MBA Releases Reverse Mortgage Model Legislation

image The Mortgage Bankers Association (MBA) released a copy of its model legislation for reverse mortgages earlier this month at its conference in San Diego, CA.  According to the MBA, it’s meant to define a national standard of consumer protections for reverse mortgage products.

The MBA believes that if reverse mortgages uniformly incorporate the principles in the model legislation, both the borrower and the lender will be safeguarded from undue hardships.

As far as which states the MBA has introduced the model legislation, John Mechem, MBA’s Spokesman told RMD that, “MBA has been using its model reverse mortgage lending bill behind the scenes to educate and inform lawmakers in states where we expect to see legislation and regulation in that area.”

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He added that, “So far it has been more of a conceptual discussion, as most legislatures have not been in session since the model bill has been finalized.  Nonetheless, we have been pleased with the reaction we have gotten – and are gratified to see the recent bill in California very closely tracked MBA’s model.” 

One of the most interesting aspects of the bill is how it its handles the growing issues of taxes and insurance.  It reads that:

SECTION 9 TAXES AND INSURANCE.

A) Upon issuing a reverse mortgage loan, lenders must form a set-aside account of the estimated costs of three years of both taxes and insurance payments from the borrower’s payout. Should the borrower fail to pay taxes and insurance on the mortgaged property, lenders must pay the taxes and insurance from the available reverse mortgage line of credit funds available to the borrower. If the borrower does not have a line of credit or the line of credit becomes insolvent, the lender is authorized to pay taxes and insurance from the set- aside account until the set-aside account becomes depleted.

B) Should the borrower pay taxes and insurance on the mortgaged property without incident, the value of the set-aside account will be used to offset the amount of cash, interest and fees the borrower or the borrower’s estate must repay to the lender at loan termination.

Remember this is just an outline for legislation, but it’s the first that I’ve seen deal directly with the issue of T&I defaults. 

MBA Model Reverse Mortgage Legislation

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  • Mr. Mechem needs to check his facts. Unless I am terribly mistaken, it is MBA bill that structured itself after the California legislation, not vice versa. The first draft of the model bill was in large part a copy of the California law that has been in existence since 2006 except as to the MBA T&I section.

    Now the redraft is in large part a copy of AB 329 that has been around in large part for months. The model bill seems to be very late and not much of a model — more of an outline or something….

  • According to section B) above, the estate is paying cash, interest and fees owing to the lender at the time of loan termination. What cash, interest, and fees must the estate repay the lenders? This is a non-recourse loan, isn't it? Isn't the only time the estate would pay anything to the lender when the debt exceeds the value of the home and the estate wishes to retain the home? Then the estate or the heirs would have to repay the full amount of the debt. It is my understanding that all reverse mortgages, past and present since 1989, including HECMs, Homekeepers, and proprietary loans are non-recourse debt.

    So why does the states model act have this language?

    • Louise
      Click the link to the entire document. On page 2 it defines reverse mortgage as a non recourse loan. Since the estate owns the home they are responsible to make payments of up to 95% of the appraised value of the home. There are several ways to accomplish this.

  • Keep in mind that most of the proprietary products that are out there (currently no new ones being originated) do not have the non-recourse protection feature that the HECM offers.

    • ReverseGuy,

      While this may not be true of you, many people do not understand the nonrecourse nature of a HECM. A HECM is not recourse because it is insured by FHA. To be insurable by FHA, the note and lien must be nonrecourse.

      If the HECM is not FHA insurable but the loan is legal and valid under federal and state laws, it will generally be nonrecourse despite its lack of FHA coverage. It is the nonrecourse nature of the lender instruments that cause cancelled (or forgiven) proceeds on a HECM to become taxable at termination — not FHA reimbursements to the lender — a subject well beyond the scope of this response.

      Like Mr. DeMarkey (see below), I would be very surprised if any lender has issued any significant volume of proprietary reverse mortgages on property located in the U.S. that are recourse after 1999.

  • ReverseGuy,

    I am not aware of any prop. products that have been or currently are being offered on a regional or nat'l basis that do not have a non-recourse feature. Please be specific – what products are you referring to???

  • This worry about the three years tax and insurance is a moot point for the tenure option. If they are receiving monthly payments, then the borrower should be able to avail themselves of the entire principal limit (less the standard set aside). Drawing $1000 per month or the limited fractional amount available on a monthly basis will leave most of the equity available to a foreclosing lender should the tax and insurance issue become a foreclosable event.
    As for the option to keep three years tax and insurance, that is a method that could be solved by other means. I'd suggest using options in the case where the loan is drawn in a single payment, such as a payoff of an
    existing loan. In these instances, that three year cushion may make the borrower short to pay off the existing loan. Perhaps the owner or a potential heir could personally guarantee the three years tax and insurance. I would guarantee not the “Amount” of the three year cushion, but the actual payment to the tax authority (or insurance company). In other words, the guarantee would not cover just any deficiency, only the tax or insurance related advances made by the lender.
    In actuality, the T &I reserve need only be one year. The first year insurance is paid in advance, so there is already at lease a six month to one year cushion. The taxes are often paid in arrears, so a one year cushion may not be quite enough. So, use 1.5 or 2 years tax amounts for reserves. In the event that the owner does not pay the tax, then advise the list of alternate contacts (and get a few more interested parties on the list) of the foreclosure ramifications if not paid. Certainly, many on the lists or family members will find a way to assist rather than having boarders in their homes.

    Sending a doom scenario to lawmakers to review is not telling the whole story. These lawmakers are not familiar with the process enough to ask the proper questions to insure the best interests of the borrowers as well as the lenders.

  • please forgive my typo……. at least……..
    Another option for tenure borrowers is to have the authority to escrow 1/12th of hte tenure payment if the taxes or insurance becomes delinquent. Perhaps a qualification would be necessary on a lump sum payout with no reserves for taxes. If no reserves, then prove ability to pay from income or have a great credit score. Still leave qualifications unnecessary for tenure or lump sum agreeing to a tax reserve.

    • dbpete,

      On one hand you seem to be against any set aside for taxes and insurance. On the other you are fighting for a reduction to the number of years of payments set aside. While not incongruent, is there any practical need to back away so quickly from the first? It is sad to see Section 9A conceded in the state model bill from inception.

      As to tenure payments you overstress their importance. With lower home values, it is no longer true that there is much equity left in many of the related homes. To avoid overstressing the subject again, tenure payments are not as important in popularity as they were once argued to be and seem to be falling into less and less favor over time. Enough said.

      Before getting lost in arguing the inherent problems in Subsection 9A, please explain 9B, if you can. I cannot. Even those who have read this Section intently as well as those who were involved in the development of the state model bill have not been able to explain 9B let alone explain its need or value even though they wax so eloquently on 9A.

      You argue about 3 years, 1.5 years, etc. If the goal is to keep a senior in her/his home for as long as they want, having sufficient resources to pay obligations needed to stay in that home over the desired period seems imperative, that is, if you are a senior advocate. That may not be the case if those goals are as unrealistic as they are in a significant number of cases. I would argue 7 or 10 years, why not? It is not the number of years that are important but requiring everyone to be hampered by the less fortunate, less rational, or derelict that is. It seems the number of years should be based more on age and intentions in view of financial wherewithal than some arbitrary number of years.

      If the problem were only 9A, then let us debate that issue. But it is not only 9A but also 9B. Until 9B is explained and understood, 9A while relevant for its well meaning but misdirected content may be even less of a nuisance if those who support it because of 9B can be shown why 9B is not viable even in theory. On the other hand, if 9B makes 9A less onerous, then let the authors explain why; that would be a valuable discussion. As a member of the MBA, the inquiry process has formally started.

      While the impound option should be available, it should not be mandated or required.

  • dbpete,rnrnOn one hand you seem to be against any set aside for taxes and insurance. On the other you are fighting for a reduction to the number of years of payments set aside. While not incongruent, is there any practical need to back away so quickly from the first? It is sad to see Section 9A conceded in the state model bill from inception.rnrnAs to tenure payments you overstress their importance. With lower home values, it is no longer true that there is much equity left in many of the related homes. To avoid overstressing the subject again, tenure payments are not as important in popularity as they were once argued to be and seem to be falling into less and less favor over time. Enough said. rnrnBefore getting lost in arguing the inherent problems in Subsection 9A, please explain 9B, if you can. I cannot. Even those who have read this Section intently as well as those who were involved in the development of the state model bill have not been able to explain 9B let alone explain its need or value even though they wax so eloquently on 9A. rnrnYou argue about 3 years, 1.5 years, etc. If the goal is to keep a senior in her/his home for as long as they want, having sufficient resources to pay obligations needed to stay in that home over the desired period seems imperative, that is, if you are a senior advocate. That may not be the case if those goals are as unrealistic as they are in a significant number of cases. I would argue 7 or 10 years, why not? It is not the number of years that are important but requiring everyone to be hampered by the less fortunate, less rational, or derelict that is. It seems the number of years should be based more on age and intentions in view of financial wherewithal than some arbitrary number of years.rnrnIf the problem were only 9A, then let us debate that issue. But it is not only 9A but also 9B. Until 9B is explained and understood, 9A while relevant for its well meaning but misdirected content may be even less of a nuisance if those who support it because of 9B can be shown why 9B is not viable even in theory. On the other hand, if 9B makes 9A less onerous, then let the authors explain why; that would be a valuable discussion. As a member of the MBA, the inquiry process has formally started.rnrnWhile the impound option should be available, it should not be mandated or required.rn

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