The last few years haven’t been easy for the mortgage industry. Declining home values, record foreclosures, regulation and tighter lender requirements have conspired to make recovery a tedious and painful process. The truth is, the reverse mortgage industry might need to prepare for another agonizing shock as the bill comes due on more than half a million estimated reverse mortgages.
Reverse mortgage lenders are, of course, banking on the fact that while a property’s equity is depleting, there will still be enough leftover equity to prevent the home from becoming upside down. With the near-term prospects of very slow equity building, the likelihood of building an equity cushion declines.
Let’s think about the cold, hard truth.While reverse mortgages fill a critical role in providing access to a borrower’s equity, it’s essential that the originator engage the homeowner in maintaining pride in ownership. Many borrowers take just enough out to supplement their income, and that leaves very little for repairs and renovations. And, unless the lender specified that some of the loan must be put toward repairs, it’s likely that the property will have little or no capital improvements over the life of the reverse mortgage.
Servicers Add Value
In a healthy market, even fixer-uppers can hold their value. Unfortunately, in today’s market, that isn’t the case. Reverse mortgage servicers provide a critical role by helping the lender understand asset value and risk. This means more than determining the appropriate market price using Automated Valuation Models (AVMs) and Broker Price Opinions (BPOs), but really assessing potential neglect and repairs that will inevitably fall on the shoulders of the lender as properties turn to distressed assets. In a weak market, this could potentially become a double hit. Little equity and a large repair bill can easily put a home underwater overnight.
As of right now, it doesn’t seem to be an issue for servicers who are using reimbursements from HUD and GSEs to perform valuation services. Everyone’s eyes are on the valuation ball and not enough attention is being paid to repair and renovation risks. You may be wondering, how do I know this
and why is it happening? I’ve seen BPOs from nearly every valuation provider in the industry. Most still use the Fannie Mae form and have done little to enhance the information provided in the inspection. Not only are most inspections exterior only, agents are also provided minimal guidance as to what is expected in regard to repairs. Independent property inspectors can help bridge the gap, but they offer little or no insight into what repairs are actually required to market the property.
Let’s face the facts: The truth is there is no easy answer, and as valuation subsidies decline, it’s even likelier that lenders will have even less information about the subject property. For reverse lenders with stipulations in the loan about property maintenance, if they haven’t been effectively tracking repairs, what do you do once the borrower is deceased?
Here’s what I recommend as a potential solution:
First: Every lender or servicer needs to do a better job of collecting repairs and maintenance. I’m nearly certain that Jiffy Lube knows more about how often I need to change the oil in my car than lenders know about what is expected for a property.
Second: Track marketability. Even if the house has no major structural damage, 20 years of no renovations can leave a property uncompetitive in the market. In the end, the goal will be to find a buyer and maximize the sale price.
Third: Follow the trends. The best way to predict the future is to collect data to determine trends. Everyone knows how to do that in terms of market price or value. But the tools currently employed do not allow us to adequately assess a loan portfolio and determine future repair costs.
A couple of weeks ago we actually had an agent turn in a BPO with a value of $1. When asked, they said it would be better to bulldoze and start over. From a valuation perspective, that’s definitely something you do not want in your reverse mortgage portfolio. Collecting repairs, tracking marketability and following trends will only help increase our chances of reversing the decline of the reverse mortgage industry.
