HECM Escrow Accounts: A solution in search of a problem?

On its face, the issue of reverse mortgage holders failing to pay property taxes and insurance is an easy one to solve. After all, the forward mortgage world has had the answer for a long time in the form of escrow accounts, a straight-forward process of collecting such assessments in advance of their due dates, thus ensuring that when the time comes to pay, the money will be there. So why isn’t that standard practice in the reverse world?

“Why wouldn’t a bank, lender or escrow company set up an option for a borrower to make regular payments into an escrow account?” asks Angella Conrard, reverse mortgage advisor, National Aging in Place Council-Orange County, Calif., and founder, National Care Planning Council-South OC. “A small fee could be charged for the service or a bank could do it for free,” suggests Conrard, “because they would be able to use the money as a deposit. The servicer could send out a simple monthly invoice that the borrower could send back with a payment on monthly basis.”

Sounds easy enough. But, not so fast, counters David Fontanilla, director, Knight Capital Markets, who cites as one T&I escrow complication the fact that “not all states have the same property taxes. New Jersey [for example] has high taxes and three to five years of escrow [there] would crush what the senior could get on a reverse mortgage,” Fontanilla calculates.

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And, Cheryl MacNally, national sales manager, senior products, Wells Fargo Mortgage, believes an escrow approach may simply be “delaying the inevitable. If you do a three-year escrow,” she asks, “what happens at the end of that? Are you just prolonging the ultimate end, which might be a default?” Indeed, escrow proposals may be less salutary than one would think. “In comparison to all the HECM endorsements out there,” MacNally concludes, “the T&I defaults are a relatively manageable number.”

In January, HUD issued guidance on T&I defaults that serves to offer loss mitigation options to allow the mortgagor the opportunity to bring the mortgage into compliance. The guidance stated the following: “Loss mitigation options available to mortgagors who have a delinquent mortgage due to unpaid property charges must include, but are not limited to:

(1) Establishing a realistic repayment plan for the delinquent property charge(s);

(2) Contacting a HUD-approved Housing Counseling Agency (HCA) to receive free assistance in finding some viable resolution to their delinquency, or identifying local resources available to provide funds or homestead exemptions; and

(3) Refinancing the delinquent HECM to a new HECM if there is sufficient equity to satisfy the existing mortgage and outstanding property charges.”

Ever the optimist, Angela Conrard maintains that “there are all kinds of [T&I] options that we can use to set our consumers up for success.”

Written by Neil Morse