How Reverse Mortgage Servicing Works
Loan servicing is a critical component to the reverse mortgage process. It’s also one of the most misunderstood functions by borrowers.
A reverse mortgage goes through several different cycles throughout the life of the loan. The loan begins in the origination stage, moves to closing and then enters the servicing phase, where the reverse mortgage will remain throughout the life of the loan – but that doesn’t necessary mean that it will stay with the same servicer throughout the life of the loan!.
Reverse mortgage servicing is important because this is the stage where you, as the borrower, begin to receive disbursements from the loan whether in the form of a single lump sum payment, monthly installments or via a line of credit that can be tapped into as needed.
Servicing is also crucial to borrowers because their loan servicer is ultimately the company they will need to contact should they have any questions or need information on their reverse mortgage. Some originators really stress this fact and try to sway borrowers telling that they don’t sell their servicing so borrowers should only deal with them as a result but that’s only a part of the story.
The Servicer does play an important role in the part of any loan and a reverse mortgage is no different in that respect but borrowers need to be informed about the entire process and the history of the loans and their servicing.
Who is the reverse mortgage servicer?
A reverse mortgage servicer may be different from the lender who originated your reverse mortgage. Even if the originating company retains the servicing, the loan officer who worked with you during the application and origination phases will not be the same person servicing your loan. That duty falls in the hands of the reverse mortgage servicer.
There are separate departments, several specialized companies that perform reverse mortgage servicing, as well as some firms that service both conventional and reverse mortgage loans. Similar to the traditional mortgage market, servicers may acquire mortgage servicing rights from other companies. This means your loan servicer could change, however, the terms of your reverse mortgage will remain the same.
In fact, throughout the history of reverse mortgages, all the major Banks that once were the largest reverse mortgage lenders in the market, Wells Fargo, Bank of America, MetLife Bank all closed and sold their servicing to other entities. So if a loan originator tells you that their company services their loans, give them time – history has shown us that sooner or later all companies will sell loans at some point.
But, the terms of your loan are determined by the covenants or promises you make with the lender in the legal documents and therefore, the servicer has only the rights that you granted to the servicer through the Note, Deed of Trust and Security Agreement that you signed with your lender.
Regardless of who services the loan, they can only do or require you to do the things agreed upon in the legal documents you signed when you received your loan. FHA insures the loan, making the guarantee to you that no matter what happens to your lender or your servicer you will always have access to the funds shown in your loan documents and that is the purpose of the Mortgage Insurance.
You have the full faith and credit of the government (FHA / HUD) backing your loan so the lender and servicer are just the players at that point in time and if they should change, your guarantees are still solid.
Unlike the way they would choose a reverse mortgage originator, borrowers typically do not get the option to choose their reverse mortgage servicer.
What is the role of the servicer?
Think of the reverse mortgage servicer as the overseer of your loan that provides an array of administrative duties to ensure the loan runs smoothly.
Similar to servicing on traditional “forward” mortgages, reverse mortgage servicers monitor monthly payments, including taxes and insurance, and they manage account delinquencies and respond to borrower inquiries.
Throughout the life of your loan, you will have several touch points with your servicer. One of these touch points includes an annual occupancy certificate that the servicer will send in the mail as a measure to ensure you are continuing to live in the home in which you have taken the reverse mortgage.
Borrowers are required to sign this certificate and return it to their servicer typically within 30 days of receipt. Failure to return this certificate in a timely manner may lead the servicer to believe you are no longer occupying the residence, thus triggering a maturity event where the loan balance must be satisfied.
What is the servicer’s role at the end of the loan?
Reverse mortgage servicers play an integral role in the fulfillment of the loan balance. Typically such a maturity event happens when the reverse mortgage borrower dies or otherwise vacates the property for longer than 12 months, or fails to timely pay taxes and insurance on their property.
The servicer will then notify the borrower, or heirs in the event of the borrower’s death, to let them know that the reverse mortgage is now due and payable. This letter will detail several options for satisfying the loan balance.
These options include:
- Paying the loan balance in full;
- Completing a short sale of the property, in which the estate may sell the property for 95% of its current appraised value;
- Walk away from the property, which would result in a foreclosure action by the servicer;
- Complete a deed in lieu of foreclosure, where the estate signs documents titling the property back to the investor.
Because reverse mortgages are considered “non-recourse” loans, there is no negative financial impact on the borrowers’ heirs or estate if they choose to initiate foreclosure proceedings, complete a short sale or deed in lieu of foreclosure.
Why is it important to communicate with the servicer?
Keeping regular contact with your reverse mortgage loan servicer ensures effective communication and reduces the chances of any potential misunderstandings that could dramatically impact your ability to continue borrowing.
Not only should borrowers be mindful of certain timelines, such as those confirming residence occupancy, but borrowers should also include their heirs and other immediate family in their reverse mortgage activities, as these may be the people who will ultimately decide how to satisfy the loan balance if the borrower passes away.
Servicing is a vital part of the reverse mortgage loan cycle that requires frequent communication and awareness on the part of borrowers. If you are considering a reverse mortgage and would like to know more about this financial product and what to expect on the servicing front, contact us for more information.
ARLO recommends these helpful resources:
- How to Understand Your Reverse Mortgage Statement
- .PDF Download “Ask the Servicer” https://reverse.mortgage/media/occupancy_defaults.pdf
- Is Anyone Home? http://www.celink.com/sites/default/files/Servicing%20Feb%202012.pdf
- HUD.gov: Reverse Mortgage Borrower and Property Eligibility http://portal.hud.gov/hudportal/documents/huddoc?id=7610-0_5_secC.pdf