A notice implemented into the reverse mortgage servicing process that is designed to flag potential foreclosures if they are in a federally declared disaster area could prove to be beneficial for any borrowers currently impacted by the Los Angeles-area wildfires, according to a servicing industry expert.
Colorado fire and Ed Sharp
After a reverse mortgage borrower in Superior, Colorado, was forced out of his home by the Marshall fire in December 2021 — which burned more than 6,000 acres and caused an estimated $513 million in damage — he waited months for his insurance to allow for the purchase of a new manufactured home. Once the funds were released, Ed Sharp moved in and aimed to get his life back to normal.
But soon after, Sharp was notified that his servicer was bringing a foreclosure action against him for purportedly running afoul of Federal Housing Administration (FHA) occupancy rules that dictate a Home Equity Conversion Mortgage (HECM) borrower must remain in their home. A public outcry followed that included local TV news reporting, intervention from his state and federal representatives, and changes signed into law by Gov. Jared Polis.
But some changes also happened at the U.S. Department of Housing and Urban Development (HUD), which will potentially help reverse mortgage borrowers who are displaced by that area’s wildfires in avoiding foreclosure.
In May 2023, Sharp’s congressman — Rep. Joe Neguse (D) — announced that HUD had “taken action” to prevent foreclosures for victims of the Marshall fire.
“HUD flagged all properties located within Louisville, Superior, and unincorporated Boulder County in their servicing system to require additional HUD approval before Due and Payable actions are taken,” according to an announcement from the representative’s office.
HousingWire’s Reverse Mortgage Daily (RMD) subsequently inquired to HUD about the congressman’s statement. The department explained that Sharp’s foreclosure never should have happened, and that it was moving to try and prevent similar instances from occurring again.
“When we became aware of the incident that occurred with the reverse mortgage borrower in Colorado, in addition to addressing that issue specifically, we also sought to ensure that similar events did not occur in the future as HECM borrowers seek to recover and rebuild following a disaster,” a HUD spokesperson said in May 2023.
Potential application to Los Angeles
The action applied to the Home Equity Reverse Mortgage Information Technology (HERMIT) system, originally launched in 2012 to improve HECM endorsement processes along with servicing and claims processing at HUD. Following the impact of the wildfires in Los Angeles, RMD again reached out to HUD.
“These safeguards we implemented in 2023 remain in place for all HECM borrowers,” a HUD spokesperson told RMD this week.
To assess the potential application to reverse mortgage borrowers who are also Los Angeles wildfire victims, RMD spoke with Jared Skrabala at Reverse Market Insight (RMI), who works on servicing oversight and asset management.
“HUD has taken additional measures to ensure that a system alert/flag for properties located in presidentially declared major disaster areas (PDMDA) are highly visible in the HERMIT system to ensure consideration is given to that alert before any decision is rendered on the loan, including decisions on due and payable requests and foreclosure referrals,” Skrabala said.
The measure was implemented into HERMIT in September 2023, and HERMIT Release Notes 7.4 “included an enhancement to add a ‘loan header scrolling text’ to display an active critical alert that will always display (in red) across the top of the page when reviewing a loan in the system,” he explained. “The alert is an effective way to bring attention to a property located in a PDMDA.”
This applies to all HECM borrowers who may reside in a PDMDA, he said. President Joe Biden issued a disaster declaration for the impacted areas of Los Angeles on Jan. 8. But there is already likely to be more deliberation from reverse mortgage servicers about actions that could impact area wildfire victims, Skrabala added.
“From a servicing perspective, my expectation is that HECM servicers will be taking additional measures to protect borrowers that have to vacate their property following a natural disaster and prevent unnecessary acceleration of the loan,” he said. “I think there will be heightened awareness and sensitivity here. I imagine servicers are scrutinizing these cases closely and will want to thoroughly review everything before submitting a due-and-payable request.”
Borrowers have disaster options
On top of the HERMIT safeguard, FHA earlier this week published a notice designed to offer guidance for lenders about servicing and originations of FHA-backed loans in PDMDAs, including HECMs.
“In PDMDAs, FHA provides HECM mortgagees an automatic 90-day extension from the date of the PDMDA foreclosure moratorium expiration date to commence or recommence a foreclosure action,” the notice said.
HECM loans that become due and payable for any reason other than “the death of the last surviving borrower and eligible non-borrowing spouse are subject to a 90-day extension of HECM foreclosure timelines,” the agency explained.
Industry professionals including Skrabala and Gail Balettie, senior vice president of client satisfaction at Celink, previously offered several action items for HECM borrowers to refer to if they’re impacted by the fires.
