Prevention of reverse mortgage defaults has been one of the biggest—if not the biggest—issue the industry has worked on in 2011. The department of Housing and Urban Development has publicly endorsed the implementation of a financial assessment to determine a borrower’s willingness and ability to pay tax and insurance, and one major lender has already put such underwriting into play.
When we will see results of those actions, however, may still be a long way off.
“We won’t know for a year, but in 2012, especially toward the end of the year, we will start to get our first indications of [how effective] financial assessment 1.0 has been at changing the default pattern,” says John Lunde, co-founder and president of Reverse Market Insight.
That problem, HUD reported in November, was roughly 8% of outstanding reverse mortgage loans on Federal Housing Administration books.
The financial assessment, which has been implemented by MetLife to include a look into borrowers’ tax and credit history, as well as their expected cash flow following the reverse mortgage, has been in place for just a month, with little data on the number of borrowers whom it has impacted.
Further, Lunde says, and a bigger issue, is that lenders are beginning to foreclose on tax and insurance defaults and that trend will continue into 2012, setting a tone for borrowers who may be in default but who still have the option to resolve that default through repayment.
“When other borrowers start hearing about this, do we see cures improve? Do they realize there really is a penalty here?”
With a smaller number of borrowers who actually go into foreclosure than the number of defaults themselves, through different resolution methods including default counseling and repayment plans, one of the issues in the default conversation has been willingness versus ability to pay tax and insurance. This issue may come to light, Lunde says.
“The silver lining might be that some of these defaults cure when they realize there’s a penalty. It’s borrower choice as opposed to ability. The financial assessment is targeted at winnowing out those who can’t afford to pay and how many can pay but choose not to. We may get the answer to both of those.”
Written by Elizabeth Ecker
