PERSON OF THE WEEK: Reverse mortgages are forecast to increase in the coming years which means mortgage servicers and subservicers that handle these products are likely to see more of them in their reverse portfolios.
One of the various pitfalls reverse mortgages can sometimes present for mortgage servicers is failing to keep timely and accurate track of property taxes. And as Mike Whiting, senior vice president for tax services firm LERETA, tells MortgageOrb, timely and accurate payment of property taxes is even more important with reverse mortgages than it is with forward products.
Q: The industry is anticipating an increase in reverse mortgages. What should lenders/servicers be focused on as they gear up to respond to the growing interest?
Whiting: It’s true that reverse mortgages will see an uptick, some say a significant one, as people age and want to take advantage of the healthy equity they’ve gained to supplement their retirement income without having to move out of their home. According to a new Freddie Mac survey, 66% of baby boomers, who hold the majority of real estate wealth in the U.S., say they expect to age in place.
There are key differences with reverse mortgages compared to traditional “forward mortgages”– particularly with property tax set up and payments – that should be paid attention to in very specific ways. Customers with reverse mortgages no longer have to make mortgage payments, but the taxes must still be paid, and ensuring there is enough money allocated to pay those taxes, over several decades or more, is key to protect both the customer and the servicer. Depending on how they are set up, reverse mortgages can be less flexible, so if taxes or insurance go unpaid the customer could face foreclosure.
With a reverse mortgage, perhaps even more so than with a forward mortgage, timely and accurate payment of taxes is critically important. For those currently managing, or who are planning to manage, a reverse mortgage portfolio, they should make sure they have the resources in place to effectively and accurately manage the property taxes. There are only a handful of reverse mortgage servicers and subservicers, so my advice is to work with a tax service provider that really understands the nuances involved.
Q: What are the options for setting up a reverse mortgage account to ensure funds don’t run dry during the life of the loan?
Whiting: From a tax perspective, reverse mortgage loans can be set up in two ways: as a non-escrow account or as a LESA account. A Life Expectancy Set Aside (LESA) account is designed to allocate funds at origination to pay the taxes and homeowners’ insurance that are estimated for the life of the loan. While LESA may seem similar to escrow accounts, there are important differences that require a more rigorous calculation during set-up.
LESA accounts are designed to cover tax and insurance payments for the expected life of the loan – or the customer’s anticipated life expectancy. For example, if a LESA account is calculated assuming the customer would only need to pay bills until they are 87 and the customer remains in the home until they reach 96 years of age, the LESA account could be permanently impacted or depleted causing the LESA to run out of money before the end of the loan. This would then, at age 87, put the burden of paying the taxes back on the customer.
Q: Can a loan be changed from a non-escrow account to a LESA account after it’s set up? Likewise, if it looks like funds are running low in a LESA account, can it be adjusted?
Whiting: Once a loan is set up as either a non-escrow or a LESA account, it cannot be changed. It’s the irreversible part of reverse mortgages. Also, unlike a regular escrow account, LESA account reserves cannot be adjusted or replenished after the loan has closed. Once the amounts are set, there is no opportunity to increase them to cover tax and insurance payments that are higher, or life expectancy that goes longer. As a result, internal staff or external tax providers need to make sure the calculation is right at the outset, or there will be major headaches down the road for both the servicer and the homeowner.
As with most financial offerings, the difference is in the details, and tax set up for reverse mortgages is no exception. Ideally, it should be managed by a tax service provider well-versed in best practices and potential pitfalls. Our firm has a specialized reverse mortgage tax group that understands the nuances of reverse mortgages and how to set-up and manage tax payments to reduce the risk of default, so both customers and servicers are protected for the long haul.