Technical Defaults Challenge Reverse Mortgage Servicers

To some, the term “technical default” is akin to being “somewhat pregnant” – i.e. inherently contradictory, since one either is or isn’t. However, with so much sensitivity surrounding seniors and reverse mortgages, their failure to properly make tax and insurance (T&I) payments produces a “you go first” reaction when it comes to penalizing such action (or inaction).

That’s not likely to last forever, especially with TDs rising in direct correlation to declines in property values. Mary Riski, a New View Advisors Associate, told an industry audience this fall that “the TI issue is emerging and will be a big problem.” Her colleague, Joe Kelly upped the ante: “The day of reckoning is at hand,” he declared, suggesting that FHA will roll out “a new product with a TI set aside.”

Servicing experts speaking at the NRMLA Annual Meeting earlier this month in San Diego were asked about the T&I issue and technical defaults. Reluctant to speak for all their peers, let alone HUD, on this touchy topic, nevertheless at the urging of audience members, some did. “I am unaware of any foreclosures today based on a T&I default,” offered Linda Bridges, assistant vice-president, reverse mortgage servicing for Wells Fargo Home Mortgage, moderating a discussion of servicing issues at the meeting. She said the industry does “have a lot of activity working with HUD right now on the T&I default [issue]. We have engaged with them several times throughout the year and our hope is to get clearer guidelines presented back to the servicing world in a Mortgagee Letter, so we do the right thing at the right time.”

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Asked again for specific numbers, Bridges said: “I can not report to you exactly how many T&I defaults there are out there.” But Marc Helm, chief operating officer, Reverse Mortgage Solutions, put the figure at “somewhere between 2 and 3 percent of [servicers’] portfolios. It could certainly be [as many as] 10,000,” he said.

Neil J. Morse has been a communications professional working in the mortgage finance industry for more than a decade. He can be reached at nmorse@reversemortgagedaily.com

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  • Here’s the problem – it’s a HUD problem not a lender problem:rnrnMost lenders have borrowers who have not been paying their property taxes and/or homeowners insurance for whatever reason. The lender usually pays these expenses for the borrowers and just add these costs to their loan balance. The lender wants the property insured but do not want any foreclosure headlines, and the FHA Insurance is there to prevent lender losses anyway.rnrnHowever this ‘forced placement’ practice, though admirable and ethical, can greatly accelerate the loan balance’s growth. That increases the pressure on the HUD/FHA in two ways: 1) if the borrowers pass away after a period of poor or negative property value appreciation, the reverse mortgage balance is more likely to be underwater, and the beneficiaries are more likely to walk away and force the lender to foreclose on the deceased’s home, triggereing a claim on the FHA insurance; 2) the loan balance reaches 90% of the Max Claim Amount and FHA takes over the loan servicing.rnrnAdd the existing 2-3% of existing HECMs that are already in ‘technical default’ from non-payment of insurance premiums and property taxes, calculate that the ‘TD’ percentage is going to increase while property values are down, add that to the other more types of defaults we’ve all been talking about for over a year, and HUD is faced with a window of amplified risk of operational and claims costs.rnrnSo, some people think a T&I set-aside is one way to reduce HUD’s risk from this source of potential costs, but some technical difficulties arise.rnrnHow would you calculate a T&I set-aside now for future costs that can change, and what happens if the set-aside is insufficient or overfunded X years down the road?rnrnOr a smaller issue; ARM HECMs have some similar mechanisms already in play, but how would the servicer manage a T&I set-aside on a Fixed Rate HECM? rnrnIf these problems can be solved, then maybe the question of exercising a T&I set-aside could be a matter of choice for some borrowers, “Shall we pay the required expenses from the reverse or from other assets or income?” rnrnNot everyone will have this choice if a mandatory T&I set-aside is implemented. The risk to the larger market is that a forced T&I set-aside will not leave enough available funds to pay off existing mortgages. rnrnThat could be a case where the fix for a potential problem, a technical default, prevents a potential borrower from keeping their home in the first place. This “cure” could be worse than the “disease”. Any protection of HUD’s balance sheet from technical default costs would probably just shift to Medicaid’s, Supplemental Social Security, and other safety net programs where they would cost the Treasury even more.rnrn

  • Perhaps Tax and Insurance set asides should only be required based on the borrower’s financial assets (liquid) and monthly cash flow. If the reverse mortgage makes their monthly cashflow positive should the senior be forced to take a lesser sum of money because of a large T&I set aside?rnrnThere has to be a better solution. And why are we shaking up the entire industry for a problem that only effects 2-3% of current reverse mortgage holders?

  • A program should be put into place to help Seniors with no relatives (or unwilling–there are such Children, believe me; fortunately, it’s a small segment,) to help pay Real Estate Taxes (Defered or ongoing) and homeowners Insurance when the funds are not there. Sometimes the FHA HECM does not leave any funds at closing to create a “Holdback”. For Heavens sake, will some Washington D.C. people take a look at what the cost would be to the Taxpayer if most seniors “spenddown” their assetsrnto qualify for nursing home care under Medicade: try 5 to 8 thousand dollars per month per Senior. If we don’t help Seniors remain in their homes, those Seniors who refuse to live in a nursing home, will be living in their cars or on the street. Personally, it’s time to bring back the Draft and start putting the Sons and Daughters of the Wealthy and the politically powerful on the firing line. Then, watch how quickly we quick wasting borrowed moneyrnon foreign Wars of dubious value. Those who wave the riffle ought to try packing one. Let’s come home and take care of the needs of the United States citizens. I predict the President will be a one termer, if he doesn’t quit wasting Treasure and lives overseas and quickly. For those who haven’t done it, read the history of Afgahnistan–“If we don’t have a Foreigner to fight, then we fight each other. We always have, we always will.” rn

  • A program should be put into place to help Seniors with no relatives (or unwilling–there are such Children, believe me; fortunately, it's a small segment,) to help pay Real Estate Taxes (Defered or ongoing) and homeowners Insurance when the funds are not there. Sometimes the FHA HECM does not leave any funds at closing to create a “Holdback”. For Heavens sake, will some Washington D.C. people take a look at what the cost would be to the Taxpayer if most seniors “spenddown” their assets
    to qualify for nursing home care under Medicade: try 5 to 8 thousand dollars per month per Senior. If we don't help Seniors remain in their homes, those Seniors who refuse to live in a nursing home, will be living in their cars or on the street. Personally, it's time to bring back the Draft and start putting the Sons and Daughters of the Wealthy and the politically powerful on the firing line. Then, watch how quickly we quick wasting borrowed money
    on foreign Wars of dubious value. Those who wave the riffle ought to try packing one. Let's come home and take care of the needs of the United States citizens. I predict the President will be a one termer, if he doesn't quit wasting Treasure and lives overseas and quickly. For those who haven't done it, read the history of Afgahnistan–“If we don't have a Foreigner to fight, then we fight each other. We always have, we always will.”

    • This is one of those rare times when I agree more with your political outlook than your comments on the HECM program.

      Actually I really hope you are promoting your idea of AARP providing financial help to seniors who cannot afford to pay for insurance and property taxes. Take your fight to the AARP Foundation, not to AARP. The foundation is an IRS qualified charitable organization while AARP itself is a tax-exempt senior community related organization but it is not a charity.

  • Perhaps Tax and Insurance set asides should only be required based on the borrower's financial assets (liquid) and monthly cash flow. If the reverse mortgage makes their monthly cashflow positive should the senior be forced to take a lesser sum of money because of a large T&I set aside?

    There has to be a better solution. And why are we shaking up the entire industry for a problem that only effects 2-3% of current reverse mortgage holders?

  • Here's the problem – it's a HUD problem not a lender problem:

    Most lenders I've worked with have borrowers who have not been paying their property taxes and/or homeowners insurance. The lenders will usually pay that amount for the borrowers and add that amount to their loan balance. I first came across this in doing some HECM to HECM refis. The lender does this because they want the property insured but no lender wants any foreclosure headlines, and the FHA Insurance was there to prevent lender losses anyway.

    However this practice can greatly accelerate the loan balance's growth toward the Maximum Claim Amount. That increases the pressure on the HUD/FHA in two ways: 1) if the borrowers pass away after a period of poor or negative property value appreciation, the reverse mortgage balance is more likely to be underwater, and the beneficiaries are more likely to walk away and force the lender to foreclose on the deceased's home; 2) the loan balance reaches 90% of the Max Claim Amount and FHA takes over the loan servicing.

    Add the existing 2-3% of exiting HECMs that are already in technical default with this 'forced placement' of insurance and property tax payments, calculate that the 'TD' percentage is going to increase while property values are down, add that to the other defaults, and HUD is faced with a window of amplified risk of operational and claims costs.

    So, some people think a T&I set-aside is one way to reduce HUD's risk from this source of potential costs. Whether it is advisable or not, some technical difficulties arise.

    How would you calculate a T&I set-aside now for future costs that can change, and what happens if the set-aside is insufficient or overfunded X years down the road?

    A smaller issue: ARM HECMs have some similar mechanisms already in play, but how would the servicer manage a T&I set-aside on a Fixed Rate HECM?

    If these problems can be solved, then maybe the question of exercising a T&I set-aside could be a matter of choice for some borrowers, “Shall we pay the required expenses from the reverse or from other assets or income?”

    Not everyone will have this choice. The risk to the larger market is that a forced T&I set-aside will not leave enough available funds to pay off existing mortgages. That could be a case where the fix for a potential future problem, a technical default, prevents a potential borrower from keeping their home. This “cure” could be worse than the “disease” of technical defaults, and any resulting protection of HUD's balance sheet from costs would probably just shift to Medicaid's, Supplemental Social Security, and other safety net programs where they would cost the Treasury even more.

    • billpeters,

      I have difficulty with your comment on several fronts.

      First one needs to understand the difference in the responsibilities of the lender when it sells a HECM to Ginnie Mae versus selling a HECM to Fannie Mae. As long as the loan balance due has not reached 98% (not 90%) of the MCA, a HECM cannot be assigned to HUD. Under the Ginnie Mae agreement, before assignment the lender remains secondarily responsible for taxes and insurance while Fannie Mae takes on this responsibility. So what exactly is the FHA role before HECM assignment as to T & I or have I misrepresented the actual situation?

      Despite the general tone of your argument, the situation is becoming more acute as each day goes by. What is accelerating the problem is the popularity and percentage growth in the number of endorsed closed end HECM products and the percentage decline in the open end HECM products. With the open end products, history shows there is a significant percentage of these loans where there is still enough available in the line of credit to pay T & I for several years. There is no such situation with the closed end product.

      An election by borrowers is hardly a responsible answer to the problem. It is doubtful if a significant percentage of those who actually need the set aside would ever elect it. That is a very optimistic view of human nature. In fact most of those who elect it would prove to be those who never needed it.

      Far more relevant would be a determination by counselors and underwriters. Perhaps gathering the necessary data should be the job of the loan officer during a required meeting with the senior in their home. Some like OneReverse will object but for many seniors this is the only effective and accountable way that the underlying data can be gathered and properly distributed to all necessary parties. If the counselor determines that a set aside is required, seniors should be permitted to appeal to HUD. If the underwriter reaches the conclusion a T & I set aside should be required, no appeal should be allowed; the senior should just find a different lender.

      The originator should be subject to penalties if the information provided proves to be derelict or in any substantial way fraudulent. Without a penalty regimen, there will be a built in incentive to insure that someone who will not qualify for a HECM with a T & I set aside somehow “magically” shows the cash flow numbers needed to avoid one. Will this process require a certain amount of verification by the originator? Probably enough to demonstrate that a significant portion of the data was verified.

  • Thanks, Shannon. I was trying to answer your question as best I could even though I did not address it to you.

    Unfortunately, it wasn't well-said enough for The Cynic. He corrected me on the percentage of MCA that triggers HUD's involvement and the influence of the investor – an area I'm happy to admit my weaker understanding. He also seriously misinterpreted a comment about a potential choice that a few borrowers might have and launched from that incorrect base to a greater off-target trajectory of misunderstanding. He does that in a lot of his posts, but his technical knowledge is valuable.

    Time to go submit a new loan.

  • Bill,

    I think both you the The Cynic share similar concerns. The Cynic has a very good grasp of the inner workings of our industry.

    For myself, while the technical details can be overwhelming, the bottom line question that always lurks in my mind when another restriction/regulation is added to the HECM is: 1- Why do we need this? and 2- Does this really help the majority of seniors trying to obtain a HECM in the first place.

    Let's hope a pragmatic approach rather than a reactionary one is chosen when it comes to T&I set asides.

  • Bill,rnrnI think both you the The Cynic share similar concerns. The Cynic has a very good grasp of the inner workings of our industry.rnrnFor myself, while the technical details can be overwhelming, the bottom line question that always lurks in my mind when another restriction/regulation is added to the HECM is: 1- Why do we need this? and 2- Does this really help the majority of seniors trying to obtain a HECM in the first place.rnrnLet’s hope a pragmatic approach rather than a reactionary one is chosen when it comes to T&I set asides.

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