a mortgage in 15 years is becoming a more and more tempting opportunity for borrowers who don’t want to have to make mortgage payments in retirement–another factor that has made reverse mortgages tempting.

Reverse Mortgage Warning Signs

While reverse mortgage fraud is less common than some would have one believe, it still occurs. Below are some warning signs and what you can do to stop them:

1. If You Don’t Receive An Estimate or a Good Faith: Lenders should be able to tell a borrower how much money they can expect to receive up front. There are many reverse mortgage calculators available online (reverse mortgage calculator) that can also tell borrowers this information. As a result, be suspicious if a lender doesn’t tell the borrower how much money they can receive or can’t provide an explanation of how the amount was determined.

In addition, at closing, lenders are required to provide the borrower with a “Good Faith,” which lists all of the costs and fees of the reverse mortgage. The borrower should make sure a good faith is presented and that they are familiar with its contents.

2. Never Heard of the Lender

If you have never heard of the lender before, it makes sense to check the HUD website or another lender list and make sure that they are listed and accredited.

3. Don’t Talk About Counseling

Reverse mortgage counseling by a third party is a mandatory part of the reverse mortgage process. Be wary of anyone who does not talk about counseling or dismisses it as unnecessary. It is required to get a federally insured reverse mortgage and, depending on the state, most proprietary ones.

4. No One Answers the Phone

If your calls go unanswered, especially for long periods of time, it might be best to proceed with caution. Everyone is busy and many loan originators travel to meet with clients and for closings. However, there should be an answering machine if this is the case.

5. Try to Cross-Sell

Cross-seling, the practice of selling more a product along with a reverse mortgage, is prohibited. One of the most common reverse mortgage scams involves the lender convincing the borrower to take out a reverse mortgage and use the proceeds to buy insurance or make investments. A lender cannot, by law, speak to the borrower about anything other than a reverse mortgage. Therefore, if a lender tries to sell a borrower a product– especially an investment product– be wary. It is not permitted.

ReverseMortgageGuides featured in April issue of "Reverse Mortgage"

The ReverseMortgageGuides.org Calculator was featured in this month’s issue of “Reverse Mortgage,” the official magazine of the National Reverse Mortgage Lenders Association. The article talks about the proliferation of online web applications for reverse mortgage lenders. The Reverse Mortgage Toolkit features a free calculator that can be embedded in a lenders’ site in only a few minutes. A more enhanced, paid version is in development.

Links to the calculator for both lenders and borrowers can be found below:

Reverse Mortgage Calculator (Borrowers): http://www.reversemortgageguides.org/reverse_mortgage_calculator.php

Reverse Mortgage Toolkit (Lenders): http://www.reversemortgageguides.org/toolkit/