The Reverse Mortgage “Family Secret”, Defaults

Like the family secret no one wants to divulge for fear of embarrassment or worse, participants in the reverse mortgage sector reportedly are playing down the growing problem of seniors who forget, don’t know, or are unable to pay taxes and insurance on their properties. Unlike a forward mortgage, where “T&I” routinely is escrowed – that is, collected in advance by the servicer for future, timely payment to the proper recipients – no such uniform process is in place for reverse mortgages.

As a result, some loan recipients are not making those mandatory payments, causing ongoing problems and finally, one large headache when the reverse mortgage term ends.

“Currently, if servicers advance for taxes or insurance,” says Ryan LaRose, senior vice-president of reverse mortgages for Celink, Lansing, Mich., “they capitalize the advance to the loan balance, move the loan into T&I Default status, and then request approval from HUD to ‘defer’ calling the loan due and payable,” thereby avoiding having to foreclose and evict a senior borrower from their home. But, LaRose says, “This is [only] a ‘stop-gap’ process, until HUD and the industry can come up with a long-term solution to the T&I default issue.”

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One industry leader says “HUD and Fannie Mae are leery about foreclosures on property for non-payment of taxes, because of the ‘social stigma’ involved.” This person explains that, up to now, the two agencies have been relying on rising equity values to cover their arrears. There are unconfirmed reports that Fannie currently has 9,000 loans in tax/insurance default, of which 2,000 already are over 100% LTV. One person familiar with this hushed problem, says of some reverse mortgage holders: “Nobody bothered to educate them on their fiduciary responsibilities and nobody looked to see if their monthly income stream would be sufficient for [T&I].” Calls to both HUD and Fannie were referred to media relations personnel who did not provide further information.

Neil J. Morse has been a communications professional working in the mortgage finance industry for more than a decade, currently specializing in the reverse mortgage sector. He can be reached at nmorse@morsecommunications.com

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  • Income is not sufficient for T and I, WTF!!!! The seniors have the same tax responsibility regardless of the encumbrences on the property…

  • Wouldn’t it be great if a reverse mortgage company provided a way to ensure that a senior’s important bills were paid automatically out of the monthly proceeds of the loan?

    Wouldn’t Priority Pay be a great name for it?

    Now, who would provide such a useful service? 😉

  • If a senior is having this problem after they take out a reverse mortgage, for certain the problem was there even more severely before the reverse mortgage. At this point they have eliminated a mortgage payment, created a credit line or are receiving a monthly income. This is supposed to free up money for them to be able to pay these expenses and others. We can only do so much as loan originators. We are not their money managers as well.

  • No originator can guarentee that a senior will do the responsible thing after closing There is much we can do to help the senior prepare for life after closing. It starts with a before and after cash flow analysis. In addition, we can get caring relatives involved as well. For seniors who lack budgeting experience it may be as simple as showing them how to setup a separete savings account with automatic debit, say on the 4th of the month, to put aside moneys to pay these bills when they come due. HECM counelors can do a better job here to.

    Finally, if all the money is going to pay debt and there will not be enough money to pay T&I and make ends meet we should be encouraging seniors to seek other alteratives including selling. It’s the responsible thing to do.

  • We recognized this suitabiity issue some time back and incorporated a third disclosure for the closing table where the responsibilities are explained one more time. What happens from that point is anyone’s guess but we feel ramping up the awareness issue is the best we can absent a required set aside. Here is a possible solution but it would disqualify even more seniors because the benefits would be impacted. If the typical reverse has a 7 year shelf life, and the typical default takes place in year three, perhaps escrowing two years T & I would be an incentive to make the payments. At year 5, the escrow could be released, making more money available if the prior years had been paid on time.

    We cannot be held responsible for deteriorating memories or general irresponsibility. We CAN be responsible for more, better client education.

    Notice I said WE, not the counselors.

  • As an ex-HUD HECM counselor and now an originator, I have always made sure that the customer understands that property taxes and h.o. insurance premiums are required to be paid current, and to not let them become delinquent. Not paying the taxes and insurance will result in a default of the terms of the security instrument, and the lender will then advance to pay these and put the loan into default, and even foreclosure.

    There is one option for property taxes that is available in every state, the Senior and Low Income Property Tax Deferral Program. If the customer qualifies, the property tax deferral program will ensure that the taxes are paid to the Co. by the State every year, and a lien is established by the State, along with 6% simple interest, which is not repayable until they: Sell, no longer occupy the home as their primary residence or no longer income qualify for the program. Income qualification limits are over $36k yearly in Oregon, most seniors that I talk to qualify. Most folks don’t know about this program, I think it is something that the HUD counselors tell clients about and I give my customers the application package with my initial disclosure package, and again at closing-so they have the information for the future.

  • Donna Lea, You are a Beauty and a Top Person, indeed. Your Clients are very well served. It’s true–having a line of credit and the availability to use the
    house payment money for Real Estate Taxes and Homeowner’s Insurance makes life easier for a Senior. Taking advantage of the State Special Real Estate Tax Program for Seniors is smart as well: Loan Originators who inform Seniors about the State program are likewise smart and very thoughtful.

  • Its my understanding in the state of California that the Low Income Property Tax Deferral Program is not available to those who enter a reverse mortgage. I know it was available in the past. Although, over the last year I have heard many telling me if they get a reverse mortgage the state is declining. Its too bad because it would be a benefit and I am sure would help with this issue.

  • Donna,

    Most states do not allow the Tax Deferral Program and the reverse mortgage, to my knowledge there are only 2 states that allow both, Oregon being one and I believe Oklahoma being the 2nd. Sounds like you originate in one of those states where seniors can take advantage of the Tax Deferral in addition to the reverse mortgage. It’s great that you provide the info to your clients. Unfortunately it’s not available for the majority of our seniors doing a reverse mortgage.

  • Remember one of the most important reasons the Government is pushing the FHA HECM is because the U.S. Taxpayer–that’s you and me and everybody else–cannot afford to pay for all Seniors to go to a nursing home.
    Keeping Seniors in their own homes (where most wish to be anyway) will save Taxpayers Billions of Dollars
    (and get the Seniors to us their own money to pay for
    most of their living expenses). Last time I looked most nursing homes were from three to five thousand
    dollars monthly. If some FHA program is put into place to assure that real estate taxes and homeowners’s insurance were timely paid, maybe it would be a prudent move. For those who simply do not have the funds and there is no State paid program, I would think it would still be cheaper for the FEDS/STATE to pay those bills. Three or four months of taxpayer medicade dollars will pay for most Senior’s
    R.E. taxes and H.O. Insurance and who knows how long one would live in a nursing home. I’ve heard the average stay is eighteen months–and that is someone who has to go to a nursing home for health reasons. How long would someone live who is healthy but just without enough funds to live in their own home and pay taxes and insurance?

  • Just to clarify, the only States that currently meet the criteria for the borrower to participate in a tax deferral program are:

    1) Massachusetts
    2) California
    3) Oregon

    Borrowers can always explore tax exemption programs in their State, but if they were to engage in a tax deferral program in any States, other than those listed above, the tax deferral lien would be placed in front of the reverse mortgage, thereby making the loan due and payable.

  • The servicer,

    I believe you are wrong about California. I know they have a program for low income tax deferral. Although, I was told once a senior has obtains a reverse mortgage (now) the state of California is declining the application. I know in the past California was allowing this but I believe they changed their rules. I hope I am wrong but I don’t think so.

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