With the reverse mortgage industry starting to make strides in an effort to preventing tax and insurance defaults for HECM borrowers through a financial assessment, some industry players are beginning to shed light on the problem—and its solution.
While some fear an industry-wide financial assessment geared toward preventing tax and insurance defaults could rule out some borrowers who still would stand to benefit from reverse mortgages, most lenders are keeping a very close eye on the problem, starting with looking for the answer through data analysis.
“It makes a lot of sense to look at what the past has shown us,” says John Lunde, president of Reverse Market Insight. “For example, the cash flow numbers we’re talking about as an industry—we haven’t gathered that type of data in the past.”
When it comes to the some of the characteristics of borrowers who may be predisposed to tax and insurance default, there are a few knowns, Lunde says.
“When folks draw all the cash upfront, they’re significantly more likely to go into default later,” he says. While it is important to distinguish between ARM full draw borrowers and fixed full draw borrowers, Lunde says, for ARM full draw borrowers, they have about 50% higher default rate.
Other considerations include the state and year of the HECM loan.
In states where the taxes and insurance costs are higher, borrowers are more likely to default, Lunde says. In Florida and Texas, for example, the default rates are about 40% higher than the national average, he says. The same goes for certain years; some have a significant difference in terms of what percent of loans are in default now.
Some servicers, likewise, are taking a look at their data to see whether there are any clear indicators that can serve to guide to addressing the issue.
Reverse Mortgage Solutions, the Spring, Texas-based loan servicer, lender and Ginnie Mae issuer, sees loans from origination to securitization—and all the stages in between.
“We are very much involved in the sense that we buy loans and we are a servicer,” says Marc Helm, RMS chief operating officer, of the effort to combat T&I defaults.
“It’s certainly a concern of ours. On the origination side, if we see a person is going to come to closing with any tax defaults or a new insurance policy, we are quick to talk to the borrower as much as we can and try to ascertain why they have not had an insurance policy before and why they have not paid their taxes. We spend a lot of time in what amounts to a second tier of counseling with this person about their loan obligations.”
And RMS has found that these extra efforts have paid off, resulting in some of the highest success rates in borrower repayments. “We’ve put a lot of work into our systems, the training of our people and the processes we use to manage T&I default and the re-payment process.
“We have grown staff in that area. It has been very successful.”
By looking into the HUD-1 documents for borrowers, problematic tax and insurance issues can be unveiled. However, the HUD-1 documents aren’t everything.
While the HUD-1 can help by providing this borrower history, there are other considerations, says Ryan LaRose, chief operating officer of reverse mortgage subservicer Celink.
“It’s not always a stong indicator,” he says of the HUD-1. “A lot of times it’s a life event that happens [that leads to default].”
And for Celink, the repayment plans have shown some signs of success, LaRose says, but it will take time before the full picture is known.
“It has really been six or seven months since HUD provided specific guidance for a payment plan,” he says. “We are just starting to see some of these loans paying off.”
The National Reverse Mortgage Lenders Associaton is also waiting for HUD data, which it hopes will help hone in on the solution.
“We are still waiting for data reporting on an aggregate level out of HUD,” says Steve Irwin, NRMLA executive vice president. “That’s forthcoming. NRMLA is also participating in a loss mitigation advisory group that is sharing default counseling experience with HUD and with servicers and with counselors.”
The association has reported that based on conversations with HUD officials, that data should be available by the end of August. In the meantime, NRMLA is continuing its efforts, Irwin says.
And more data may be on the way.
“We are taking an analytic approach to our whole portfolio and looking very hard at loans, where we have acquired servicing, for tax defaults or a new insurance policy or tax lien that indicates we’ll have problems with defaults in future,” Helm says.
As for a financial assessment that could become commonplace in the industry, a reasonable level of agreement on what data needs to be collected and the exact definition of what that data is is necessary, Lunde says.
“There’s a lot of data we can use intelligently,” he says. “We don’t have all the data, but I think we have enough to inform the process.”
Written by Elizabeth Ecker
This edition of RMD Report is brought to you by Landmark, a leading national appraisal management and compliance company serving the reverse mortgage lending industry.