How Reverse Mortgage Servicing Handles Tax & Insurance Defaults

“Reverse mortgage servicing is a breeze—just send money and track accounts, right?” If only it were that simple.  When our CEO attended his first NRMLA conference in 2004, he quickly learned the truth: reverse mortgages are complex, requiring deep knowledge of HUD and Fannie Mae guidelines, custom-built systems, and a team passionate about protecting seniors.  One of the toughest challenges?  Handling tax and insurance (T&I) defaults—a growing dilemma for the industry.

The T&I Default Challenge

Most reverse mortgage borrowers keep their property taxes and insurance current.  But for some, immediate financial needs exhaust their loan proceeds at closing or soon after.  Many seniors, used to escrow accounts from traditional mortgages, don’t reserve funds for T&I bills—or can’t afford to.  When a servicer learns of a delinquent tax or lapsed insurance policy, they reach out, hoping it’s an oversight.  Too often, though, the borrower is “tapped out,” with no resources to fix the default.

HUD guidelines initially stunned us: call the loan due and payable for any T&I default.  Foreclosing on an 85-year-old widow over a $500 insurance premium?  Unthinkable.  Thankfully, Fannie Mae, the primary HECM investor in the early 2000s, opted not to pursue foreclosures, easing our fears.  But as Wall Street investors entered in 2007 and T&I defaults spiked by 2008 (with Celink servicing nearly 20,000 loans), the issue grew thornier.

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Why T&I Defaults Are Rising

A 2008 analysis of our portfolio revealed a startling trend: over 80% of new T&I defaulters had taken a lump sum payment at closing.  This full draw left no buffer for future expenses.  Worse, secondary market investors often incentivize originators based on initial draws, unintentionally fueling this pattern.  As home values dropped during the housing crisis, the stakes rose higher for servicers and investors alike.

When borrowers can’t pay, servicers sometimes advance T&I funds—met with grateful remarks like, “Thank you for paying my taxes; I’d be lost without you.” But these aren’t gifts; repayment is expected, though recovery rates via repayment plans are low.

HUD’s Deferral Solution

Fannie Mae, HUD, and NRMLA have wrestled with T&I defaults for years.  Congressional gridlock limits HUD’s ability to overhaul policies, but in 2008, they introduced a deferral program.  Here’s how it works:

• Evaluation: Servicers assess the loan-to-value ratio and other factors to predict future losses.
• Deferral: If HUD sees no immediate risk, they allow the servicer to delay calling the loan due, avoiding foreclosure.
• Foreclosure: If the property can’t support future advances, HUD may approve calling the loan due, though foreclosures remain rare.

No HECM foreclosures for T&I defaults have been reported, likely due to this program and investors’ reluctance to evict seniors.  Still, gaps persist—HUD hasn’t issued a clear Mortgagee Letter, and criteria inconsistencies risk uneven servicing practices.

The Bigger Picture

T&I defaults strain servicers and investors, especially as advances mount and home values fluctuate.  Yet, the reverse mortgage industry thrives—growth, higher loan limits, and consumer acceptance soared by 2008.  For Celink and others, finding a lasting T&I solution remains urgent to sustain this progress.

Key Takeaways

T&I defaults highlight the complexity of reverse mortgage servicing.  Borrowers often lack reserves, lump sum draws exacerbate the issue, and HUD’s deferral program offers relief but not a fix.  Servicers balance compassion with compliance, while investors like Fannie Mae shoulder advances to protect seniors.  A broader solution is still needed.