Horse out of the barn? Industry Leader Update

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Reverse Mortgage Tax & Insurance Defaults

Is the proverbial “horse out of the barn” when it comes to Reverse Mortgage Tax & Insurance Defaults? A problem that was quietly brewing for more than a decade grew into glaring issue with the crash of housing values in 2007 & 2008. Many borrowers hit hard financially by the economy could not or chose not to pay their property taxes and insurance and thus placed themselves in a position to default on their reverse mortgage.

Reverse Mortgage Tax & Insurance Defaults

7 comments

Terri December 20, 2011 at 9:25 am

Impound account at closing for the est’d years we figure for the length of their lives in the home. If we cannot do that, please explain why.

Reply
James E. Veale, CPA, MBT December 20, 2011 at 11:46 am

Terri,

First, we cannot do that presently. Lenders have no right to withhold proceeds from borrowers unless it is granted by law, regulations, rulings, or by the program regulator.

In science there is the old adage: “Even if we can do it, should we?”

Applying the adage to your suggestion, why impound accounts? They are very expensive. The loan goes up by the amount taken and accrues interest from funding forward. The little interest they may pay does not nearly offset their cost. That is a costly solution when a far less costly solution will do, set asides like the servicing fee set aside accounts which have been in the industry for years.

Second, no one knows the length of “their lives.” How would you determine that? Using the HECM estimate, using doctor physicals and from there MetLife actuarial estimates, or using another approach you failed to identify? How is it you propose to determine life expectancy?

Third, why does it have to be for life? With fixed rate HECMs it is easy to determine when assignment is scheduled to take place. Why not use that timeframe for lenders?

Adjustable rate HECMs are a different story. Perhaps 80% of the life expectancy used in the TALC calculations would suffice.

But to avoid any unnecessary draconian impact, I suggest using the methodology developed by NRMLA in its June letter to Ms. Karin Hill at HUD. However, instead of life expectancy, I recommend using the periods presented in the two paragraphs immediately preceding this one.

In any case, until HUD grants the right to lenders to mandate set asides or more costly escrow (or impound) accounts, lenders are not permitted to take the course of action you suggest.

Reply
Terri December 21, 2011 at 9:07 am

Thank you! Very helpful.
Happy Holidays Everyone!

Reply
Nanci S. Cummings December 21, 2011 at 9:46 am

This is a bigger issue than defaulting on a Reverse Mortgage. I see it as a mere reflection of our society in general…seniors are finding it more and more difficult to meet rising costs while on a fixed income. Cities, counties, states need to address the issue of helping seniors by taking measures to waive taxes in some cases, at certain ages, etc. It would be more economically responsible for the state, county to pay $2,000 for a senior’s prop. taxes than to put them on Medicaid and in a home.

Reply
The_Cynic December 24, 2011 at 5:14 pm

Nanci,

Sometimes deferring or forgiving the tax due could be just putting off until later what should be done now. But it is also very true many do not want to face many of the harsh realities we do in this era and forgive debt to avoid more costly solutions.

One thing we all know, decisions today are much harder than they were five years ago.

Reply
CLIFF RIDDLE December 27, 2011 at 12:05 pm

why is it that 10% or less makes all the rules, regulations and laws and therefore eliminates some of the good people from programs they need ???? seems like the fix is always an over kill when its a government fix… in there indeavor to make something 100% they will reduce it below the 90% …….

Reply
The_Critic December 29, 2011 at 7:52 am

Cliff,

MetLife is not the government yet many in the industry believe its financial assessment underwriting standards are draconian. Care to respond?

Reply

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