How Reverse Mortgage Servicing Handles Occupancy Defaults
Misunderstanding and confusion often surround a borrower’s reverse mortgage occupancy requirements. The topic is a timely one! The return of warm weather signals the migratory return of “snowbirds” to their primary residences north of the Mason-Dixon Line. (The term “snowbirds” refers to those fortunate individuals who spend the winter months in a much warmer climate.)
A condition of all reverse mortgages is the stipulation that the borrower live in the property as their primary residence. Borrowers are allowed to leave the primary residence for designated periods such as rehabilitation from an injury in an off-site facility; extend, extended visits to family or extended vacations, or the,r own “snowbird” migration to warmer climates through the winter months.
There are stated restrictions on how long they can be absent from the property and certain attestations that must be made annually. The general rule of thumb used in servicing is that the borrower is allowed to be absent from the property for up to 12 months before the loan is considered to be in default.
Here’s an ig exception. If a borrower is traveling on a mission trip, travels to be away from the primary residence for longer than 12 months. An important cautionary note: Borrowers should always seek HUD approval before leaving on any mission trip that is anticipated to extend beyond 12 months.
HUD reserves the right to deny this type of request. These timelines and guidelines allow borrowers to travel and enjoy life away from their primary residences without violating their loan covenants. Occupancy guidelines are in place primarily to protect the investor (Fannie Mae or others) and insurer (HUD).
As the property is the only real collateral on a reverse mortgage, servicers must monitor occupancy status vigilantly. Vacant or abandoned properties can quickly fall into disrepair, and the result is diminished, resulting in a loss for all.
How is the reverse mortgage occupancy requirement monitored?
Servicers use two primary tools: annual Occupancy Certificates and return mail. HUD requires accurate tracking and follow-up without exception, and monitoring occupancy requirements is a critical component of the servicing function. It can be time-consuming and, from time to time, requires extensive and sensitive follow-up with borrowers.
Annual Occupancy Certificate
Around the first anniversary of loan funding and every year after that, servicers must mail out an Occupancy Certificate to borrowers, asking them to sign and attest to the fact that the property remains their principal residence. Borrowers are required to sign this certificate and return it to their servicer in a prompt fashion (typically within 30 days). Each servicer has its variation of an Annual Occupancy Certificate, but HUD requires one piece of standard language to be present:
“Warning: Section 1001 of Title 18 of the United States Code makes it a criminal offense to make a willfully false statement or misrepresentation to any department or agency of the United States government as to any matter within its jurisdiction.”
This required HUD language is vital yet vitally important. Servicers rely solely on the borWhen signing and returning this document, servicers are entirely truthful about their occupancy status when signing and returning this the primary residence for longer than 12 months, or indicates that they have permanently moved from their primary residence. The servicer must seek HUD’s approval to call the loan due and payable.
Once approval from HUD is received, the servicer mails out a demand letter to the borrowers, requiring them to either repay the loan in whole or cure the default by re-occupying the property as their principal residence.
Return Mail
As previously stated, borrowers may move in and out of their homes at different times throughout the year and for various reasons. When the mail addressed to the borrower gets returned to the servicer by the Post Office, the returned mail (typically a monthly statement) serves as a red flag indicator that there may be an occupancy issue with the property.
Certainly, not all cases of returned mail result in an occupancy default! The borrower could be traveling or have forgotten to inform their servicer to forward their statements to their winter home or the son or daughter who handles their affairs. Whatever the reason for return mail, the servicer uses the occasion to reach out to the borrower to validate that there might or might not be a valid occupancy default.
Consider how sensitive a servicing agent must be when fielding calls from very irate borrowers wanting to know why the follow-up to a simple piece of returned mail could result in their loan being called due and payable! There is an inherent nervousness in some reverse mortgage borrowers, and what appears to be routine and standard follow-up must be handled with finesse and professionalism by the servicer.
The occupancy requirements and annual certification process are valuable to the investor, insurer, and borrower. Lenders can assist in this process and ultimately create a better experience for their borrowers by setting expectations on the front end. Loan origination is the opportune time to educate new borrowers on the occupancy verification processes that are in place to protect them and the viability of the reverse mortgage program.
ARLO recommends these helpful resources:
