The critical HUD IG report last year that recently led to a servicing mortgagee letter related to situations in which borrowers fail to meet their tax and insurance payment obligations has likely future implications for origination practices as well.
“At present the way that reverse mortgages are originated we’re not even permitted to ask people to do a credit underwriting, so we don’t really have any tools right now in terms of the way we originate the loans to try to minimize the future occurrence of these events,” said Jeff Lewis, chairman of reverse lender/servicer Generation Mortgage, a company that originates through both mortgage professionals on-staff and third parties.
“I think what we’re going to have to do, at least for some borrowers, is have some sort of limited credit underwriting where borrowers whose credit is below a certain level are going to get access to less money in order to compensate for the increased risk that they pose in terms of defaulting or through a set aside,” he said.
In the mean time, increased media attention has exacerbated what in some cases is a misunderstanding of the product, requiring more in the way of clarification and explanation when discussing it with borrowers, he said.
“There seems to be a lot of misperception about this issue that almost, somehow magically, only because people have reverse mortgages are they required to pay these bills,” Lewis said. “The facts are that the reverse mortgage is not causing anyone to lose their home. What’s causing people to lose their home is the fact that they didn’t pay their bills. That’s unfortunate, but that’s the cause.
“What we’ve really been doing is we’ve been basically turning our heads a bit to this activity because we so desperately didn’t want to foreclose on any seniors,” he said. “All reverse mortgages have done is enable people to either pay the bills themselves on time and keep their house longer than they would have.
“Let’s be clear, when everyone signed up at the beginning they all agreed that they would handle these obligations, so it’s not as though we sort of foisted this upon them after the fact and said, 'Well, You know what? We decided to force these rules on you,’” he said.
“A lot of people are saying 'beware of reverse mortgages, you could end up being foreclosed on in a reverse mortgage.’ It has rarely happened. It will start to happen more [if something isn’t done],” said Lewis.
“I understand how everybody feels about people losing their homes, especially at this point in their lives but is it fair to have other people who could have used a reverse mortgage and kept their home not be able to get one because it got more expensive because of the fact that there are people in the pool that are basically putting this cost in?
“We were very hesitant to see this day come but I’m not really sure there’s any alternative to it other than essentially a new source of money from the federal government where people have this problem.”
However, Lewis believes such a move is unlikely.
“FHA does not have the authority to turn a loan program into a tax assistance program. That’s just beyond the scope of their authority,” Lewis said.
“I imagine it would be difficult in this fiscal environment. We would welcome programs from the federal government that would assist seniors who are having difficulty paying their taxes and insurance where they still have a lot of equity left in the house. That would be wonderful. But...FHA does not have the authority to turn a loan program into a tax assistance program. That’s just beyond the scope of their authority.”
Without some kind of government assistance to borrowers struggling to make T&I payments, limited credit underwriting and/or set-asides for T&I payments could affect proceeds are the logical alternative, he said.
Lewis said this could affect proceeds but the resulting improvement will be worth it, and the factor is not currently nor likely to be a major one relative to other concerns affecting volumes.
“As much as I understand that originators don’t want to see the proceeds cut at the end of the day if there is a cost, there has to be a way to pay it,” he said, noting that this is better than the alternative.
“We certainly don’t want to look ahead five or 10 years and still have the same situation where there’s so many people getting into this predicament.”
