One of the basic selling points of the reverse mortgage products in comparison to forward mortgage products has always been, "there is no income or credit score qualifying." Ask most originators about a reverse mortgage and this will likely be one of their three basic statements about the loan.
All of a sudden, HUD indicates that they are working on a new rule that will require lenders to verify a borrower's ability to pay taxes and insurance on their homes as a qualifying event in the processing of their reverse mortgage. Actually, the news that HUD is finally getting around to officially drafting this rule should not come as a surprise to anyone in this industry. An article in U.S. News and World Report highlights that this has been issue that HUD and the industry has been reviewing for some time.
For years, HUD has questioned the selling technique that reverse mortgages have "no monthly payments." Although this is true in a technical sense of traditional mortgage payments of principle and interest, the concern has always been that the approach glosses over the borrower responsibility to maintain taxes and homeowner's insurance. It has been discussed for some time that requiring borrower's to demonstrate their ability to pay these costs would not only help limit the number of tax and insurance defaults, but would also provide a clear reminder to borrowers of their responsibilities during the origination process.
This issue was brought to a head by HUD's identification of the number of loans that currently have unpaid taxes and insurance or have payments that have been made by the lender or servicer as dictated by HUD. As the industry works with HUD to resolve these loans in a proactive and positive way without resorting to foreclosure, HUD also feels a need to reduce the percentage of borrowers who do fail to make these payments.
HUD acknowledged in Mortgagee Letter 11-01 that they had failed to provide lenders and servicers clear guidance on how to address loans that were in tax and insurance default. The goal, according to HUD, was to provide a clear process for reporting and addressing these defaults with the intent of resolving them directly with the borrower, and maintaining foreclosure as an option of last resort.
However, HUD has made it clear that this guidance only addressed the existing problem and did not take on the underlying cause that has created the issue.
The easiest solution to require some form of qualifying event during underwriting that demonstrates a borrower's ability to maintain their responsibilities, or require that an escrow account be set up to ensure these payments are made. At the end of the day, the goal of this new rule will be to make it clear to borrowers that this requirement is real and make sure that originators are being diligent in preparing borrowers for this requirement.
Obviously, setting up an escrow account is a challenging task,because it is difficult to determine exactly how much should be set-aside to cover these expenses without completely eroding a borrower's proceeds.
Originators, of course, fear that in an already narrow underwriting environment, adding an income and/or asset based qualifying requirement could further limit the number of borrowers who can access a reverse mortgage, especially those in the most need.
A simple, middle-ground approach may be for HUD and servicers to consider providing the option for "pay-in" escrow impound accounts. Many forward mortgage borrowers, in cases where they are not required, have elected to have escrow accounts because it takes the responsibility out of their hands. They just pay a set amount each month and the servicer takes care of making those payments.
In a reverse mortgage arena, a borrower could have the same assistance, while the servicer would be able to monitor a borrower's payments. Some might argue that this then creates a form of "monthly payment" for the borrowers, but in reality, it is merely a servicing option to assist borrowers with their obligations. In this case, notice that a borrower was falling behind would come much sooner than after the fact notification that taxes and/or insurance have not been paid. This would provide servicers time to communicate with borrowers before these expenses went unpaid. and work them to resolve.
For those concerned about this coming new rule, hopefully you haven't been hiding under a rock and are not surprised that it is finally on the verge of being drafted. The surprise will be in how HUD decides to implement this new rule. Remember, a draft rule will be released with a comment period of at least 60 days. If the industry has any desire to help shape this rule, then it will be tantamount that participants respond in intelligent and meaningful ways about the most effective way to address this issue, without unreasonable impact on borrowers or lenders.