Servicers Offer Tips on Handling Reverse Mortgage Repair Requirements

At face value, it could seem like a small issue: A borrower might need to make a few minor repairs on a property in the weeks and months after securing a reverse mortgage to bring it up to the Department of Housing  and Urban Development’s standards. But improperly navigating the repair and approval process could land a borrower in default, and it’s up to both originators and servicers to help the homeowner through the process. 

About 15% of all new Home Equity Conversion Mortgages have some type of repair rider, Celink president and chief operating officer Ryan LaRose said during a panel discussion at the National Reverse Mortgage Lenders Association’s eastern regional meeting in New York City last month.

In the reverse mortgage subservicer’s current portfolio, the repair amounts range from $500 — to fix some peeling paint — to more than $75,000, which one borrower needed to replace a roof and dismantle an unsafe deck.

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“It can be a wide variety of items that come up on that,” LaRose said.

To handle these required repairs, the servicer establishes a set-aside, carving out a piece of the borrower’s principal limit and saving it to cover the costs of the contracting work. In Celink’s case, that set-aside typically amounts to 150% of the estimated cost, providing a cushion in the likely event that the homeowner experiences cost overruns during the course of the project.

Homeowners generally have a year from the closing date to complete the work and undergo an inspection from a Federal Housing Administration-approved company — and if he or she fails, the loan technically enters default and the servicer is required to freeze all disbursements, LaRose noted.

That’s where originators and servicers need to team up to make sure homeowners understand their obligations. 

“Make sure that they are fully aware that they don’t have to wait to start the repairs. The repair rider is a deadline date, not a start date,” LaRose said. “And we sometimes have to educate the borrowers about that.”

Homeowners should also be aware that a servicer can’t provide set-aside money to cover upfront deposits that many contractors require before providing service — and that even if they elect to perform the repairs themselves, the work still must meet strict FHA guidelines.

“They may be confused about the process and not truly understand what some of the ramifications may be. They may think they have more time than they do,” LaRose said of homeowners. “I think the number-one reason, though, is trouble locating a qualified contractor to do the work. So we try to assist where we can.”

The process is a little different for repairs to damage that occurs after closing. Leslie Flynne of Reverse Mortgage Solutions said the recovery process after a natural disaster or other damaging event is the number-one source of dissatisfaction for active borrowers, as the servicer in many cases must oversee the use of insurance money to pay for the repairs.

In some cases, particularly for borrowers with lines of credit or a solid history, servicers can make concessions. For instance, RMS will closely monitor the progress of repairs and release funds in stages to help the homeowner cover the cost of supplies or installment payments to contractors. But that can only happen if he or she loops the servicer into the process as soon as possible, and Flynne called on originators to make sure borrowers understand this before a disaster strikes.

“We would encourage you as you educate your borrower on what life is like after a HECM has funded, that should they have a loss, that they always need to call their insurance company, file the insurance claim — but they need to let us know as a servicer,” Flynne said. “Because again, we want to help them.”

Part of that help could also include reviewing bills from contractors to make sure seniors aren’t getting duped into paying inflated costs or covering unnecessary repairs, she noted.

“They are not in default because they’ve had a loss, but they may be in default if they don’t repair that loss. … You’d be amazed at how many people don’t complete the repairs even though their funds are frozen because they don’t need the money yet, and they’re perhaps less than attentive to it,” Flynne said. 

Written by Alex Spanko

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  • This is an important article to pay attention to. So many today in our industry do not know how a repair has to be handled or what the amount available is!

    The repair set aside fee was always in the past limited to no more than 30% of the home value, is that still the case?

    I know the the set aside fee is based in 150% of the repair cost but my question is on the max amount, which used to be 30 % of the home value or max claim amount, which ever is the lesser of the two?

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

    • John,

      I have never heard the concept of the lower of the home value or max claim amount. The maximum claim amount is the lowest of 1) the purchase price the home, 2) the appraised value of the home, or 3) the lending limit.

      The new regs at 24 CFR 206.47 state the following:

      Ҥ 206.47 Property standards; repair work.
      (a) Need for repairs. Properties must meet the applicable property requirements of the Commissioner in order to be eligible. Properties that do not meet the property requirements
      must be repaired in order to ensure that the repaired property will serve as adequate security for the insured mortgage.

      (b) Assurance that repairs are made. The mortgage may be closed before the repair work is completed if the Commissioner estimates that the cost of the remaining repair work will not exceed 15 percent of the maximum claim amount and the mortgage contains provisions approved by the
      Commissioner concerning payment for the repairs.”

      I find paragraph (b) interesting since it requires that Brian Montgomery must estimate the cost of remaining repair work. I hardly think he will be doing that.

      However, the existing HUD HECM Handbook 4235.1 at Chapter 3, Section 3.A. states the following:

      “3) A property should not be rejected by the appraiser. If required repairs are estimated to cost more than 30% of the maximum claim amount (see Paragraph 3-8), the Valuation Branch of the local HUD office should review the property to determine if it is acceptable for the program.”

      • Carmine,

        You are 100% right, I can’t believe I put 30% in there, great catch on your part!

        However, yes, it can be the lower of the maximum claim amount or appraised value. What if the home was valued at $850,000? If the loan is a HECM, the maximum claim amount would be the lower of the two.

        In that case, the max set aside fee allowed, which as you pointed out is 15% would be based on the maximum claim amount!

        John Smaldone

  • Wow, that’s what you might call a one-sided, self-serving, cover-your-own-rear-end narrative.

    What they’re leaving out is how often the servicer majorly screws-up the process, and it’s not in any way the borrowers’ fault. And we’re talking about the simplest examples of repair-set-aside situations; the servicer-screw-ups-level-of-incompetence goes up exponentially with the work-scope over $10,000 where the homeowner-insurance company is involved.

    The servicers seem to be doing quite well for themselves in convincing politicians of the various states (who get complaints about the servicers from seniors) that: “It’s all the senior citizen-borrowers’ fault, because they’re just too dumb to “get it.” ”

    Uh, no, “servicer industry,” the borrowers have been smart enough to have responsible jobs at a level where they paid-off a mortgage to the equity-qualifying degree of being eligible for a HECM in the first place. Your customer service representatives seem fortunate if they have the I.Q. of a shoe size.

    The rash of complaints about HECM servicers from borrowers to the various states’ Attorneys General is due to the servicers inability to handle even the most basic functions as “keeping track of the paperwork (most especially),” and the servicers’ customer service representatives having some idea of what they’re talking about; and they’re rude if questioned on anything at all.

    • Ed,

      I am glad you are a borrower. Some of your arguments are slightly overstated as is your characterization of the IQ of the average servicer but we get the drift of what you are saying.

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