The reverse mortgage industry has weathered some uncertainty in the past year driven by continuing declines in home values that have limited available equity. The surprise exit of two large bank originators, Wells Fargo and Bank of America, has added uncertainty, as has delayed retirement among those demographically eligible for a reverse mortgage. On the servicing side, a key challenge for companies that service reverse mortgage loans has been tax and insurance (T&I) default delinquencies and the financial and workload burdens it places on servicers.
Owner occupancy and repair requirements also continue to be of concern when borrowers fail to respond to our outreach efforts. [Looking to the future, there is a growing sense of urgency as servicers prepare to migrate from HUD’s 22-year-old Insurance Accounting Collection Systems (IACS) to the new HERMIT system.]
Clearly, though, T&I default is on many minds, including those at HUD charged with developing a policy to improve its effects.
How serious is it? It was all over the news when a 101-year-old reverse mortgage borrower was recently facing foreclosure because she failed to make her T&I payments. That’s not the kind of publicity the reverse mortgage business needs.
In the forward mortgage world, of course, servicers are routinely required to set up escrow accounts to pay taxes and insurance on behalf of their borrowers. By contrast, reverse mortgages do not have escrow accounts and the homeowners are responsible for paying those bills themselves, just like on a non-escrow forward mortgage.
In the past year or so, we’ve seen an increasing number of borrowers failing to keep their T&I payments current. Many are unaware of or forgetful about this obligation. Sadly, many seniors do not have the money to make these payments and their reverse mortgage loan is fully drawn down. When there are no funds available from the loan, the servicer must advance funds to bring T&I payments current, under HUD guidelines. The servicer must then attempt to put the borrower on a payment plan to cure the default.
The structure of the payment plans available and the actions required by the servicer are governed by HUD. If the borrower then defaults on the payment plan and a new plan cannot be reached with the borrower, the servicer must submit a request to HUD to call the mortgage note due and payable, which can lead to foreclosure proceedings.
Extra burdens on servicers
From a servicing perspective, delinquent T&I payments create large financial and logistical burdens on servicers. Dealing with customers’ failure to make T&I payments requires the hiring of additional staff and increases employee work loads. At RMS, for example, we had to increase our T&I staff by 300 percent in the last 12 months and also needed to hire supplemental seasonal help to handle the added load. Much of that work involved sending multiple letters to customers, supplemented by multiple phone calls to the borrowers and alternate contacts, such as their adult children.
For the borrower, it also requires servicers to make advances on already fully drawn loans.
Even though the reverse mortgage qualification process does not require that borrowers demonstrate that they can meet their T&I responsibilities, we need to understand and make clear to the general public that the reverse mortgage is not to blame for creating this situation.
Homeowners have always been responsible for paying their real estate taxes, either directly to their local taxing authority or through an escrow account, whether they have a forward mortgage or a reverse mortgage. If they don’t make those payments, the end result is the same: The servicer pays the taxes and the borrower has to reimburse the servicer either through a higher escrow payment or a repayment plan. If the homeowners do not have a mortgage and own the home free and clear, they are still required to pay their taxes or be subject to their property being sold at a tax sale.
But just because reverse mortgages didn’t create this issue, doesn’t mean our industry is absolved from trying to help find a way to reduce the frequency of T&I defaults.
In the past there haven’t been any credit overlays at origination to qualify the borrower’s ability to pay future taxes and hazard insurance premiums, including their ability to maintain other expenses. But the tide is changing and credit qualification is becoming a reality in the reverse mortgage industry.
Sometimes the issue can be resolved with a simple reminder to the borrower emphasizing that their failure to maintain taxes and insurance can and will lead to foreclosure and loss of the home. But in most cases, unfortunately, it’s not that simple: The borrower simply doesn’t have the money and their reverse mortgage is fully drawn down. The National Reverse Mortgage Lenders Association (NRMLA) has formed a task force to address the issue and determine what steps the industry can take to reduce the magnitude of this problem.
Fixing the problem starts at the beginning, namely qualifying and educating homeowners during the origination process. Unfortunately, that isn’t always helpful in predicting what the borrower may do three years from now or what event may occur in their lives that prevents them from paying T&I in the future.
Owner occupancy certification and required repairs
Owner occupancy and required repairs are other big issues that place added burdens on servicers. The good news is that there are less of these than T&I defaults. The bad news is that they can lead to the same result: foreclosure.
In order to qualify for a reverse mortgage, HUD requires that the borrower must certify that the property is his or her primary residence and continue to certify occupancy on an annual basis. Each year the servicer sends the annual occupancy letter to the borrower(s) for them to sign and return, certifying the property is their primary residence. But failure to return the occupancy certification letter triggers additional letters from the servicer, followed by multiple calls to the borrower and alternate contacts.
If all of these attempts fail, the servicer can request HUD to call the loan due and payable. If granted, a company sends out a demand letter and initiates foreclosure proceedings.
HUD also requires that reverse borrowers make necessary repairs to the property prior to the loan’s origination, or to use proceeds from the loan to pay for the repairs. About 10 percent of homes with reverse mortgages need such repairs at closing.
Under HUD regulations, servicers are required to set aside 150 percent of the estimated cost of repairs from the loan proceeds at the closing. The borrower then has one year to make the necessary repairs, although most lenders require them to be completed in six to nine months after the closing.
While the originator of the loan is responsible for getting the repair estimate, the servicer is responsible for making sure that the work is completed satisfactorily. In addition, the servicer tracks and monitors the repairs and, as needed, remits the repair funds to the contractor and borrower.
However, many borrowers don’t properly understand their obligations under the repair set-aside rules, or believe their home doesn’t need to be repaired. In some cases they just don’t know how to go about getting the work done. A typical servicer contacts the borrower right at the beginning of their loan to remind them of the repairs and to guide them through the process. Often this involves multiple letters and calls to the borrower or alternate contacts in an effort to follow through and ensure the repairs are completed.
If the borrower has a credit line and has not done the repair work, the servicer is required by HUD to discontinue payments to the borrower. Many borrowers are dependent on that money to supplement their income for daily expenses, so it can be a harsh and unpopular order to enforce.
Despite a servicer’s best efforts, the borrower sometimes fails to respond to letters and calls. If the borrower fails to make the repairs by the deadline, the servicer is required to notify HUD and may make a request to call the loan due and payable. If HUD approves, the servicer may declare the homeowner in default, and if the default is not cured, foreclosure proceedings may begin; but normally a demand letter will generate a response and the issue will be resolved. Still, the servicer incurs costs corresponding with the borrower, and fees are assessed to the borrower for their lack of response.
Transitioning from IACS to HERMIT
HUD recently disclosed that no dates have yet been scheduled to test its new Home Equity Reverse Mortgage Information Technology (HERMIT) system, which will eventually replace its Insurance Accounting Collection Systems (IACS). But servicers must be prepared to transition to the new system when it gets the green light.
IACS was developed back in 1989 as a prototype for the then-pilot Home Equity Conversion Mortgage (HECM) program. But it has been used by servicers ever since to collect initial mortgage insurance premiums (IMIP) and monthly mortgage insurance premiums (MMIP) from borrowers.
The new Web-based HERMIT software is powered by STORM (Servicing Technology on Reverse Mortgages), a servicing platform developed by RMS that can handle the increasing demand for HECM loans and provide one solution to support the entire reverse mortgage process. According to a recent statement by HUD, IACS is a time-consuming and manual process because the data resides across a variety of different platforms. The new system will help “improve overall monitoring and oversight over the various stages of the product’s life cycle,” HUD says.
Among the many benefits of the new system, STORM will allow servicers to electronically transmit loan balance transactions, including initial loan data, which is manually entered today. It provides additional-loan level maintenance functionality to authorized users. It also enables servicers to file claims electronically. In addition, it enables document viewing and uploading capability.
Servicers will need to reconcile their servicing accounts to balance with IACS before the release of HERMIT. HUD currently drafts insurance premiums electronically, based on servicer-entered loan balance information contained in IACS, so it’s extremely critical to both HUD and the servicer to maintain maximum accuracy in the system to ensure proper payment of insurance premiums and also proper payment of claims. Any corrections must be sent to HUD to make the adjustment.