Tax and Insurance Defaults Could Impact Origination Practices

Origination News reported last week on the future origination implications of a recent mortgagee letter related to borrowers who default on tax and insurance payments.

“At present the way that reverse mortgages are originated we’re not even permitted to ask people to do a credit underwriting, so we don’t really have any tools right now in terms of the way we originate the loans to try to minimize the future occurrence of these events,” Generation Mortgage chairman Jeff Lewis told Origination News. “I think what we’re going to have to do, at least for some borrowers, is have some sort of limited credit underwriting where borrowers whose credit is below a certain level are going to get access to less money in order to compensate for the increased risk that they pose in terms of defaulting or through a set aside.”

The product has been misunderstood more so lately with increased media attention, Lewis told Origination News, saying that it is not the reverse mortgage that causes someone to lose his or her home, it’s the fact that he or she didn’t pay his or her bills.

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While government assistance to those who are in danger of T&I default would help, that assistance is unlikely, Lewis said.

Without some kind of government assistance to borrowers struggling to make T&I payments, limited credit underwriting and/or set-asides for T&I payments could affect proceeds are the logical alternative, he said. It could impact proceeds, but the improvement would be worth it, he added.

“As much as I understand that originators don’t want to see the proceeds cut at the end of the day if there is a cost, there has to be a way to pay it,” he said.

See the original Origination News article.

Written by Elizabeth Ecker

 

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  • I don’t know the answer and I don’t have data in front of me, but I am willing to bet that many of those defaults were in arrears when they took out their RM; perhaps the reason these particular borrowers sought out RM’s in the first place were to get caught up on tax (and other) obligations. If the data analysis shows this to be statistically significant, then perhaps yes, something as simple as a tax set-aside can be established for applicants who are currently delinquent on their property taxes, for say, more than a year? Of course as the Cynic pointed out, we need to understand the data first. Causes will be tough because correlation doesn’t necessarily mean causation.

    In my opinion, tax set-asides seem like the right solution for certain borrowers, but it would be foolish to make it a blanket requirement for all applicants. Unfortunately, we all know that Uncle Sam caters to the least common denominator when reacting in a knee jerk style to any challenge…..

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