What Originators Should Know about Reverse Mortgage Servicing

By Atare E. Agbamu, CRMS

Every loan originator should be able to discuss in detail how a reverse mortgage works, explain the role of processing and underwriting, but most importantly what happens after a loan closes.

Borrowers need to fully understand their contractual obligations and the role played by the loan servicer, so that they understand how the administration of a reverse mortgage works (including payment plan changes), tax and insurance defaults and loan maturity issues.

To discuss these topics, NRMLA invited consultant Steve Irwin and Linda Bridges, Assistant Vice President at Wells Fargo Home Mortgage, Greensboro, N.C. to speak at NRMLA's Annual Meeting & Expo.

Function of a Reverse Mortgage Servicer
Following is a list of key services handled on a daily basis by a reverse mortgage loan servicer, according to Irwin and Bridges:

• Making Payments to a Borrower. A loan servicer fulfills scheduled monthly payments for life (tenure) or for a specific period of time (term), unscheduled credit line payments at the borrower’s discretion, or a combination of these. Requests must be submitted in writing to access funds from a line of credit. A fax is considered a written request. The servicer has five business days from the date the written request is received to mail or electronically transfer the funds. The five business days is measured by the postage date on the mailing envelope, or the date the electronic funds leave the servicer's institution.
  
  
• Processing Payment Plan Changes. A loan servicer processes borrower requests to change payment plan options for a nominal fee of $20 for someone who received a HECM.
  
  
• Issuing Account Statements. A loan servicer issues periodical account statements; generally monthly or quarterly.
  
  
• Notifying Customers of Rate Changes. Because the HECM is a variable rate loan, existing law requires a loan servicer to give a borrower 25 days notice of any interest rate changes.
  
  
• Tracking Principal and Interest. A loan servicer tracks principal and interest owed on any account at any time.
  
  
• Monitoring Property Taxes and Insurance. A loan servicer makes sure that property taxes, hazard insurance, and flood insurance (if applicable) are kept current. If an insurance policy lapses, the servicer will instruct the borrower to renew the existing policy or seek a new policy. If there are no insurance carriers willing to insure the property, then the servicer may seek a "force-placed" insurance policy. If the borrower has no money to pay for taxes or insurance, then the servicer can call the loan due and payable. A loan can not be assigned to HUD when the taxes or insurance are not paid current .
  
  
• Certifying Borrower Residency. A loan servicer confirms through an annual certification process that the property securing the reverse mortgage loan is still the primary residence of the borrower(s).
  
  
• Administering Repairs. A loan servicer makes sure all mandatory repairs required as a condition for closing a loan are completed within HUD guidelines. HUD requires all mandatory repairs to be completed by the repair expiration date, although a borrower can apply for extensions (up to one year after closing). If the borrower refuses to complete the repairs within one year, then the servicer has the authority to suspend all payments or access to funds.
  
  
• Acting as Escrow Agent. If a customer creates a set-aside for property taxes, hazard insurance, and flood insurance (where applicable), the loan servicer makes those payments.
  
  
• Calling Loan “Due and Payable." After the last remaining borrower permanently vacates the property, the loan servicer can call the loan due and payable. The heirs or estate have six months to pay back the loan, either by using private funds or selling the home. If payment is not received after six months, the heirs or estate can apply up for two 3 month extensions. In cases of default under the terms of the loan agreement, a loan servicer can call a loan 'due and payable.' Examples include non-payment of property taxes, allowing property insurance to lapse, and permitting the property to fall into disrepair.
  
  
• Executing Foreclosure. If foreclosure becomes necessary, the loan servicer carries out the process. A foreclosure can occur if the borrower's heirs or estate do not respond to a servicer's request to pay back the reverse mortgage when it becomes due and payable.
  
  
• Processing Prepayments. If a borrower wants to make partial or full re- payment of the loan, the loan servicer fulfills the request.
  
  
• Releasing Lien on Property. When a loan payoffs, the loan servicer releases the lien on the property.
  
  
• Reporting to Investor . Finally, the loan servicer reports on the status of a loan to the investor or owner of the loan.

Payment Plan Changes
Reverse mortgage borrowers can change their payment plans whenever they wish for a small fee. But the change doesn't happen overnight. The process can take up to 30 days, according to Bridges and Irwin. It takes time to process a payment plan change, so originators should stress these facts upfront and put the borrower in the right payment plan prior to closing. Here is how a HECM payment plan change works:

1. Borrower requests a payment plan change in writing to the loan servicer;
2. A new payment plan agreement is created and sent to borrower(s) for signature(s);
3. A signed payment plan agreement is received and entered into the FHA system;
4. A new payment plan agreement becomes effective on the first business day of the month.

Because a servicer cannot effect a payment plan change without receiving a signed new payment plan agreement from the borrower, the importance of promptly signing and returning a payment plan change agreement should be emphasized to borrowers.

Factors Affecting Payment Plan Changes
Below is a list of reasons why borrowers often want to change their payment plans: 

1. Customer wants to increase or decrease monthly cash advances;
2. Customer wants to set up a line of credit because one was not created at origination;
3. Customer wants to create a set-aside to escrow for property taxes or insurance;
4. Customer wants to make a partial pre-payment; and change their scheduled payment amount
5. Loan servicer forces a change to create a tax and insurance set-aside because a borrower is chronically delinquent.

Growth in Line of Credit
One issue that servicers would like loan originators to better explain upfront pertains to the growth factor in the HECM line of credit option.

The line of credit is NOT an interest-bearing account. Instead, the growth factor takes into consideration that a borrower's home has appreciated in value over the past 12 months and that a person is one year older.

Tax and Insurance Issues/Tax Deferral Programs
Irwin and Bridges explained that loan originators should encourage borrowers to establish set-asides for taxes and insurance, because it helps avoid future defaults. T&I defaults have been a recurring headache for servicers. Some borrowers exhaust all the proceeds from their reverse mortgage and have no money left over to pay for property taxes, or the borrower allows the insurance policy to lapse.

HUD as Servicer
Once a loan reaches 98% of the original FHA lending limit or maximum claim amount, a servicer can assign the loan to HUD. HUD contracts with First Madison Services to service all assigned loans.

Nursing-home Stays
When a nursing-home stay extends beyond 12 months, a loan servicer evaluates whether the borrower ever intends to return home before calling a loan due and payable. The evaluation may include talking with the customer’s medical team.

When HECM Customer(s) Dies …
When the last borrower (or spouse in the case of couples) dies, the loan servicer sends a ‘due and payable’ notice to the heirs or estate. If the heirs or estate have not responded within six months, then the servicer has the option to foreclose.

Depending on how long it takes to sell the home to satisfy the loan, a servicer may ask HUD for up to two 90-day extensions after the initial six months.