Las week I received an interesting question from a RMD reader about servicing.  They asked:

Let’s say that a reverse mortgage lender goes under and another bank buys their reverse mortgage servicing portfolio, what historically has happened in situations like this?  Does the lender temporarily stop disbursing funds to borrowers or does FHA take over immediately without a hitch?

John LaRose the CEO of Celink was nice enough to give me the answer below.

The need for a quality, experienced, and stable servicers/subservicers of reverse mortgages cannot be overstated.  There could be dramatic differences from one servicer to the next based on their respective corporate cultures, ethics, financial stability, etc. 

In addition to the borrower care capabilities of the servicer, there are risks that are often overlooked by lenders and investors. HUD insurance protects the investor against losses that fall within the HUD insurance claim guidelines – in most cases when the loan is assigned to HUD at 98% of the maximum claim amount, or when the property is sold after a foreclosure sale. 

However, HUD insurance does not insure against servicer errors or omissions.  Examples of just some of the errors that could cause a lender and/or investor to incur a loss are: failure to properly remit borrower disbursements timely, failure to properly remit monthly MIP to HUD, failure to annually certify occupancy, failure to monitor taxes and insurance, etc. If this happens, the investor may expect the servicer to reimburse them for any losses, which speaks to my earlier point about making sure the servicer/subservicer is financially strong.

As to the question of what happens if a lender, servicer, or subservicer were to fail, we currently service a small portfolio of loans for Fannie Mae that were "seized" from a lender that declared bankruptcy several years ago. In this case, the lender/servicer failed to meet their obligations under the HUD and Fannie Mae servicing guidelines, and the portfolio was "seized" by Fannie Mae and placed with us to subservice. HUD would not normally get involved in cases like this, unless both the servicer AND the investor failed to act to ensure that the borrowers were being properly serviced. 

If an investor ever were to fail to meet their obligations to the borrower, HUD would probably step in and assign the loans to their contract servicer.  I am not aware of this happening, as Fannie Mae has historically been the primary, and/or only investor in reverse mortgages. 

I hope this helps provide some information on why the servicing/subservicing of reverse mortgages is critical that it be done properly and professionally.