Escrow Accounts for Reverse Mortgages? [Poll]

NewImage.jpgBest Reverse Mortgage writer Peter Miller brings up a good question… why not have escrow accounts for reverse mortgage borrowers?

He writes:

I used to be one of those who objected to escrow accounts on the grounds that I’m a responsible citizen and can set aside money each month for taxes and insurance — and collect the interest earned from such accounts. But now my view has changed because the interest earnings are minimal and when a lender collects money for taxes and insurance it’s not an issue of concern anymore. Reverse mortgage borrowers should also enjoy such assurances — and so should HUD.

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This is not just a concern for borrowers and those with FHA reverse mortgages. Reverse lenders want to have a good and credible product to sell and it does not help when borrowers fail. Given this reality, you can suspect that more than a few reverse lenders would actually like to see an escrow requirement — that would create an even competitive field for all lenders while also helping many senior borrowers.

There has been discussion of the Department of Housing and Urban Development having a “financial assessment” as part of the HECM, but nothing official yet.

I thought I’d pose the question to RMD readers.  Let us know what you think.

Escrow Accounts For Reverse Mortgages

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  • As I see it, the huge difference is that on a forward mortgage, the borrower keeps making payments (hopefully) and a portion of those payments often go into escrow accounts for taxes and insurance. Putting aside a little each month as a part of an overall payment is something that works out extremely well for most borrowers.

    On a reverse mortgage, in most instances the borrower would have to decide how much to put into an escrow account at closing. This is especially true with fixed rate, fully drawn loans. So how many years of taxes and insurance payments should a borrower put into an account that they cannot touch? 1 year, 2, 3? When you start adding up the total amount of taxes and insurance over a 3 year period it could easily be $10,000 or more.

    With the mandated reduced principal limit, we have already experienced a significant drop-off of potential borrowers who do not qualify and even if they do, the net proceeds are a heckuva lot smaller.

    Requiring a borrower to set aside monies for future tax or insurance payments is something that HUD and NRMLA are looking at very carefully because it could end up unfairly restricting much-needed funds to pay off a 1st mortgage, or it could unfairly limit the number of potential borrowers even more.

    If there could be “light underwriting”, or some other reasonable standards established where the vast majority of seniors did not have to place any funds into a tax and/or insurance set-aside, then I think it would be a good idea. If it ends up being an across-the-board mandate for ALL borrowers, than I think it would be a very bad idea.

  • It’s important to keep in mind that “escrow accounts” and “tax/insurance set asides” are two completely different things.

    “Escrow Accounts” would involve the borrower sending in a monthly payment to their reverse mortgage company, which would then be placed in to an actual escrow bank account. I can’t even imagine how difficult it would be for a servicer to try to collect missed monthly escrow payments from some reverse mortgage borrowers.

    “Tax/Insurance Set Asides”, to my understanding, is where the borrower can take a portion of their available proceeds from their reverse mortgage and allocate them to be disbursed at some point and time in the future – when their taxes or insurance come due. Also, the way I understand it, the borrower is not charged any interest on the funds in their set aside until it is actually disbursed to pay for taxes or insurance.

    In my opinion, the increased use of set asides at the time of closing would help many borrowers who are forgetful or incapable of budgeting on their own to put aside enough money each month from their social security checks, pension, etc. to pay for their future taxes/insurance. An actual “escrow account” is exactly the wrong way to go…

    • ReverseGuy,

      You are making a voluntary argument. Mr. Miller is not.

      What most of the advocates of escrow accounts are discussing is to take the cash out at funding and placing it in an escrow account. Their dispute is the number of years of funding which will be needed and what costs should be included in the calculation.

      I am not aware of any serious discussion of escrow accounts where the senior pays in a monthly amount to servicers. This thread is the only place I have read this angle.

  • Many seniors qualify for real estate tax relief but have to apply every year with the county to qualify. If you make a set-aside for say 5 or 10 years I doubt the servicer is going to file for the tax relief with the respective county.

    • ReverseMoments,

      How could the servicer apply for the tax relief to begin with? The relief is not only based on age it is also generally based on income. It would be no different before or after as to who must apply — it will always be the senior.

  • …..A 1/12th tax and insurance ETF to servicer each month might be exactly the right way to go. A simple way for borrowers to budget these required expenses..

    • Peter,
      Don’t kid yourself. No meaningful discussion is going on about borrowers making monthly payments to servicers. All that would do is put the servicer on early notice as to the fact that the senior will not be paying taxes or insurance.

      • I wish I knew everything, as you apparently do. Your tone is insulting.
        My point was that many may be happy to have a monthly, budgeted EFT vs. having 3-4 YEARS set aside initially.

      • Peter,
        I apologize if I insulted you. The issue is not what will make anyone happy but how to minimize the default rate. Usually those who are happy to do pay into an escrow account are the ones who would be making their required payments anyway.
        The real issue is whether lenders and HUD will ever require defaults to go into foreclosure. So far the answer is NO.

  • I still think this should be an optional item for borrowers, but some details on how it might work.

    For fixed rate full draws an escrow account means setting aside 3+ years of T&I, which in all likelihood leads to a higher default rate in year 4 than we have now. Get people out of the habit of paying for this and you might end up with a worse problem than you have now.

    For monthly payment plans, withhold a sufficient amount each month to fund escrow, reconciling each year with an escrow analysis. This is by far the best case scenario for the borrower and industry, particularly if they’re on a tenure plan.

    Challenges arise with borrower changes to payment plan selections (re-calc origination escrow logic), term payments (ensure xx number of years of escrow available even if term is shorter, but what happens when T&I inevitably amounts change?), and LOC (reserve xx years from principal limit).

  • It is odd not to see more passionate arguments against mandatory escrow accounts and set asides for taxes and insurance. Even if technical defaults are at 20,000 (per Mr. Miller), they are less than 5% of all outstanding reverse mortgages.
    While the ideas espoused by Mr. Miller may be appealing to over 40% of those taking the poll as of the time this comment was written, it still does not deal with the current situation. It is a preventive measure only to be applied to prospective closings; it cannot be applied retroactively. So how will the current future defaults in the current reverse mortgages be cured?
    I personally object to the very concept of escrow accounts when it comes to HECMs. It is economically wrong for seniors unless the interest and MIP being accrued on the moneys taken to establish the accounts is no greater than the interest earned on the funds escrowed, net of the impact of income taxes. On a HECM Saver with a 4.99% fixed interest rate, the interest rate on the escrow account would have to be over 10% based on the highest federal rate net of state income taxes. It is preposterous to believe lenders would provide minimal of earnings of 6.24% through their servicing entities but that is what it would take to make even those who pay no income taxes whole on a fixed rate HECM at current accrued interest and ongoing MIP rates.
    What protection does “light” underwriting provide lenders in a lawsuit? Such a slippery slope will result in the lender becoming responsible for the decision to get the loan using ridiculous standards such as those recently proposed by the California State Senate. The final suitability standard presented in that bill was any other standard that the judge believed relevant. What kind of standard is that?
    Perhaps the answer is a hard date by which borrowers can cure “technical” defaults” or the foreclosure process will begin. Maybe showing a set aside option built into the loan at funding which the borrower can decline at closing would be a viable option. As at least one other commenter has suggested, I see no reason for FIT or BCU being connected to counseling. IF they are such effective tools against technical defaults, they should be mandated in the lending side of the origination process so that it becomes part of the underwriting and credit determination process. Right now lenders have no access to that information.

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