With the government agency that dominates the reverse mortgage space working on moves to address the increase in tax and insurance default concerns there, some players may want to keep an eye on how these affect the market for this product.
To put a complex and sensitive issue in rough and simple terms: In the short term, there could be a jolt to what has been a small secondary market for existing reverse mortgages as a result, but in the long term it looks like there also could be some positive implications for new and perhaps even older product.
T&Is have been a mounting problem because, while no one wants to foreclose on the senior borrowers that take out these “mortgages”/home equity withdrawals when they run out of money to pay them, there has being growing financial strain on just about every participant in this public-private market in the wake of the recent downturn that has moved everyone closer to that possibility.
Ryan LaRose, chief operating officer at Celink, said that to his knowledge so far none of the largest entities have initiated a foreclosure action on these loans and Celink never has.
Ultimately servicers generally have to advance T&I payments and add them to the loan when borrowers’ draws run out, but current servicer guidelines are officially open-ended regarding T&I.
A soon-to-be-released mortgagee letter could change that, he said. “If we had our way there’d be some sort of forgiveness program or monitoring program. That’s what most servicers are hoping,” he said. “But I think ultimately the first pass of the mortgagee letter, from what we’ve heard, is going to just beef up the language surrounding calling the loan ‘due and payable.’”
If investors see such a development as affecting reverse mortgage prepayments there could be another jolt to the market for as was seen earlier this fall, said Jeff Traister, a managing director who runs the reverse mortgage desk at Cantor Fitzgerald.
Nevertheless, there seems to be agreement that something has to be done about the issue. “There’s no easy solution to it, but I think everyone realizes the status quo is really not acceptable,” said Joe Kelly, partner at New View Advisors.
Kelly said he backs an anticipated Department of Housing and Urban Development (HUD) origination standard change that HUD is said to be planning as well as its likely more imminent servicing move. The origination change would add a set-aside for T&I payments going forward. However, he notes, as others do, that coming on the heels of principal limit reductions originators may not like that.
“It’s a mixed bag in that if you put a set-aside for taxes and insurance it’s going to reduce the principal limit and people want to get as much as possible,” said Atare Agbamu, owner of consultancy ThinkReverse and a former originator of the product.
Traister thinks even with this risk a set-aside could ultimately draw more investors into the space. While it initially lessens supply, that supply could later expand if buyer interest holds. “The cleaner you make the product the better it is in the long run but of course there’s a tradeoff,” he said.
As for existing product, Agbamu, Celink CEO John LaRose and the Mortgage Bankers Association — as well as others — have all suggested public funds or programs of various stripes be used to mitigate T&I distress.
If public reverse mortgage aid gains momentum and proves effective, in addition to possibly affecting prepayment expectations short-term it could also potentially boost long-term performance.