New FHA Reverse Mortgage Warning Issued By HUD

It seems that the much-troubled FHA reverse mortgage program has a new problem: lender meddling in the supposedly-independent counseling process which is supposed to protect borrowers.

Before getting a reverse mortgage borrowers are required to meet with an independent counselor to better understand how the program works. The counseling requirement is intended to assure that borrowers do no rely on lender representations alone.

Reverse loans — or home equity conversion mortgages (HECMs) as HUD calls them — are designed for borrowers aged 62 and above. Such loans are made to borrowers largely on the basis of home values. There is no requirement to make monthly mortgage payments for principal and interest, however borrowers remain responsible for paying such costs as property taxes, insurance, repairs and homeowner fees.

Reverse Mortgage Counseling

The benefit of a reverse mortgage is that it allows qualified borrowers to access their equity. A borrower could use the program to pay off a current “forward” loan, to buy a property or to have a line of credit. Repayment of the loan is due when the borrower moves, sells or dies. Importantly, the loan is secured only by the property and neither the lender nor HUD, which insures the loan, can make any other claim against the borrower or the borrower’s estate.

“The lender may not steer, direct, recommend or otherwise encourage a client to seek the services of any one particular counselor or counseling agency,” says HUD. “Lenders are required to give every client a list of HECM counseling providers that includes the national intermediaries providing telephone counseling and five agencies in the local area and/or state of the client with at least one of the local agencies located within a reasonable driving distance for face-to-face counseling.”

However, HUD says some of the counseling sessions are neither private nor independent. HUD says reverse mortgage lender representatives have attended counseling sessions, provided counselors with advance copies of borrower questions and steered borrowers to specific — and presumably friendly — counselors. Each of these actions is a violation of HUD rules.

No Steering

HUD says that lenders who violate the counseling rules could face financial penalties, suspension from the program or the loss of their right to market FHA loans.

For potential reverse mortgage borrowers the essential point is that the counseling system should not be your only information source. Speak also with attorneys who specialize in elder law and fee-only financial planners. Yes, there are fees to be paid for such services but a reverse mortgage is a huge financial commitment and worth the time and cost of independent information.

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