With the shift in the secondary market for reverse mortgages from Fannie Mae over to Ginnie Mae, issuers themselves now bear the responsibility and risks associated with managing the real estate owned process, a sea change for some of them.
In addition, home prices are falling and continue to fall, which makes handling these special real estate-owned assets particularly challenging, according to Darren White, vice president for default/foreclosure/REO/claims at Reverse Mortgage Solutions Inc. in Spring, Texas.
“Even for those with past REO experience, in the 'forward’ mortgage market it is a very different process in the reverse world; we call it a 'niche within a niche.’ If you try to handle REO in the reverse world the same as the forward market, you will lose money,” White told National Mortgage News.
“The HECM REO is truly a square peg and the forward REO process is simply a round hole. Beat that square peg hard enough and it will go in but those corners you knock off are a great deal of financial loss.”
Because of these differences, RMS has created a new asset management division called RMS Asset Management Solution (RAMS), to handle this specialty line of business. RMS provides private-label subservicing, as well as a reverse mortgage loan origination system.
But now, in addition to handling its own REO properties, the company is assisting other lenders and servicers in the “unique process” of disposing of REO properties from reverse mortgage loans. RAMS uses a national network of companies and individuals that sell and support the sale of the REO.
“The key to a successful REO sale process in the reverse mortgage world is the ability to move quickly once you obtain marketable title. You have six months to market a property before an appraisal-based claim is necessitated with HUD. You want to be able to sell the property as soon as possible,” stressed White.
For example, unlike the typical forward mortgage REO property, where servicers are allowed some leeway on bringing prices down, in the reverse market servicers and lenders can’t lower the price in order to dispose of the property.
In the reverse world, White said, the lender or servicer is required to sell the property at its “as is” appraised value. Under HUD rules, reverse mortgage servicers have 180 days to sell the house after the borrower vacates the property.
The servicer can’t sell the house below the “as is” appraisal price. Under HUD guidelines most repairs are prohibited and properties are always sold “as is,” he added.
“It used to be that foreclosing on a senior borrower filled servicers and investors with dread because of the public relations headaches it creates,” White told NMN.
“Large national and regional banks are particularly averse to foreclosures because customers have multiple accounts with them and fear losing them. But lately the tide has been turning. Now the carrying costs of holding defaulted properties are simply too high.”
With property values continuing to fall, more investors are willing to go to foreclosure. Also, according to White, many investors and servicers in the reverse world tend to be more anonymous and less well known than the big banks and therefore more inclined to do it.
“However, when a servicer does go to foreclosure, you must follow the HUD guidelines to the letter to make sure you do it properly.
“The servicer must provide evidence that he did everything he could to prevent a default. RMS’s goal with our new division is to be the premier REO asset management provider for reverse mortgage lenders.”
