Supporting HECMâ€™s Unintended Value

The Reverse Review - January 2012

Last Updated on Thursday, 18 February 2010 17:23 Written by Atare E. Agbamu Monday, 18 January 2010 11:17

Designed to reverse cash shortage among seniors, reverse mortgages have proven their effectiveness in reversing a common financial ailment among elders today: foreclosure.

Known to professionals for some time, the ongoing foreclosure crisis has brought this reverse-mortgage value to the public. For seniors facing foreclosures and for banks looking at balance-sheet-busting losses from bad home loans, this unintended use of reverse mortgages is a win-win; but there is a problem.

In some cases where reverse-mortgage cash could be used to pay off a forward mortgage in default and save the borrower’s home, the homeowner’s equity may be insufficient to satisfy the loan balance. Wisely, some lenders are accepting reverse-mortgage proceeds as sufficient payment for satisfaction, reasoning that the headline risk of putting seniors on the streets is not worth the extra dollar they may gain from foreclosure and a fire sale. Sadly, not all lenders take this approach, which brings us to a lawyer and senior advocate in Northern California.

David L. Mandel of California Senior Legal Hotline has proposed one solution: Put a subordinate lien (sub-lien) behind a HECM reverse mortgage, the dominant program in the U.S. market, controlled by the Federal Housing Administration (FHA). However, in Mortgagee Letter 2009-49 (November 18, 2009), FHA reiterated its ban on new sub-liens as part of HECM transactions and added a ban to subordination of existing liens.

Mandel was a writer and editor for 20 years (including 9 years at the Sacramento Bee) before, during, and after law school in Israel, where he lived for 11 years. He has written and spoken widely on delivery of legal services to seniors, housing counseling, ethics, and technology at legal aid hotlines.

When he is not presiding over crushing caseloads of seniors in foreclosures and other financial crises, Mandel finds respite in his family, in playing his viola, and in training for marathons.

Although FHA has banned sub-liens behind HECM, discussing them is healthy as we look for ideas to solve a raging foreclosure crisis among our elders. David Mandel and I caught up recently to discuss his ideas for helping seniors avoid foreclosures.

What do you do at California Senior Legal Hotline/Sacramento Senior Legal Services?

At the hotline, we field calls from seniors statewide on any legal issue and provide at least some information and advice, at times more extensive intervention when we can and it's likely to be effective. For Sacramento seniors our responsibilities include also representation in selected cases and various types of community education and outreach. Beyond that, our practice tends to focus on certain areas as developments occur or as funding opportunities arise that are consistent with our mission, which is to empower seniors with the help they need to maintain health, safety and independence to the extent possible.

These days, we spend much of our time working with seniors facing possible loss of their home due to the foreclosure crisis. We advise, negotiate for modifications or other workouts and, in some cases, litigate. Other current special projects include pension counseling and advocacy, SNAP (food stamps) outreach and enrollment, and an in-house mediation department. For more information please visit us on the web at www.seniorlegalhotline.org.

What kinds of challenges are seniors facing in your areas of operation, what are the causes of these challenges, and how can they be resolved?

There are huge economic challenges among seniors such as foreclosures and evictions. Seniors with home equity were high on the target list of financial predators. Layoffs and furloughs are hurting many of those who have remained employed. The $62-a-month reduction in SSI (Supplemental Security Income) payment hurt many seniors. Add to that suspension of property tax help, cuts in many programs like meals, transportation, case management, in-home help, adult day care, total elimination of state funding for our program, where so many try to turn for help in dealing with everything else. We have nowhere near the capacity to answer all calls.

You have proposed a loss mitigation idea to help seniors and forward lenders in potential foreclosure situations. What is it, and why do you think it is a good idea for seniors and lenders? Do you have any success story?

In several cases, servicers (and investors) have been willing to accept the net proceeds of a reverse mortgage as a short payoff of a loan balance far higher than market value. Typically this occurs when there is a smoking gun of predatory lending and frankly, when we keep up the pressure. We'd like to see it become much more common, and think that servicers would have an interest in getting the quick payoff that only a reverse mortgage (as opposed to a standard modification) can provide when appropriate; even though it comes to just a percentage of current value. In more run-of-the-mill cases without any serious legal violations in the original loan, we'd like to see the use of subordinate loans (amortized over a short term or silent) to make up the difference between HECM proceeds and net present value (NPV – what a lender would net from a foreclosure), where appropriate after counseling.

With Mortgagee Letter 2009-49, FHA has closed the door on your idea. What is the reception from conventional lenders?

In conversations with FHA we had heard that it remains opposed to the idea. And now it has apparently even disallowed the one previously permitted means -- modification of the existing underwater loan into the subordinate one (as opposed to creating a new loan).

In this economic crisis, we think that is unfortunate. In normal times, preserving equity is paramount and a reverse mortgage may or may not be the best solution for a given client. Now, when a client is determined and able to keep their home of decades, and foreclosure is the clear alternative, we think it should at least be made an option in the government's Making Home Affordable program. A number of lenders we've spoken to understand this very well and some say that they have made such arrangements, however, in general, they seem hesitant to help push the idea with HUD.

You deal with seniors in crisis. You hear their stories. What is your favorite story?

An 84-year-old client was illegally locked out last year after foreclosure of a predatory loan by a local real estate agency representing Fannie Mae that somehow thought eviction law didn't apply to it. We helped arrange for a locksmith, who donated his services, to break the locks as TV cameras rolled. The foreclosure sale was voided, and she is still there more than a year later, having been offered a series of unaffordable modifications while we try to get someone to listen to our proposals involving a HECM.

In another case we handled, a borrower and his terminally-ill wife were on the verge of eviction. So we helped them persuade a court to set aside the judgment. Then, we negotiated with the lender for months, and it agreed to reverse the foreclosure and accept the HECM proceeds, writing off nearly $400,000 in principal.

A second lender agreed to accept a small payoff from the first lender and subordinate a small remaining amount, with very affordable payments by the homeowner. A story about the case appeared in the October 21^st issue of the Wall Street Journal.

Dedicated to the Reverse Mortgage Industry!