How Will T&I Guidance Impact Reverse Mortgages?

NewImage.jpgHow the taxes and insurance default situation facing the reverse mortgage industry plays out is unclear, but National Mortgage News looks into a few possibilities.

According to the article, there could be a jolt to the secondary market for existing reverse mortgages as a result in the short term, but in the long term it looks like there also could be some positive implications for new and perhaps even older product.

While there has been few if any foreclosures as a result so far, the reverse mortgage industry is anxiously awaiting a mortgagee letter from the Department of Housing and Urban Development on how to handle the loans.  Everyone agrees that something must be done, but exactly what isn’t clear.

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“There’s no easy solution to it, but I think everyone realizes the status quo is really not acceptable,” Joe Kelly, partner at New View Advisors LLC, told NMN.  He believes HUD will require a set-aside for T&I payments going forward, but admits it doesn’t help in the wake of two principal limit reductions.

Jeff Traister, Managing Director at Cantor Fitzgerald told NMN adding the new set aside could draw more investors into the space. While it initially lessens supply, that supply could later expand if buyer interest holds. “The cleaner you make the product the better it is in the long run but of course there’s a tradeoff,” he said.

Read the rest of the article below.

What Planned T&I Moves Could Mean for Reverse Mortgages

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  • Both Joe and Jeff have some idea about what they speak but they both fail to discuss the meat of the topic which is the number of years of set aside which will be required. If it is one year that one is discussion but if it is for the life expectancy of the borrower, that wipes out a huge portion of the market. Will anticipated increases be included in the computations and what about other home costs like homeowner association dues?

    For the last few years there has been a lot of discussion about the amount of deferred maintenance which is still undone at the termination of most HECMs. Will HUD require some set aside for that purpose?

    There is still the basic question as to why 4% of all HECM borrowers force this solution on the many?

  • Making the HECM ‘bullet proof’ for ALL borrowers will make it unavailable for MOST borrowers and spell the end of this industry. Designing for the lowest common denominator is NOT the way to go…the Critic poses the right question.

  • Making the HECM ‘bullet proof’ for ALL borrowers will make it unavailable for MOST borrowers and spell the end of this industry. Designing for the lowest common denominator is NOT the way to go…the Critic poses the right question.

  • How about requiring a T&I set-aside on those that don’t income qualify for their current taxes and insurance? If one has $0 in monthly income, but $x in assets, he or she could be exempted from the set-aside due to significant assets in reserve. We should really look to start slowly with the set-aside requirements and inch them upward as needed to cut down on the default issue.

  • How about requiring a T&I set-aside on those that don’t income qualify for their current taxes and insurance? If one has $0 in monthly income, but $x in assets, he or she could be exempted from the set-aside due to significant assets in reserve. We should really look to start slowly with the set-aside requirements and inch them upward as needed to cut down on the default issue.

  • Originators won’t like this, but I see a day when we look back in amazement that we never did anything in this regard. A cash flow underwrite might be better than a set-aside, similar to DTI on a traditional loan, coupled with a reserves analysis if necessary. This would require documentation of course. For borrowers that fail that, a set-aside might be a back-stop using life expectancy.

    • Lance,

      Be careful what you promote.

      I do not disagree with the idea of a cash flow underwrite but I do question its validity.

      In looking at any borrower, the problem is not today but rather what will happen in the future especially with the average age mode dropping so dramatically. The cash flow situation of a 62 year old is much more susceptible to change in ten years than that of the 76 year old widow.

      If the life expectancy of a 62 year old is 17 years and the annual costs of real estate taxes and insurance run $3,500 per year as they do on some $125,000 homes in Texas, then the T & I set aside will all but exceed the principal limit.

      Before advising on the subject, I think it is extremely important, the numbers be looked at and carefully weighed. I do not agree with your conclusion. This is why the issue has been a very stubborn one.

      I know it is easy to suggest ideas but as a real estate broker, I know the underlying numbers can do havoc to our industry.

  • Originators won’t like this, but I see a day when we look back in amazement that we never did anything in this regard. A cash flow underwrite might be better than a set-aside, similar to DTI on a traditional loan, coupled with a reserves analysis if necessary. This would require documentation of course. For borrowers that fail that, a set-aside might be a back-stop using life expectancy.

  • I think the main problem for those in default is a lack of planning their income to cover T&I. Then, when due, don’t have the ready funds to pay that big chunk. (Yes, there may be some that ‘play the system’.)

    On the Forward side, adding T&I to the payments and setting up escrow accounts is standard procedure. For Reverse, it has never seemed natural to have borrowers make monthly payments to an escrow account since they are not making P&I payments.

    Perhaps the solution that accounts for the 4% default’ers as well as the 96% do-righters is to allow everyone at closing to opt to make their own payments or set up the T&I escrow payments as they wish. But miss one (two?) payment(s) to taxes or insurance and you are mandated to make escrow payments. Worse case is you can’t get too far behind. If you won’t make the escrow payments, the steps toward foreclosure would seem natural.

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