Those of us in the reverse mortgage servicing business often speak a different language than our colleagues on the forward side. One example is the use of the word “default.” In the forward mortgage world, “default” generally reflects failure, as in a borrower who stops making payments or a loan that stops performing according to expectations.
But in the reverse sector, that word most often means a predictable conclusion: that the senior has left the residence under several different but predictable conditions. As a result, the timing can be challenging for actually declaring a loan “due and payable” (a.k.a. in default).
Five such scenarios are:
* Death of the borrower (and coborrower, if applicable)
* Transfer of title
* Non-occupancy for 12 consecutive months
* Failure to make required repairs or maintain property
* Delinquent taxes and/or not maintaining hazard insurance
Of these scenarios, only death and transfer of title allow a servicer to call the loan due and payable without HUD approval. For the three issues that require HUD approval, a series of borrower contact letters and calls – and any additional outreach – must be made, including inspections of the property.
A servicer must document all attempts and conversations with a borrower in order to provide proof of its actions to HUD. The overall objective is correcting the issue, whether by establishing a payment plan for delinquent taxes and insurance, or working with the borrower and their representative to make the necessary repairs.
Cases that can’t be resolved
But there are cases that can’t be resolved and the next step is to submit a request to HUD to call the loan due and payable. Once HUD approves, the clock starts ticking on resolving the issue with the borrower or through an alternative action such as a deed-inlieu, short sale or foreclosure.
From the time a loan is considered due and payable, either by death or HUD approval, a series of actions must take place. For example, in the case of the last borrower’s death, the servicer has 30 days from the notification date to complete an appraisal. Therefore, a servicer must have the oversight to ensure the appraisal is ordered in a timely fashion. The appraisal company must understand the timelines and those timelines must be managed. In addition to the appraisal, a servicer must complete an inspection of the property within 45 days of the loan being called due and payable.
This timeline is based on HUD requirements, which in this case do not differentiate between forward and reverse mortgages. The final action that must occur immediately upon the due and payable approval is to issue a repayment letter outlining the options to repay the loan instead of the alternative action, foreclosure.
If the due and payable issue cannot be resolved either by the loan being brought back to an active status and in good standing or through a deedin- lieu, short sale or full sale of the property, then the servicer has no alternative but to foreclose. Once a sale date has been set, a servicer is required to obtain a new appraisal 15 days prior to the sale date.
Even after a servicer has documented and followed all the timelines to get to this stage, it’s not over yet. At this point, it is a real estate owned (REO) property with a new set of timelines and requirements that new reverse mortgage servicers and non-servicers may not fully understand.
Indeed, while reverse mortgage servicing is itself a niche within the mortgage servicing industry, reverse REO servicing is an even finer niche within a niche. Understanding the complexity and timelines of processing a reverse REO is key to mitigating risk and losses