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.


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

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  • I agree with Angela, there is absolutely no reason a servicing company could not accept monthly payments from a borrower just for tax and insurance impounds. You wouldn’t need a “set aside”, just the initial cushion formulation that lenders use when they set up an impound account on a traditional forward loan. Many borrowers would be happy to make just a tax and insurance monthly payment. I’ve counseled reverse borrowers to set up an automatic withdrawal from their checking accounts every month to a separate “Tax & Insurance” savings account that they can then use to pay those bills as they come due.

    • Deborah,

      This is the Great Recession. Many people today are deciding between cutting back on meals and electricity not between breakfast at Denny’s or MacDonald’s. For many it is not a matter of a strategic or elective default but one of eating.

      If all of the T & I defaults are actually less than 6% in total in this economic environment and the vast majority of those we deal with are on fixed incomes that is rather amazing. As the ReverseGuy points out and so many others are already aware of making this option available could drive servicing wild.

      James Veale thinks few who would default would voluntarily participate. If that is so, what is it this idea will achieve especially since borrowers can also voluntarily drop out if they choose when they are in financial trouble?

      My opinion is it will drive up servicing costs with marginal benefit.

  • David and Cheryl are very experienced and knowledgeable, but it strikes me that their comments pertain more directly to set-asides (reserving a portion of loan funds) than escrow accounts (monthly payments by borrower into separate account).

    An escrow would seem to be at least a pro-active measure that most borrowers would already be accustomed to using, and perhaps even an early warning system given that a borrower missing payments to escrow is likely to happen several months in advance of actually falling in default on the taxes and/or insurance payment.

    Not a silver bullet, but maybe prevents part of the problem.

    • John,

      It seems you are suggesting a pay as you go escrow but would it be voluntary or mandatory? That is a lot of work and cost for only less than a 6% taxes and insurance default rate in the midst of the Great Recession and all for a early detection system.

      I agree that set asides either in the HECM set aside format or as actual escrow accounts are a bogus idea.

  • What an odd article. The concept being advocated by Angela is not the same as that dismissed by Cheryl and David.

    The idea presented by Cheryl and David is a disbursement at funding into an escrow account. Although not much different, a set aside should be preferred to a disbursement of loan proceeds which will accrue costs at a much combined higher rate (interest plus MIP) than the cash will earn interest in an escrow account. Plus the interest earned will be taxed as earned while the interest accrued cannot be deducted until paid.

    Per her February 2nd announcement to a reporter from the Orlando Sentinel, Sue Hunt of CredAbility claims less than 6% of HECMs have T & I defaults. Translated into a more optimistic statement, Sue is saying that over 94% of all HECMs are current on taxes and insurance despite the horrible economic environment.

    I fully agree with Cheryl. Unless sufficiently large, mandatory impounds are little more than a delay strategy. Why should over 94% of borrowers suffer when it is less than 6% who cause the problem? Even IF there was a financial program which could accurately predict who the 6% will be, unless the impounds are equal to the life expectancy (plus a few years) of those borrowers, defaults will no doubt occur and of course the seniors would see much smaller net principal limits. When the MBA proposed this measure as reported by RMD on September 24, 2009 in its reverse model state model act, the idea seemed ridiculous and it seems no different now.

    While there is absolutely nothing wrong with the idea Angela promotes, by and large it is those who are compliant who normally avail themselves of such programs not those who have difficulty avoiding default. These types of programs have generally failed to mitigate the problems they are designed to address.

  • We simply need to:
    1. Allow escrow accounts if the customers would prefer
    2. Require escrow accounts for borrowers below a certain credit score ( 640 ? )

    • hecmpro,

      Most seniors I deal with have a FICO score below 640. What kind of escrow account are you talking about? Impound monies at funding or a pay as you go type plan?

      If you are talking about impounding loan monies, then how years of insurance and real estate taxes do you believe should be taken? Then you have the problem of changes in the law, etc. How would you get more if taxes or insurance go up?

      A mandatory pay as you go plan is little more than an early detection problem and could cause immense problems for those with more erratic income streams.

  • Sure, escrow payments sound simple on the surface. However, from what little I know of the servicing side of this business, I would think that you would need to double or triple the amount that HECM servicers are paid if they are going to be asked to invoice and chase after seniors to make their monthly escrow payments. What a nightmare that would be!

  • The challenge with a true escrow account (whereby the borrower makes monthly T&I payments) is very simple:

    Since the industry was born, all stakeholders (lenders, counselors, policy makers, consumer advocacy groups, etc) have been describing the product as a payment-deferred loan…..the challenge would be to unwind that marketplace perceived notion of the product into one where the borrower doesn’t have to make any P&I payments, but does have to make a T&I payment.

    My hope is that there are other more elegant solutions that will be created by HUD and the industry,

    • Joe,

      No doubt you are right but even if it could be done with great diplomatic effort, would it solve anything? If seniors end up not being able to pay the bills themselves, would they be more apt to pay installments of those same bills? A pay as you go plan hardly seems to kill the root of the problem or do too much damage to it at all.

  • I agree 100%! Have the borrower make monthly payments into an escrow account for T&I. No need for set aside’s and no need for the ridicules “Financial Assessment Test” borrowers will have to subjected too.

    As far as the servicing costs, they may have to be raised some, not doubled or tripled! No more than $5 to $10 per month would compensate the servicer for the additional responsibility. We are talking about 5 to 10% of borrowers are going to be a problem in collecting escrows, the rest will pay on time from statement only.

    Some one mentioned the requirement of escrows on credit scores below 640? I feel that would not only create mass confusion and it would require the Financial Assessment Test” to be implemented. Some how this test needs to be stopped in its tracts and never come to fruition!

    Why not make this as simple as we can make it. This suggestion seems to be a very logical solution to the problem. How do we get it implemented?

    John Smaldone

    • John,

      Have you ever worked in a collections environment? To say that “…the rest will pay on time from the statement only” makes me believe that you have not spent much time in that part of the mortgage industry.

      True – some borrowers will pay religously every month on time, with no problems. However, I would be willing to bet that a majority of senior borrowers would require at least some follow up calls, additional collection letters, etc. to help them remember to remit their T&I payment. Each and every time that a mortgage servicer has to mail a letter or pick up the phone, it costs them money. To say that an additional $5/month would cover those type of personnel costs to cover that level of personal touch just does not add up.

  • Some of this thread reads like people who have never dealt with mortgage law or passed the national portion of the NLMS exam. There are two separate problems here. One is existing borrowers and the other is new borrowers.

    How can FHA, note owners, or servicers force existing borrowers who have never been late on property tax (or insurance) payments to pay monthly into escrow accounts? Do people actually believe that monthly service charges on existing HECMs can be raised at a whim like the great idea of stopping T & I defaults?

    A mortgage agreement is a binding contract. To suggest it can be unilaterally changed is crazy no matter how good the intention. Like James Veale is so fond of saying over and over, a HECM is first and foremost a mortgage, not equity release, or some other marketing ploy.

    New HECMs can be structured the way any lender wants them to be as long as they fit the parameters in which HUD will insure them. It was not that long ago the industry was in the great turmoil over whether or not HECMs could be closed ended loans. Guess what? That could have been done from day one but not unilaterally by FHA, note owners, or servicers to the HECMs already closed as open ended mortgages.

    The industry can chase new HECM prospects off any way it chooses. I, for one, am glad there are level headed people in the industry such as Cheryl, David, Joe, Peter, James, and many others.

    Neil, your title for the article says it all!!!

    • Reverse Maven,I don’t think anyone in this thread is suggesting changing the terms of any existing loans – just new loans going forward.

      • ReverseGuy,If all this is about is future originations, then we are kidding ourselves. The likelihood of the vast majority of new defaults arising in the next three years from new originations in that timeframe is very low when compared to the potential number of defaults from the current outstanding pool of HECMs. To many of us who have studied for the NMLS license and are familiar with the mortgage market as a whole, it is clear that the biggest single factor indicating default problems in the future are defaults in the past.Beyond that, there are the closed ended HECMs which have been funded since 2007 to date. Without the traditional capacity information which is available with forward mortgages, most believe that in the current pool of outstanding HECMs this is the second strongest characteristic indicating potential default. Yet that characteristic is not all that helpful in permitting servicers to be more proactive in the future.Future defaults in the current outstanding pool of HECMs either from those who defaulted in the past or new ones in the future should be of significant concern and be considered the most immediate future problem. After all with HECMs yet to be originated, there are many ways to reform contracts, tweak them, and tinker with them in order to find ways to mitigate defaults from loans not yet originated. But there are few ways to tinker with the mortgage contracts of well over half a million HECMs outstanding. It is the outstanding HECMs which should be of greatest immediate concern.

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