Reverse mortgage T&I defaults about to be addressed by HUD?

February 28th, 2010 | by Neil Morse Published in FHA, News, Reverse Mortgage | 61 Comments

Industry veterans may have heard this before, but HUD’s deputy assistant secretary for single family housing, Vicki Bott, says her agency will shortly issue a mortgagee letter “addressing HECM’s loss mitigation tools.” Speaking to an audience gathered in San Diego last week for an annual servicing conference sponsored by the Mortgage Bankers Association, Bott said: “We know this is something that needs to be delivered to servicers because we see HECM defaults with taxes and insurance and we don’t have a clear path for the servicer to move forward.”

Her comments were greeted with some skepticism, though. “We’ve been told it’s coming before,” said one servicing and reverse mortgage veteran in the audience, “but we’re still waiting.” The toughest part of the problem for HUD, he softened, “has been deciding what to do when seniors fail to pay tax and insurance bills on their properties.” This condition, known as “technical default,” is particularly daunting when the property in question still may have considerable equity remaining. “HUD has to look long and hard at these situations and decide what kind of policy changes they’re going to make, long-term,” the seasoned practitioner noted.

The industry has been busy “working with HUD on the T&I default [issue],” said Linda Bridges, assistant vice-president, reverse mortgage servicing for Wells Fargo Home Mortgage, speaking last fall at an industry conference. “We have engaged with them several times throughout the year and our hope is to get clearer guidelines presented back to the servicing world.”

An essay on this matter, circulated last summer by New View Advisors, recommended a T&I set-aside in the form of a fixed dollar amount equal to six months of taxes and insurance payments. “This amount would be deducted, or ‘set-aside’, from the Principal Limit at origination,” the essay stated. “The servicer would then have the ability to cure T&I defaults by paying those expenses directly and adding the payment to the loan balance.”

The number of current T&I defaults seems to be a tightly held secret and more often a matter of the age of the loan (worsening as the years pass on). One estimate is “somewhere between 2 and 3 percent of servicers’ portfolios,” according to one player, who added: “It could certainly be [as many as] 10,000.”

Written by Neil Morse

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The_Cynic

reversemanic,

I respect your opinion and your scenario is one reasonable outcome. The risk of that outcome is not worth the cost. As in most such conversations, other possible scenarios pale in comparison even though your scenario might not even be a highly probable outcome.

Most solutions deal with future loans. So who is to pay for the past?
With the rise in closed end HECMs the problem will only grow.

Which covenant violations are “non-technical” and which are “technical”? Which ones should be enforced and which ones should not be? Once this mind frame sets in where does it end? A true slippery slope….

The reason why everyone has been kicking the ball down the road is because no alternative is a good solution. If investors are enduring the loss happily, then let that continue. HUD will not pay these costs.

So should the 97% – 98% suffer? The way things seem, lenders are willing to throw out seniors who default on their forward mortgages but have problems with reverse mortgage defaults. Why is that?

What is your suggested solution? If it involves set asides or impound type escrow accounts, why many years of insurance and taxes should be involved? Should be it be different with a home with no expected positive equity in the future versus one with enormous equity now and expected in the future? Not so easy but ignoring some types of defaults while enforcing others does not seem equitable or fair either.
The_Cynic

HECM_Dude,

Programs can change or be changed. Just look how Social Security (or Medicare) started and where it is today. Change happens.

The HECM program switched from the GI category in the budget to the MMI category. The Administration forced a lower appreciation rate than was contemplated in the HECM financial model that HUD created. As a result a deficit was indicated for the HECMs to be endorsed in this fiscal and next. Congress would not fund it and now proceeds are lower. That sounds like definite changes to the program that were not intended.

Social Security contributions were never supposed to be used in the general fund. We were never supposed to have gone off the gold standard. But like William Barrett Travis at the Alamo, you are telling us that there is a line drawn in the sand when it comes to HECMs.

So what is the answer? It is time we begin thinking outside of the box.
The_Cynic

John,

Thank you. I appreciate your support.

For approximately half of the life of the HECM program this issue has been kicked back and forth. Maybe it needs another ten years or more before an equitable solution is reached. Brighter minds than mine and individuals with far more experience in HECMs have been addressing this issue for years with no resolution.

What should be done???
wealthone

We suggest to the borrower to open up a money market account and auto debit into it a 12th of their annual T&I each month from their income stream and then its always available when they need it. Very few of them say no.
reversemaniac

I agree with almost everything you have posted on this topic and if you want to know what I think is a workable solution, read the “white paper” created by the NRMLA Servicing Committee; it is posted on NRMLA’s website.

My only point is with those people who are so comfortable in saying things like, “If the borrower is in default, foreclose just like on the ‘forward’ side!”

There has been so much unwarranted and unfounded negative attention being paid to the reverse mortgage industry, and who knows when NRMLA will actually go-live with a PR campaign?

My concern is that once we start foreclosing on, what will be portrayed in the media as “poor destitute seniors”, we will have a PR nightmare scenario and I wonder how we will be treated by state and federal regulators.

If we get several showcase foreclosures in the mainstream media (think about how much damage was done by Senator McCaskill’s hearing about ONE borrower who was taken advantage of) I shudder to think what she would do with them!

Hopefully, the upcoming HUD mortgagee letter will allow for clarity on this issue, but it will not keep me from losing sleep over the potential fallout once we start foreclosing.
jsmaldone

Cynic,

You are welcome, it was my pleasure to support you. You are also probably right in what you just said. The T&I issue can't be resolved in this environment. I feel it is better left alone for now. The industry has gone through so many changes and to fast for one year.

Like you said earlier, if their is to be a set aside for T&I, make it for a term and an amount that means something. However, I am against a T&I set aside all together. We need to start working with what we have, learn and understand all the changes that have taken place. We need to take a moratorium on any more new changes for a while. We need to get back to business and focus on our seniors. Cynic, you have a good day.

What should be done?? For now, nothing!!

John A. Smaldone

Take care,

John Smaldone
jsmaldone

Good day all,

I have read everyone's comments so far and they all have validity. However, the borrower (our seniors) must take some responsibility, such as paying their taxes and insurance annually. If we create a set aside fee for T&I we are going to be putting a reverse mortgage out of reach for many seniors around the country.

As one person said, do we allow a default to take place because a borrower did not pay their T&I, Then it hits the news media? No simple answer to this, maybe the answer is yes, foreclose on the default.

When you compare the amount of people that will be able to get a reverse mortgage because of no set aside for T&I, I think you will see no set aside is the way to go! My opinion only?

John A. Smaldone
The_Critic

Although I do not expect our industry will learn any lesson from T & I, one thing stands out. Fear, timidity, indecision, inaction, and a reactive posture only make things worse. Decisive action was needed from NRMLA but none has come. Why?

If this issue had been taken head on when the first default took place, we would all be better off. Even though the problem may only be at 2%-3% today or below 15,000 HECMs, most of us believe that percentage will only be creeping up especially with a predominance of closed end HECMs having been generated in the last two years and little increase in home appreciation. If current treands continue, in less than 3 years the majority of outstanding HECMs will no doubt be closed end.

So why didn’t the industry deal with this issue when the servicing committee at NRMLA was first formed? Vacillation on this issue has only created a greater number of problem cases. Imagine if the decision is to foreclose. All of a sudden, like when a logjam is cleared up, a large number of foreclosures will flow at once. That will produce bad press.

Where has the industry leadership been on this issue? Tax and Insurance set asides MIGHT mitigate the problem for new HECMs, but what about the past? I have never met an ostrich which has ever successfully built or led an industry. Problems of this nature do not go away; they only get worse.

So now indecision leaves us with no good alternatives. No matter what HUD does it will be a bitter pill to swallow — especially now with lowered principal limits, a higher ongoing MIP rate on the horizon, and low appreciation rates. Perhaps for now inaction is the best answer but with a course of action in place just in case Congress does not provide any relief before January 1, 2013.
HECM_Dude

Cynic,

The HECM program is not Social Security or Medicare. The vast majority of American workers participate in Social Security and Medicare, which constitute a social contract between generations of Americans and their government to provide certain benefits to which they are entitled during their later years.

No such contract or entitlement exists in the case of the HECM program. Borrowers under the HECM program constitute a small, and some would say privileged, minority of seniors who are so fortunate as to be homeowners. Seniors who are not homeowners, or senior homeowners who are not HECM borrowers, might justifiably resent seeing their tax dollars used to subsidize HECM borrowers when their own finances are strained.

Why do you mention that the HECM program was switched from GI to MMI other than to show off your knowledge of minutiae that are not relevant to the discussion?

What should the Government do with Social Security and Medicare funds that are not needed to fund current obligations? Who says they never were to be used in the General Fund? If surplus Social Security and Medicare funds cannot be loaned to the General Fund (as they currently are), they would have to be invested elsewhere, and the Treasury would have to replace those funds by borrowing even more from the private sector (incurring more interest expense).

Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession. Many economists believe that the U.S. adherence to the gold standard prevented our early recovery from the great depression. According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery from the great depression. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer.

The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons. Assuming a gold price of $1,000 per ounce, or $32,500 per kilogram, the total value of all the gold ever mined would be around $4.5 trillion. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit (M2). Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of gold, which may limit its use in current applications.

I'm still scratching my head, trying to figure out what the gold standard and the Alamo have to do with this discussion.
The_Cynic

At the time of the American Revolution, Virginia had belonged to England longer than Social Security has been part of our retirement system today. It might be a generations’ contract to you but my mom and dad were teenagers when Social Security became law.

In 1965 when I was a teenager, LBJ got a bill passed that transferred the Social Security Trust Fund into the General Fund. That is just part of American economic history. Come on HECM_Dude, they should have presented that in at least one economic course you took.

My ancestors and extended family fought in every major American war including the American Revolution. America is a great experiment full of change. So what was true yesterday was true yesterday. Two years ago, you would have attacked me for saying that lower principal limits would be mandated by HUD. Why? Because there was some contract or another…. Moving the HECM budget category from GI to MMI changed all of that.. You, as an economist, should know that!!!

When ol' Sam Houston told Billy Travis to get of the Alamo, young Billy could not see what was on the horizon and thought he knew better. Young Billy drew a line in the sand and forced some very heroic patriots to die behind inferior fortifications in a losing effort. He would not change.

I appreciate your magnificent efforts to protect American taxpayers but some of us were not pleased with cash for clunkers and other government programs. Some of us believe more in the HECM program than we believe in forcing those who did not want TARP funds to accept them. What constitutional argument do you hold for not funding the subsidy? The right answer is — there is none.
Anonymous

At the time of the American Revolution, Virginia had belonged to England longer than Social Security has been part of our retirement system today. It might be a generationsu2019 contract to you but my mom and dad were teenagers when Social Security became law.rnrnIn 1965 when I was a teenager, LBJ got a bill passed that transferred the Social Security Trust Fund into the General Fund. That is just part of American economic history. Come on HECM_Dude, they should have presented that in at least one economic course you took.rnrnMy ancestors and extended family fought in every major American war including the American Revolution. America is a great experiment full of change. So what was true yesterday was true yesterday. Two years ago, you would have attacked me for saying that lower principal limits would be mandated by HUD. Why? Because there was some contract or anotheru2026. Moving the HECM budget category from GI to MMI changed all of that.. You, as an economist, should know that!!! rnrnWhen ol’ Sam Houston told Billy Travis to get out of the Alamo, young Billy could not see what was on the horizon and thought he knew better. Young Billy drew a line in the sand and forced some very heroic patriots to die behind inferior fortifications in a losing effort. He would not change.rnrnI appreciate your magnificent efforts to protect American taxpayers but some of us were not pleased with cash for clunkers and other government programs. Some of us believe more in the HECM program than we believe in forcing those who did not want TARP funds to accept them. What constitutional argument do you hold for not funding the subsidy? The right answer is — there is none.rn

Reverse mortgage T&I defaults about to be addressed by HUD?

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