History has shown that delinquent property taxes are one of the major causes of defaults in the HECM program. As a result, evaluating property tax charges became a key component of the Financial Assessment process. The new regulations appear to be rather simple, however, many lenders are discovering that a wide variety of special situations and allowances must be considered when determining a senior’s ability and willingness to maintain property charges.
For example, the regulation requires that a 24-month payment history be obtained as evidence that a prospective borrower has demonstrated these characteristics. But what if a person’s property tax was paid late, or by a previous mortgage servicer, or by a family member, or via a plethora of other options currently available to senior citizens, including tax deferrals and exemptions? What methods are you using to gather this detailed information to help ensure you are mitigating financial risks while helping your borrowers plan for the future?
During our research, we found three primary methods currently being utilized to collect tax information prior to a loan closing:
Borrower provides the information
Outsource with a third party
Each option has its own advantages and disadvantages. When the borrower provides the information, internal processing resources can be dedicated to their core competency, which is closing loans and producing revenue. This can also eliminate the cost of additional staff and increased closing costs. The disadvantages are the additional pressure on or inconvenience to the borrower; uncertainty that all tax years and all jurisdictions are included in the supplied information; delays during closing due to incomplete or inaccurate borrower supplied information; and the possibility of fraudulent information.
Insourcing the collection of tax information eliminates many of these disadvantages, but requires a substantial time and financial investment to build an experienced team of tax professionals to obtain information from the 26,000-plus tax assessors and collectors within the U.S., to ensure that all information collected is timely and accurate. Moreover, settlement service charges are traditionally passed to a service provider and cannot be retained by the lender. Therefore, the development of an insource model is cost-prohibitive for many.
As with the insourcing option, outsourcing to a third party eliminates many, if not all, of the disadvantages referenced in the borrower-provided model, but does not require a substantial investment in a fixed-cost model by the lender. However, lenders must be selective in choosing the right outsource partner to ensure they receive the level of information needed to determine a borrower’s willingness and ability to pay property charges.
In the end, it basically comes down to the lender to decide which option would be the most cost-effective and least risky, and ensure compliance with the FA requirements so they can remain competitive in the marketplace.