HECM Credit Underwrite Rule Coming Within 60 Days says HUD Official

The Federal Housing Administration (FHA) will require proof of creditworthiness from reverse mortgage borrowers, Bloomberg reported this week through its Terminal subscription service.

The article, titled, “Reverse Mortgages Decline Under New FHA Rules, Shrinking Equity,” captures many of the issues of interest to those in the business today. Among the article’s highlights: unreported defaults; the introduction of a reverse mortgage with the option of taking out less money and paying lower fees (the HECM Saver); loan limits and underwriting standards.

While the report states that “borrowers soon will be required to prove they are creditworthy before they can tap into their home equity,” the requirement is anticipated to appear in a draft of new rules by the FHA within the coming months.

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“We want to ensure that the senior has the capacity to pay those property charges and maintain their home and ensure there’s no increased risk to FHA,” Vicki Bott, a deputy assistant secretary at FHA told Bloomberg. Bott said the the draft of the new FHA rule—which is expected within 60 days—will include a mechanism for ensuring borrowers have the ability to cover taxes and insurance costs associated with reverse mortgages.

Other topics covered in the report indicate an industry that has struggled. Bloomberg points to the $800 million subsidy the HECM program required two years ago, but fails to mention the smaller subsidy required this year and the lack of a subsidy in 2012. An unknown number of delinquencies is another point covered by Bloomberg, which quotes an analyst as saying it is likely the industry will see more delinquencies as the housing slump continues.

While the article certainly points to challenges the industry has faced, ultimately the picture may be a bit more hopeful. “Analysts say that while the federal government’s increasingly cautious approach may decrease loan volume in the near term, it may lay the foundation for long-term growth—ultimately helping reverse-mortgage lenders and securitizers including Wells Fargo & Co., MetLife Home Loans and Generation Mortgage Co.,” the article states.

Written by Elizabeth Ecker

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  • It seems that HUD is placing a greater emphasis on risk management. There are rumors that HUD may eliminate a property type soon. All of this spells lower expectations on endorsement volume and thus less help for fewer seniors.

  • The continued exception to this change should be a Court Order that approves the refiancing. The Court process is a safegaurd to the homeowner. Many Chapter 13 refiance orders allowing the HECM program has enabled seniorrs to keep there home. Wayne R. Bodow Consumer Law Attorney.

    • It is great you are looking to help seniors but with the shift from Fannie Mae to HMBSs, lenders are now accepting contingent liability for such defaults. While it will make things harder for financially desperate seniors, it will also result in less risk for the lenders and as their insurer, HUD.

  • It is a difficult tight rope that HUD must walk these next few years. HUD’s mission is to help certain segments of our population, but the most needy of those same segments may be left out in the cold if HUD continues to tighten the belt around eligibility based on their risk management.

  • Again the FHA seems to ignore the purpose of the program which at it’s most fundamental level is to help seniors stay in their homes. Many seniors who are in greatest need of a reverse often do not have good credit. Obviously any senior homeowner who is delinquent or facing foreclosure could not be helped. All because the FHA is worried about facing some unacceptable risk, a risk which is backed up by the lenders right to foreclose over unpaid property tax etc. The fact that the LTV guidelines offer considerable cushion to limit their exposure seems to have worked so far. I’d like to see this change supported by some hard statistics which show the degree to which unpaid property taxes and insurance have become a ‘problem’ in their portfolios.

    • John,

      While Fannie Mae will be required to absorb these defaults if irreversible, the terms of most HMBs, if not all, require lenders to make good on such defaults. Things are much different today than in 2007.

      Many HECMs closed between 2004 and 2007 are underwater (even if some only temporarily). PLFs (or as you refer to them LTVs) have not provided as much protection as it seems you believe. In order for PLFs to work properly, home appreciation must be approximately 4%. With some home values dropping by over 60% in some parts of the country, particularly in the non-coastal areas of California and much of Florida as well as Arizona, it seems there is room for concern. Risk to the HECM program is not as much based on national home appreciation as it is on home appreciation in the localities where the homes securing the HECMs are concentrated.

      Like all real estate, risk is not national; it is very local.

  • Long overdue from a credit risk management perspective. If a homeowner can’t meet their obligations after obtaining a reverse mortgage they should be pursuing other options anyway.

  • Lance,

    You nailed it……responsible reverse mortgage lending should include an assessment as to whether the borrower has the ability to meet their loan obligations.

  • Lance,

    You nailed it……responsible reverse mortgage lending should include an assessment as to whether the borrower has the ability to meet their loan obligations.

  • I’m working with a homeowner who is in the foreclosure process, as I’ve done many times before. Eliminating her current mortgage provides her with more than enough extra cash each month to pay taxes and insurance. The Reverse Mortgage solution probably wouldn’t be an option for her if FICO requirements were imposed. I hope HUD considers scenarios like hers when they develop their credit model.

  • Rainmand,

    If she has the ability to meet her ongoing loan obligations after the HECM is originated (i.e. if after her debt service is eliminated on her existing mortgage and she can afford her normal living expenses including paying T&I), then I do not see an issue with her meeting reasonable credit underwriting criteria.

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