I’ve written about various maturity events that occur with a reverse mortgage and place a loan in due and payable (D&P) status. Primary among those events are the death of the last surviving borrower, which, in my experience, accounts for approximately 60 percent of all D&P volume. The remaining 40 percent comprise the permanent vacancy of the property as the borrower’s principal residence and tax and insurance defaults.
As a result of HUD guidelines regarding the deadline for the initiation of foreclosure proceedings, once a loan goes into D&P status, borrowers have approximately 60 days to satisfy the loan, cure the default or provide documentation that they are taking steps to satisfy the loan before foreclosure must be initiated. Borrowers can cure the default by moving back into the property or repaying the delinquent tax or insurance advances, but in order to satisfy the loan, they would have to pay the loan in full (typically through the sale of the property), complete a short sale (per HUD guidelines), sign a deed in lieu of foreclosure (deeding the property back to the investor), or simply let the loan go into foreclosure.
In the event that a loan is called D&P, servicers attempt to work with the borrower or their heirs and assist them in satisfying the outstanding balance due on the mortgage. If the servicer is receiving regular communication and cooperation, and receives documentation that supports the efforts to sell the home and/or pay off the loan, then the servicer can request additional time extensions from HUD. These extensions can provide borrowers with up to one year from the date of death or the date the loan was approved to be called D&P by HUD. This does not mean, however, that every loan automatically receives these time extensions—they have to be individually reviewed and approved by HUD.
Every action a servicer takes after a loan has gone into D&P status has to meet the strict and precise servicing requirements set forth by HUD. It’s important to understand that HECM servicers have very little flexibility within these HUD regulations outside of what is detailed above. HUD sets forth a prescribed process and holds the servicers’ figurative feet to the fire if they violate those regulations.
To protect the product and our industry, loans cannot be originated that violate HUD regulations, and as servicers, we can’t service a loan that is in violation of HUD regulations. Most importantly, if a servicer were to disregard HUD servicing regulations, its insurance fund could be compromised.
When all available time extensions granted by HUD have expired, or the estate is uncooperative or unwilling to make an effort to satisfy the loan balance, then the servicer is required to initiate foreclosure action by referring the loan to an attorney. It’s important to note that the loan can still be satisfied anytime up to the foreclosure sale date. The reverse mortgage foreclosure process follows a similar path to that of forward mortgage foreclosures. There are required notices, timelines and actions, and they vary from state to state. For example, in Michigan, it may take 90 to 120 days from the time the borrower’s file is referred to the attorney for the property to go to foreclosure sale. In sharp contrast, in New York or Florida, depending on the complexity of the estate and number of heirs, a foreclosure may take anywhere from 24 to 36 months (or more) to complete.
The national housing market appears to be on the upswing and that certainly bodes well for the reverse market. To get a feeling for the impact of how the housing crisis impacted servicing, in 2006, once a loan went into D&P status, 25 percent of these loans resulted in a foreclosure sale, while 75 percent of them were paid in full. Compare those numbers with the “high of the low” in 2011, when we saw 70 percent of loans facing foreclosure sale, and only 30 percent of them paid in full. From what we have seen, the number of loans moving into foreclosure has already dropped by more than 10 percentage points in 2013, and that positive trend shows every sign of continuing.
Where does the servicing end? It ends with the calm, sensitive and compliance-driven resolution of the loan and the protection of our product, our industry and our HUD partners—and not a moment before.
Author’s note: This article’s title is my homage to Where the Sidewalk Ends by Shel Silverstein and my two grade-school readers. It is also an attempt to bring a bit of levity to the topic of defaults and foreclosures—no one’s favorite subject!
