Despite Anti-Foreclosure Bill, Reverse Mortgage Servicers’ Hands Tied

A new Philadelphia law would prevent reverse mortgage servicers from foreclosing on homeowners who have entered into property tax payment plans with the city — but several players in the industry say it’s not that simple. 

Introduced last week by city councilwoman Cherelle Parker, the law specifically attempts to stop mortgage servicing companies from paying off borrowers’ back taxes in order to commence foreclosure proceedings.

In a statement, Parker described this practice as “quite common,” and pointed to an update to the city’s Department of Revenue that also attempted to stop the practice.

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“It is my hope that these new regulations and my accompanying legislation will protect homeowners by finally putting an end to some of the more unscrupulous practices we have seen from reverse mortgage lenders,” Parker said.

But the Department of Housing and Urban Development has its own set of rules regarding unpaid property taxes and foreclosures, and servicers often don’t have a choice in the matter.

“Servicers are boxed in,” Leslie Flynne, senior vice president of loan servicing at Reverse Mortgage Solutions, told RMD. “We have to pay the past due taxes if the taxing authority reports them unpaid.”

Unless the taxing authority completely forgives the tax bill or the taxes are subordinate to the first-lien position on the property, Flynne said, the borrower isn’t meeting the requirements of the Home Equity Conversion Mortgage loan.

“Therefore, any agreement that taxing authorities offer cannot just help the borrower,” she said. “They really have to be tax forgiveness.”

HUD rules require mortgagees to ensure that any tax-deferral programs don’t jeopardize the department’s lien position and also don’t leave HUD on the hook for any back-tax payments upon the borrower’s death.

“This is a dilemma that HUD has created with their position on tax-[deferral] programs,” Flynne said.

Real-life pain

When asked for an example of a scenario Parker hoped to prevent with her proposed law, her chief of staff, Rachel Meadows, forwarded along the story of Philadelphia widower Leonard Hitch.

Hitch’s wife handled the couple’s finances, and when she died, he fell two years behind on his property taxes, according to Meadows and information from Community Legal Services (CLS) of Philadelphia. To remedy the situation, he entered into a low-income tax payment plan with the city, which allowed him to pay $54 per month. 

After just two payments, Champion Mortgage paid the balance of his property taxes and moved to foreclose. With the help of CLS, a local non-profit, Hitch was able to receive a grant from the city’s Housing Retention Program to repay Champion for the $3,600 in tax expenses — and stay in his home.

According to Meadows and CLS, Champion indicated that it was under no obligation to recognize Hitch’s tax payment agreement. When asked to respond to the claims, a spokesperson for Champion declined to comment on the specific case, citing its privacy policy, but did confirm that the borrower remains “in active status.”

“Champion is committed to caring customer service and our goal is always to help keep our customers in their homes,” the spokesperson said in an e-mail to RMD. “We support repayment plans in accordance with applicable law and actively partner with local non-profit organizations across the country to help homeowners get back on track.”

The spokesperson also noted that Champion must follow HUD’s “extremely prescriptive” servicing guidelines, which require servicers to initiate foreclosure proceedings as long as local government records show a homeowner in tax default — even if he or she had entered into a payment plan.

The National Reverse Mortgage Lenders Association has weighed in on the controversy, with executive vice president Steve Irwin warning that the proposed Philadelphia law could dupe homeowners into a false sense of security: Borrowers in trouble might incorrectly assume that the city law preempts the Federal Housing Administration and HUD servicing guidelines that servicers must follow.

“As currently drafted, we are concerned that Philadelphia Bill No. 180138 will inadvertently place Philadelphia seniors with current FHA-insured HECM loans or other reverse mortgages at greater risk while not affording them the benefits we believe you intend,” Irwin wrote in a letter to Parker.

Written by Alex Spanko

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  • Does it matter what HUD requires? A taxpayer has failed to pay his property taxes as agreed to in mortgage documents with a lender. The property tax agreement with taxing authorities is a subsequent contract in conflict with the mortgage documents.

    Since a loan covenant has been violated, the mortgagee seems to be within its legal rights to foreclosure on an uncured default. Unless the lender had entered into the taxing authority agreement as well, it would seem the mortgage docs should supersede. If HUD does not like the actions of the lender then HUD can deny insurance coverage on that loan.

    It seems the priority of contracts may have to be settled in the courts which may not be a bad idea.

    • George, I think all servicers would prefer a remedy to a foreclosure even if they have the contractual right to foreclose. HECM servicers have shown a desire to help borrowers in the past only to told by HUD they do not have that flexibility.

      • gr8r84u,

        It is the duty of servicers to foreclosure despite their likes or dislikes. Servicers can pursue other legal remedies but they contracted with full knowledge that they must foreclose TIMELY when all else fails. Lenders would love other remedies but cannot afford to see their servicers forego their contractual obligation to foreclose. Servicers in fact follow their contractual duties almost without fail as they should.

  • Could the situation in Philadelphia turn into a swamp for HECMs? We have seen HECMs have difficulty in Sun City and Sun City West, AZ and now in Philadelphia, PA, but they are for entirely different reasons. Failure to pay real estate taxes in full timely could become a substantially larger problem than those that surfaced in certain AZ communities.

    This is one where lenders need to band together with a common legal strategy to debunk the current position being taken the city government of Philadelphia. If cities can create laws that retroactively prevent lenders from foreclosing due to defaults, HECMs may not be the only type of mortgage that could come within the crosshairs of politicians with a lot of blind ambition.

  • This seems to be what one would call, “Darn if you do, Darn if you don’t”, right in the middle of morality and legality!

    George Owens is technically 100% right! However, what Parker and Philadelphia is putting into law may sound morally right but from a legal standpoint will it hold up against what HUD has in place, I don’t think so?

    As far as I can see, the Philadelphia move on this issue, as good as it appears to be from a moral standpoint, is going to open up a ” Pandora Box”!!

    What Champion Mortgage did by paying off the balance of the borrowers property taxes and moved to foreclose was what they had to do!

    When CLS, the local non-profit group was able to receive a grant from the city’s Housing Retention Program to repay Champion for the tax expenses they paid for, was a great thing. The homeowner/borrower was able to stay in their home but for how long?

    Did the CLS do the homeowner a favor or did they put off the inevitable for the homeowner, foreclosure?

    The CLS local non-profit organization is not going to be all over the country for everyone faced with this situation!

    I don’t mean to repeat myself but the Philadelphia move on this issue, as good as it appears to be from a moral standpoint, is going to open up a ” Pandora Box”!!

    John A. Smaldone
    http://www.hanover-financial.com

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