The tax and insurance default issue with reverse mortgage servicing continues to be portrayed as a catastrophic issue threatening the Home Equity Conversion Mortgage (HECM) program, highlighting the need for public response from the industry and new guidance from HUD regarding how the issue is being addressed.
An "The Best Life" blog in U.S. News & World Report, Philip Moeller suggests that the HECM program is plagued with a "host of serious problems." He points to reverse mortgages being controversial due to their high loan and insurance fees and because some borrowers have not maintained their responsibility to pay taxes and insurance. Of course, he includes a comment that some borrowers were convinced to use their reverse mortgage proceeds for inappropriate financial products.
Moeller estimates that 20,000 to 25,000 active HECM loans are currently in technical default due to non-payment of taxes and insurance. It is not clear how he came to this projection as most reports have place the estimate lower.
He does note that HUD has been working on new rules to guide lenders through some type of underwriting verification that HECM borrowers have the ability to continue making their tax and insurance payments.
The tax and insurance default issue is a concern for the industry and one that needs to be adequately addressed. A large portion of the problem is due to a lack of systematic follow through to remind borrowers of their responsibilities and to help them get back on track. This was addressed by guidance from HUD in Mortgagee Letter 2011-11. The next step is to determine what income or asset verification is necessary and determination for where impound accounts are necessary. This also requires that HUD devise a viable mechanism for setting aside a reasonable portion of the equity to account for the lender/servicer to make tax and insurance payments during the course of the loan.
The problems discussed by Moeller are important and do need to be addressed, and much is being done to address them. However, his suggestion that there are a host of serious problems threatening the industry are overstated. It is really more of a public relations concern. The industry seems to lack sufficient public response to these reports, or coverage of efforts to strengthen the program, that demonstrate the proactive ways these issues are being resolved.