Ask The Servicer
Written by Ryan LaRose Saturday, 01 August 2009 16:11
What happens after a loan with required repairs is closed and sent to the servicing department?
I was excited to receive this question from a Reverse Review reader. It gives me the opportunity to highlight and discuss a very detail-oriented servicing task that requires the expertise of highly specialized and trained servicing staff. A loan that closes with required repairs is also an aspect of the loan process where loan officers can have an especially significant and positive impact on the post-closing satisfaction and compliance requirements of the borrower.
Repair administration is a fairly straightforward process. A portion of reverse mortgage loans close conditionally, with the borrower required to complete specific repairs to the property. Simply stated, at the time of appraisal the property does not meet HUD standards for soundness and safety, and the borrower is obligated to complete specific repairs. The required repairs are all detailed by the appraiser during the origination process and are spelled out in a Repair Rider to the Loan Agreement.
During the origination process, the borrower then provides the lender with contractor bids for the work to be completed. As a safety net, and to mitigate any cost overruns by the contractor, the lender creates a “repair set-aside” for 150% of the total amount of the borrower-selected bid. The repair set-aside is often misunderstood to be a form of escrow account from which funds are disbursed. In fact, the repair set-aside is just that: a portion of the borrower’s available funds set aside for the payment of these repairs. Interest does not accrue on set-aside funds until they are disbursed to pay contractor invoices, required inspections, etc. and added to the loan balance.
The repair administration process for the servicer begins at the time the loan is boarded. When a new loan is boarded with required repairs, it is assigned to specialized staff within the servicer’s repair administration department.
The borrower is ultimately responsible for completion of the repairs, from selecting a qualified contractor, all the way to payment for work completed. The repair administration department is in place to provide oversight and support to the borrower throughout this process by offering advice, assistance, and even mediation in the case of any contractor disputes.
When all of the required repairs are reported by the borrower as complete, the following series of events is initiated:
When all of the required repairs are reported by the borrower as complete, the following series of events is initiated:
- The repair administration department orders an on-site visit by a HUD-certified inspector to confirm that the repairs are fully completed.
- When the inspector’s report comes back as 100% complete, a two-party check is cut (in the borrower and contractor’s names) from the repair set-aside.
- The check is then sent to the borrower, who endorses and presents it to the contractor as payment for the work completed.
- In the final step, the borrower has the contactor sign a lien waiver form, to protect against any contractor liens being placed against the property in the future.
Is there a deadline for completion of the required repairs?
Yes there is. Borrowers are “on the clock” to complete the repairs from the time the loan closes because HUD guidelines require the repairs to be completed within 12 months from the closing date. If this deadline is not met, HUD requires the servicer to place the loan in default status and suspend any further loan advances (line of credit, tenure payments, term payments, etc.) In addition, the loan could be called due and payable for non-completion of required repairs. Originators and servicers typically do a fantastic job of setting expectations for the borrower up-front. Borrowers are strongly encouraged to begin repair work immediately after closing - and without delay.
The apparent simplicity of a servicer’s role in the repair administration process is deceiving. It may seem mundane to monitor repairs, order completion inspections (when needed), and disburse funds (when required), but the process can be infinitely more complex.
The apparent simplicity of a servicer’s role in the repair administration process is deceiving. It may seem mundane to monitor repairs, order completion inspections (when needed), and disburse funds (when required), but the process can be infinitely more complex.
In reality, servicers must be diligent and remain in regular written and telephone contact with the borrower. This communication ensures that borrowers and contractors are on target to complete all repairs by the required deadline. Construction projects are notorious for not meeting projected completion dates. Everyone is familiar with the unforeseen events that can delay any construction project: weather, cost overruns, and most unfortunately, not-so-honest contractors who are happy to accept deposit checks to begin work – and then subsequently never find the time to actually do the work! Repair department personnel must juggle these challenges by remaining in constant communication with the borrower and, if necessary, the contractor to ensure a successful project completion.
Most importantly, repair administrators have to be on ever constant watch for fraud. Fraud is always painful for its victims, and the sad reality is that fraud attempts can and do threaten borrowers in the repair process. Repair administration department personnel must be trained to monitor the process and spot the following “red flags”:
- The final contractor invoice is significantly higher than bids provided up-front, with no justification for the increase.
- Additional repairs, outside of those required and listed on the Repair Rider, are included on invoices.
- Higher than normal line-item costs without proper justification. For example, a roof repair bid is significantly higher than comparable costs in the area.
- Excessive up-front deposit requests to purchase materials. Most repair departments have specific policies on how much they will allow to be disbursed as an up-front deposit to a contractor.
On a final note, repairs can range from the simple to the complex. Housing standards for soundness and safety have increased over the years, and bringing some older properties “up to code” can be costly. For borrowers who see absolutely nothing wrong with their property, the repair administration process may seem intrusive and unwarranted. The personal outreach, understanding, and patience that a servicer’s repair administration department exhibits in this process can greatly impact the quality of the borrower’s reverse mortgage experience.
I look forward to receiving any questions you may have regarding servicing at:
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. Please remember: there is no such thing as a stupid question! No doubt, the question you ask will have been in the minds of other readers as well. If you wish to remain anonymous for my response, just let me know.
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