The second in a series of articles on the reverse mortgage market and the financial crisis, an Inman News story this week focuses on an issue essential to lenders and borrowers: tax and insurance defaults.
The problem of borrower defaults increasing is an issue that has been covered in many media outlets in light of recent reports on the reverse mortgage industry. The Inman article by Jack Guttentag argues that in the case of property tax defaults, there is an incentive for reverse mortgage borrowers to not pay property taxes.
The solution could be found in a forthcoming financial assessment that is expected to be released by the Department of Housing and Urban Development later this year, Guttentag writes, comparing the situation of a Home Equity Conversion Mortgage borrower with one of a forward borrower.
On forward mortgages, borrowers are generally required to make monthly payments for taxes and insurance into an escrow account, out of which the lender makes the required payments when they come due. The rationale is that the lender needs assurance that the borrower has the capacity to meet this additional payment burden.
Since a HECM borrower does not assume a mortgage payment obligation (on the contrary, a reverse mortgage is a source of additional cash), there seemed to be no need to escrow taxes and insurance.
But this inference was based solely on financial capacity and ignored financial incentives. On a forward mortgage, the borrower has a strong incentive to pay taxes because the failure to do so would result in a lien on the property, which would prevent the mortgage from being refinanced or the property from being sold.
In contrast, many HECM borrowers have no refinance option to lose and no concern about the size of their estate, which gives them a financial incentive not to pay property taxes. The only significant deterrent is the threat of foreclosure and eviction, which most HECM borrowers realize won’t happen.
…Potential new HECM borrowers should not be deterred by the default problems of existing borrowers. However, new borrowers will face a different set of rules designed to prevent them from defaulting.
However, one reverse mortgage servicer told RMD that the reality of foreclosure is not as far off as Guttentag asserts in his article.
“HUD’s mortgagee letter prescribes certain timeframes for the repayment of the T&I default based on the actual dollar amount of the default balance,” the servicer explained. “They only get up to two years if they can prove that they have a financial hardship. Further, if the borrower outright refuses to repay the default balance (or the servicer exhausts all of their loss mitigation options made available by HUD), they would not get any further time before the servicer would have to request due and payable approval from HUD.”
The due and payable status could lead to foreclosure, when all loss mitigation efforts have been exhausted. Contrary to the article’s assertion, this does create a “very real” incentive for borrowers to pay tax and insurance, the servicer says.
Written by Elizabeth Ecker