REQUIRED READING: Tax and insurance (T&I) defaults, well known in the conventional mortgage space, have increasingly become a problem in the reverse mortgage world. These defaults can be a cause of foreclosure in either product scenario.
Home equity conversion mortgage (HECM) borrowers may have forgotten that T&I was part of their old forward mortgage, included in their escrow accounts. Or, they simply may have been unable to pay T&I in today's economy, with their investments having lost value, other sources of income down and no increases in their Social Security payments (all the while seeing their living costs go up).
Although it is never a popular move to put borrowers – especially seniors – out on the street, the reality is that borrowers are responsible for T&I, and if they have not made those payments, a foreclosure may have to be pursued. Seeking to avoid such undesirable results, many HECM servicers have taken steps to try to assist seniors.
Many servicers have helped borrowers obtain counseling and have worked out repayment plans and taken other steps that have helped borrowers stay in their homes. These actions have been formalized recently by the federal government in the U.S. Department of Housing and Urban Development's (HUD) Mortgagee Letter 2011-01, titled "Home Equity Conversion Mortgage Property Charge Loss Mitigation."
The letter orders mortgagees to inform mortgagors of their obligation to pay T&I, within 30 days of notification of the first missed payment. Furthermore, borrowers must be advised that their mortgage, because of this delinquency, is not in compliance with Federal Housing Administration requirements. Servicers that made such notifications prior to the publication of Mortgagee Letter 2011-01 originally took some heat but have since been vindicated by HUD's new requirements.
How big of a problem?
While estimates vary, most projections place the T&I default problem at about 4% of all outstanding HECMs, and the percentage is rising. An analysis by Reverse Market Insight indicates that a significant percentage of those loans are in repayment plans. HUD has had no overall default or foreclosure figures, which is one reason for the mortgagee letter's new reporting requirement, according to the department.
As of Jan. 3, the date of the letter, mortgagees are to report to HUD all loans in their portfolios that are delinquent, including any loan where the mortgagor is on a repayment plan or in a deferred status. Future delinquencies are to be reported either in monthly files or as they occur. Those reports must include all advances for unpaid charges and all amounts repaid by the mortgagor.
A primary goal of this new requirement, according to HUD, is to address the "critical gap" in current delinquency data needed to help define the various stages of delinquency that delinquent HECM borrowers are facing and to track the effectiveness of HUD's various loss mitigation requirements.
HECM servicers are dealing with more tax defaults than insurance defaults
right now, but both are major issues. The tax defaults may occur when people do not have the money to pay. The insurance defaults differ: Sometimes, it is because borrowers cannot get insurance, especially if they are in a coastal area. In some areas of Florida, it is very hard to find insurance. Servicers can play a role in these situations by directing borrowers to the appropriate agencies.
Also, although up-front counseling that occurs before a HECM is closed is still viewed as the most important counseling HECM borrowers can receive, financial counseling for delinquent reverse-mortgage borrowers is growing in importance.
HUD's new guidance, which recognizes the extent of the problem, provides direction to servicers that have had temporary moratoria in place while waiting for directions from the agency. The letter also removes some of the pressure on servicers that already have taken foreclosure actions.
HUD's letter further states that although the FHA considers a HECM to be delinquent when T&I has not been paid, servicers "must begin working with the mortgagor to bring the mortgage back into compliance at the earliest possible point. It is only after all applicable loss mitigation strategies have been exhausted that the mortgagee may submit a due and payable request to HUD."
Realistic repayment plan
Those loss mitigation strategies, as outlined by HUD, include establishing a realistic repayment plan for the delinquent charges, contacting a HUD-approved housing counseling agency to receive free assistance in finding some resolution to their delinquency or identifying local resources to provide funds or homestead exemptions, or refinancing the delinquent HECM to a new HECM if there is sufficient equity to satisfy the existing mortgage and outstanding property charges. These and other options to cure a delinquency and avoid foreclosure must be included in all due-and-payable notification letters.
A refinance is a possibility, because many T&I delinquent HECMs are older loans, made before loan limits were increased. Therefore, there may be some equity available to pay taxes and insurance.
HUD also suggests getting delinquent borrowers to tap into local government and nonprofit aid programs for food, healthcare and other needs to free up funds for T&I. These options are helpful when they are available, but securing such aid, especially in these hard economic times, is not always easy.
If the borrower, after these and other options have been tried, is not able to pay the delinquent charges, servicers and other mortgagees are required to notify HUD, providing, in HUD's words, "specific documentation that supports multiple and earnest attempts to contact the mortgagor in order to cure the delinquency."
Then, if the borrower, having failed to correct the delinquency, does not proceed to sell the house or execute a deed-in-lieu of foreclosure, foreclosure must be initiated, according to the HUD letter.
Those directions take some pressure off of HECM servicers, because now HUD – a third party – is giving definitive direction on foreclosure action. Prior to the letter, borrowers would not always take servicers seriously when they explained that they will foreclose for a T&I default amount. Nevertheless, lenders have foreclosed on seniors who were delinquent on their T&I payments. Most of the borrowers had never made any effort to repay their past-due taxes and insurance.
Helping those who don't budget
If they become required, escrow accounts might help some borrowers in the future. With an escrow system, T&I would be paid in a timely way, helping borrowers avoid penalties and the possibility of foreclosure. Escrow accounts will not help the people who do not have the money to pay, but such a system could help people who have a hard time coming up with the money all at once because they fail to budget their money properly.
With a traditional mortgage, money that is to go toward T&I is deposited monthly into an escrow account. But HECM regulations state that "funds withheld from payments due to the mortgagor for property charges…shall not be paid into an escrow account." Instead, borrowers, at their election, can require mortgagees to pay property charges by withholding funds from monthly payments due to the mortgagor or by charging such funds to a line of credit. However, the borrower may make or rescind such an election at any time.
In other words, the mortgagee is responsible for paying T&I out of set-asides, but when these set-aside funds are insufficient, or when borrowers end such a set-aside account, borrowers are then responsible for paying the balances tha tare due.
This scenario makes a strong argument for why HUD might one day permit escrow accounts. The agency may move in that direction after it receives and analyzes the results of the new T&I delinquency reporting requirements.
H. Marc Helm is president of Spring, Texas-based Reverse Mortgage Solutions Inc. He is a member of the Servicing Committee of the National Reverse Mortgage Lenders Association. He can be reached at (281) 404-7824 or mhelm@rmsnav.com.
