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Reverse mortgages have re( eived quite a bit of attention in the last few years, especially as the "forward" mortgage sector has experienced a significant fall-off in originations. And with more contraction expected for the near term - a Mortgage Bankers Association (MBA) forecast in April predicted a 38 percent drop in forward originations in 2012, compared with 2011 - the reverse-mortgage sector may appear as a safe harbor in which to wait out the storm.
However, before setting sail for what looks like calmer waters, mortgage players will want to consider just how different reverse mortgages are from forward products, particularly when it comes to servicing.
As many people know, the reverse-mortgage field is largely a Department of Housing and Urban Development (HUD) dominated business. HUD administers the Home Equity Conversion Mortgage (HECM) program, within which better than 95 percent of all reverse mortgages originate.
Unlike a conventional or forward mortgage, in a reverse mortgage the lender pays the "borrower" in one of five separate ways, ranging from equal monthly payments - for as long as at least one of the principal borrowers continues to live in the property - to a line of credit, which the senior draws down as needed until the line is exhausted.
Once the reverse mortgage is closed, there are several servicing issues that make this process more complex than in the forward world, in sum requiring greater personal intervention.
In the forward-mortgage world, servicers routinely are required to set up escrow accounts for their borrowers to pay taxes and insurance (T&I). Reverse-mortgage servicers, by contrast, are not required to set up escrow accounts to make such payments but can set aside one year's estimated tax and insurance payments at closing to be paid by the servicer.
An increasing number of borrowers are failing to keep their tax and insurance payments current for several reasons. They may:
* fail to understand their responsibility in keeping the T&I current;
* forget to remit payment,...