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.
“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