Property Tax Surprise Risk for Reverse Mortgages?

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. 

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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

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  • Oh, look!!!  Beggars are riding (in reference to the nursery rhythm — if wishes were horses, then beggars would ride).  

    Dr. Guggentag is no one’s fool.  He has hit the issue on its head.  Some in our industry find it easier to ignore the default problem altogether.

    When looking at the list of difficulties of staying in the industry, two of the most dominant problems for major lenders were and are:  1) declining origination numbers and 2) an ever growing potential liability and headline risk problem from pending foreclosures on defaults —with no good resolution in sight, just delays in enforcement with everyday having the haunting realization that more HECMs with future defaults were generated that day without the tools to mitigate the problem.

    The two year rule is not law.  It was hoped that the two years would allow many of those in default to work their way out of it.  Well in the meantime defaults are no longer 6% but now a more staggering 10% with that number only rising.  Could the time be extended by FHA order?  Why not!!!

    In watching the number of HECMs outstanding, the percentage of HECMs in default is not staying the same as a result of new defaults, it is rising!!!  That shows the new defaults are outstripping the growth rate in the total HECMs outstanding.  That concept should send chills down the backs of industry leaders and servicers.

    When will we see tools to mitigate the default problem built into current originations?  When will we see the kind of foreclosure enforcement which  will be received as a deterrent and send tremors into those who can pay but are defaulting to save cash for the future because they see no will at FHA or in the lenders to enforce foreclosure (technical defaulters) over failure to pay property charges?

    It reminds one of the election.  On one side Dr. Guggentag is pointing to the current situation while on the other we have those who remind us of unfulfilled wishes while all of the time, lenders and servicers are sitting on a ticking time bomb.  Will FHA come in time with the partial solution?  Maybe but then again….tick, tick, tick.  Dr. Guggentag will bring us the next part in this serial drama soon.  

  • Cynic,

    I think you hit the nail on the head.  Loans originated today (or yesterday, or the day before) were all done without the benefit of some sort of financial assessment to validate that the borrower has sufficient financial resources to meet future tax and insurance (and HOA) obligations. 

    When will we finally see HUD complete any sort of real action on this problem?  Until then, the bleeding continues…

  • Thomas: Are you going to step up and pay the difference? While these tax breaks sound very philanthropic many municipalities are going bankrupt and cutting services to the bare bones. Bottom line is it sounds good but not very realistic.

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