Lender411 Featured Article: 8 Common Reverse Mortgage Misconceptions

By Daniel Duffield  

In the wake of the economic downturn, an increasing amount of elderly Americans have sought financial relief through reverse mortgages. These mortgages provide homeowners age 62 and up with the ability to tap into the equity which has been accumulated in a property through a home mortgage. However, due to their unusual terms, reverse mortgages can be confusing to borrowers with experience in traditional mortgages. From this confusion, many myths have arisen about the negative aspects of reverse mortgages. To clarify these issues, here are the most common misconceptions regarding reverse mortgages:

1. The lending institution assumes ownership of the home in a reverse mortgage transaction. Under a reverse mortgage, borrowers never relinquish ownership of the property. Rather, the homeowner receives payment based on the amount of equity being cashed in. With no change in title possession, homeowners will still be required to stay current on property taxes, keep the home in good repair, and maintain applicable insurance on the home.
2. By securing a reverse mortgage, a homeowner is at risk of losing his or her home. Since ownership of the property never changes, homeowners with reverse mortgages cannot lose their homes and can remain in the home as long as they comply with reverse mortgage regulations. Until the borrower passes away or moves from the residence, he or she may continue to live in the home. 

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Borrower fraud declines on FHA-backed mortgages

By Daniel Duffield

According to a study conducted by Quality Mortgage Services, a quality control and assurance company, the percentage of borrower fraud through misrepresentation on loans guaranteed by the Federal Housing Administration (FHA) decreased 40% in 2011 from 2010 estimates.

However, recent changes to the FHA streamlined refinance program could counteract this beneficial trend, many analysts caution.

Using a series of audits and a verification procedure, the Tenessee-based assurance company investigated possible instances of borrower misrepresentation on mortgage loans. Through a random sampling of 10%of FHA quality control-related audits, QMS found that 1.96% of FHA-insured loans included some form of misrepresentation in 2011, constituting a decrease from 2010’s measurement of 3.26%.

President of Quality Mortgage Services, Tommy A. Duncan, accredits this drop to stricter regulations forming in 2010, which began to crack down on programs managing quality control. He hopes to see similarly positive results in 2012 after the successful declines of 2011.

In response to the levels of misrepresentation, 2011 saw more rigorous guidelines on underwriting, more direct prefunding, and stricter individual lender requirements, Duncan stated. The improved process requires much more concrete documentation during the underwriting phase and includes several prefunding fraud prevention safeguards.

With these streamline refinance changes, homeowners with mortgages originated prior to June 2009 should benefit greatly. However, an analyst at the Royal Bank of Scotland cautioned in March that the Department of Housing and Urban Development (HUD) could possible increase its requests for indemnification in situations where lenders wrongfully wrote the mortgage contract. 

Mortgage securities analyst Jeana Curro expressed in an email to clients that although HUD has always enforced indemnification policies, only few claims had ever surfaced. She added that she expects HUD to be more active in the process of finding and regulating mortgage fraud.

The decline in suspicious activity demonstrates the decreasing rate of fraudulent mortgage representation. Potential fraud plummeted 21% during the first quarter of 2012, falling from 25,485 to 17,651 according to a statement from the Financial Crimes Enforcement Network.

FinCEN additionally reported an “unusual spike” between the first and third quarters of 2011 as a result of the pressure on banks to repurchase mortgages. As a result of these demands, a review of suspicious mortgage loan origination and refinancing documents was enacted.

Duncan blames both lenders and borrowers when it comes to fraudulent mortgages.

“The borrower may be omitting information and perhaps the lender is not doing a good enough job to document or allowing known omissions to not be disclosed,” he says. “It can be shared.”

For more information on FHA mortgages or other mortgage programs, visit Lender411.