FHA to Implement Financial Assessment for HECM Borrowers

After months of speculation as to how the Federal Housing Administration will implement a “financial assessment” for reverse mortgage borrowers, the agency told RMD the changes are being written and could hit the street within 45 to 60 days.

Reverse mortgage lenders have expressed uncertainty and concern over the potential for new rules, which have been rumored to include a new light credit underwrite for HECM borrowers. But a credit underwrite isn’t exactly what the rule will focus on, says FHA.

“We are focusing our efforts on the ability [of borrowers] to repay recurring costs,” said Vicki Bott, deputy assistant secretary for single-family housing with the Federal Housing Administration, who says the new rule is a “financial assessment” rather than a credit requirement.

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“We don’t want to make [the rule] overburdening, but robust enough that lenders can evaluate seniors. It’s striking a balance between those two: efficient but effective,” she said.

Bott says the rule is well on its way to being written, and the FHA hopes to have it released in the near future, upon which a comment period will follow.

“The goal will be to ensure that any senior with a reverse mortgage does have the ability to pay the property charges so they will not be put in a position to default,” she said. “The focus will be on debt and income.”

The assessment is part of a larger effort by the Department of Housing and Urban Development to address the growing number of defaults from borrowers’ failure to pay taxes and insurance. A report published last year by the Office of Inspector General found nearly 13,000 such loans.

The guidance is designed to establish a clear framework that protects both the homeowner and the lender who participate in HUD’s reverse mortgage program, according to the department.

Lenders, however, have expressed concern as to what form the financial assessment will take.

An executive at from one top-20 lender told RMD he estimates that a credit requirement could mean 20%-40% of reverse mortgage borrowers would have trouble qualifying.

“Some might not qualify, but I can’t imagine it’s a large number,” said Bott. “Hopefully it proves the vast majority can.”

Written by Elizabeth Ecker

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  • Everything going on within our industry seems to narrow the amount of seniors that we can qualify. Principal limit reductions, higher MIP, rate increases, home values and soon financial assessments (I am sure I left a few out).

  • Elizabeth’s article hits the nail on the head.

    In order to be efficient yet effective more seniors must be eliminated from entering the program than would default but that does not mean defaults will simply disappear. If set asides are part of the solution, imagine who many seniors will be eliminated from eligibility and how much less help HECMs will be to seniors. It could easily end up making HECMs far less desirable to many seniors.

    It is kind of like putting all people to death with a certain type of gene just because they have a higher propensity to steal than others without that gene. If that occurs, no doubt thefts will go down but stealing will not be entirely eliminated.

    The hard thing is to find a way to limit exposure to defaults by only impacting those who would have a propensity to create them. Imagine trying to put that program together. I do not remember meeting any Solomons lately.

  • Ironically it seems the program that has traditionally helped the needs-based borrower who was “house-rich-cash-poor” is drifting out of their reach. Understandably the T&I issue speaks to the overall and continuing health of the HECM program and thus requires attention.

    I would hope the new rules for “financial assessment” would not rely heavily (if very much at all) on credit scores but rather on the homeowner’s past history of paying taxes and insurance in a timely manner. Many seniors have very little recent credit history and would reflect low credit scores due to a lack of credit not derogatory reports.

    To further offset risk, perhaps mandatory set asides (on a sliding scale) based on the borrower’s age, available assets and home value but not for the duration of the loan. We must strike a balance that does not force out the vast majority of lower income seniors who have been responsible to pay taxes and insurance yet provides a stop-gap to keep defaults from growing. Large set asides combined with reduced PLFs and rising interest rates would in fact be a perfect storm for borrowers who are on the cusp of qualifying on equity alone.

    • Just as a credit score would be an unfair evaluation tool for the needs-based borrower, so too would payment history for taxes and insurance, especially in states that allow property tax deferral. Because some states will often let a homeowner go for ten years or more with delinquent taxes, some seniors will let their taxes go unpaid while the keep up on their mortgage, medical bills, grocery bills, etc. You can still be responsible and let your taxes go delinquent, if you don’t have enough money coming in to cover your life’s necessities.
      I should also point out that some needs-based borrowers may not have a mortgage to pay off, and may have elected to forgo homeowner’s insurance. They may have other financial priorities, and still be in a position where they need a reverse mortgage to cover expenses.
      What if you have a borrower with no mortgage, who doesn’t carry homeowner’s insurance, has their taxes deferred, but needs the reverse mortgage to pay for necessary in home care? How could you use T&I payment history to demonstrate “credit worthiness”? It is important that when considering this issue, we all keep in mind the vast variety of needs and situations of our borrowers of all walks of life.
      Unfortunately, those who make the decisions in this industry are rarely those who are out in the field working with seniors on a daily basis, and lack a true understanding of their lives and needs.

  • Would it be foolish to wait for a year and see how much deterrence the increased enforcement of T&I defaults dissuades borrowers from further defaults? Or at least take a minimalist approach by requiring lenders to offer reverse borrowers escrow accounts similar to forward mortgae T&I escrows?

    It seems we have two separate issues in the existing defaults and preventing future defaults. The more pressing problem is to deal with existing defaults and it strikes me that perhaps doing so makes the problem of future defaults both smaller and clearer.

    • John,

      As to the seriousness of the problem, it all depends on which side of the table you sit. Lenders generally have no contingent liabilities for T & I defaults on HECMs purchased by Fannie Mae but they do have such potential liability on HECMs securitized through Ginnie Mae.

      The risk of these defaults is generally far less on adjustable rate HECMs than on fixed rate. It is the fixed rate HECM which has the highest risk since these have generally been closed end since inception (even though Mortgagee Letter 2008-8 permits open ended fixed rate HECMs).

      Many believe that the reason why there is a huge rise in the estimated T & I defaults since the HUD OIG discussed his findings is because most of the historical data the OIG was reviewing was skewed towards adjustable rate HECMs not fixed rate. The percentage of fixed rate HECMs to total outstanding HECMs is growing month by month.

      Since the first fixed rate HECMs were not endorsed until deep into the fiscal year ended September 30, 2007, we are just entering into the era when these HECMs will begin to be assigned to HUD or terminate in any significant numbers. Since the vast majority of HECMs which have previously been assigned to HUD with T & I defaults were insured by Fannie Mae, HUD had little reason to be overly concerned but now that we are beginning to see terminations and assignments of HECMs where the lenders are ultimately responsible rather than Fannie Mae, HUD is taking a much firmer stand about assignment where T & I defaults exist. Who can blame them?

      Lenders want a solution to the problem which will allow them to mitigate their contingent risk. They want to find ways HUD will accept which will mitigate future defaults, even for those loans which are currently in technical default.

      Like you, many in our industry believe that voluntary impound accounts will mean less defaults. Like other consumer helps of this nature, by far the vast majority of those who avail themselves of such services are those who are in compliance and in this specific case already pay and will continue to pay their T & I obligations on time and in full. All mandatory T & I impound accounts would create is an early warning system indicating those who have trouble making these payments. Personally I do not see how any voluntary or mandatory system of collecting funds from borrowers through payments to the servicer will mitigate to any extent lender contingent liability risk.

      It is only set asides or the impounding of loan proceeds which would put a dent in ongoing T & I defaults from future endorsements. These scenarios would have draconian results for the most cash poor and home-debt ridden seniors. Impounding loan proceeds could result in accruing interest and MIP costs when funds would be sitting idly in bank accounts or only earning a fraction of the amount of costs which would be accruing.

      • The Critic —

        In your reply to John Lunde (above), do you mean “insured by Fannie Mae” or bought by Fannie Mae (paragraph 4)? Was Fannie Mae ever in the HECM insurance business? We know Fannie and Freddie are in the “guarantee” business for forwards. Please help me. Thanks.

      • Atare,

        Your reply is on point and well taken.

        The Fannie Mae transactions can be categorized as sales of the notes with few warranties associated with them. The Ginnie Mae transactions on the other hand have far more warranties associated with them.

  • I am very concerned about the potential new financial assessment rule. This could be the straw that breaks the Camels back.

    What is FHA and the Feds really concerned about? Is it the fear of defaults on taxes and insurance or is to cut back the volume potential for the reverse mortgage program because of future FHA insurance endorsements and the exposure it will bring?? With all the baby boomers coming of age to qualify for a reverse mortgage, this means potential volume increases. Volume increases spell’s fear on the part of FHA and the Federal government, it shows by their actions!

    The same government that was the major creator of the housing and economic crash is the same government today that is creating smoke and mirrors to cover up their mistakes. Mistakes made that take you back to 1999 and the signing of the The Gramm–Leach–Bliley Act (GLB), also known as the Financial Services Modernization Act of 1999. This started the rush on the credit markets and the hosing value boom!

    If the financial assessment ruling goes through, it could bring the HECM program to a halt. I say a halt but I am referring to mainly those that are in dyer need of a reverse mortgage to save their home and or get the senior out of debt. The reverse mortgage program was NEVER meant to be a credit driven program, it would not work back 21 years ago and it will NOT work now.

    Our Federal government and the agencies have no confidence in our economy ever bouncing back, it is obvious in all the regulations and changes coming out. They pass new bills and regulations like bullets coming from a machine gun. Our Federal government insults our intelligent’s daily. They actually think we are naive and do not have a clue. What is sad is, they do not have the clue, the same people who are passing all the rules and regulations!

    I feel we need to get to the bottom of what the Fed’s, FHA, HUD and who ever else we can throw in the mix is wanting to achieve. To many lives are at stake in this game they are playing. You have seniors that are qualified to get a reverse mortgage and those that are coming of age that are relying on the reverse mortgage to be their for them. You have the entire industry and all its employees concerned about their careers because of what our government and the agencies have done and are doing. We are fighting for survival here, survival of millions of people that fear what their financial future may be because of what has been going on over the past couple of years.

    Once again, I call on NRMLA as well as AARP to step in represent our us in this battle. Help us with our fears and concerns as well as our seniors. Lets get to the bottom of everything once and for all. I for one happens to be one very upset individual and everyone reading my comment should be as well.

    I am giving permission to the Admin to forward my comment to NRMLA, AARP and any one else the Admin would like too. Things have gone to far, we need to strike back and stand by our seniors!

    Thank you for reading my comment,

    John A. Smaldone

    • John,

      I understand your concern for the broader issues facing our nation. However, my reply is limited to the methods being used to cure current T & I defaults and to mitigate their occurrence among future borrowers.

      Last month on February 2nd, Ms. Sue Hunt, the reverse mortgage counseling director at CredAbility, is said to have told a reporter at the Orlando Sentinel that there are currently 30,000 HECMs in default for taxes and insurance. If accurate, that means over 94% of all HECM borrowers are current on their insurance and tax obligations. With virtually no capacity guidelines and very limited credit criteria used in the HECM lending decision, that record in today’s tragic home market environment is phenomenal but thank goodness, no one is satisfied with it.

      Up until now there has been a somewhat passive response to the situation. Now there are strong efforts being applied to turning that situation around. It is truly a joint effort between servicers, FHA, counselors, and, yes, even lenders. Hopefully foreclosures will be very limited due to these efforts. But how to mitigate future defaults is another issue.

      We do not need new tools which will discourage or limit the number of participants in the program. We need financial tools which will help mitigate the problem of defaults among new borrowers. While some leaders rave about how bright our future is with 10,000 Baby Boomers turning 62 years old every day, so far based on those somewhat skewed stats, over 11 million Baby Boomers are now 62 and before October 1, 2012, over half that number will join them. How many HECMs have we funded (not endorsed) in the last 38 months and how many more does HUD expect before October 1, 2012? The numbers are less than inspiring and the average age of a borrower is still over 71 years old. It is time to do an accounting rather than leading cheer rallies.

      For example, the stats on counseling Elizabeth wrote about yesterday on RMD were deeply disturbing. While counseling numbers go up, FHA Case Number assignments and endorsements seem to go nowhere. It is and continues to be my contention that FIT is not as much a help for seniors to understand their ACTUAL financial situation as it is an artificial barrier for participation in the HECM program. It is not only poorly designed but its “flag” scoring and scoring interpretation are fundamentally weak and flawed. It is stagnant with no flexibility for changes in consumer circumstances and worse, there is no room for counselor judgment. It ranks among the ten worst financial assessment tools I have encountered in my career. Where is the fulfillment to the promises that FIT should increase pull through rates and not discourage endorsements? Those promise makers should have to make an accounting to HUD and the industry.

      HUD does not need to go to counseling agencies to design mitigation and assessment tools. HUD needs to seek the help of financial advisors who have proven financial assessment tools already in place and have those advisors work with program designers to create specially designed HECM financial assessment tools which will help consumers understand their situation, are designed for flexibility, and allow for counselor judgment without a deceitfully simple flag evaluation system. The HUD OIG, GAO, or some independent consultant should test it to see how well they believe the program will work. Then lenders and counselors should both have access to the data and the programs to determine the financial suitability of the HECM for the borrower and at the same time assist in providing advice on mitigating defaults based on the facts and circumstances of borrowers. Of course access to writing and overwriting data would have to be developed as would other basic controls.

  • I am very concerned about the potential new financial assestment rule. This could be the straw that breaks the Camells back.

    What is FHA and the Feds really concerned about? Is it the fear of defaults on taxes and insurance or is to cut back the volume potential for the reverse mortgage program??

    With all the baby boomers comming of age to qualify for a reverse mortgage, this means potential volume increases. Volume increases spell’s fear on the part of FHA and the Federal government!

    The same government that was the major creater of the housing and ecomomic crash is the same government creating smoke and mirrors to cover up thier mistakes. Mistakes that take you back to 1999 and the signing of the

  • The three Cs of the mortgage industry are credit, capacity, and collateral. If the emphasis is not credit based, it certainly is not collateral based either. This leaves capacity.

    Counseling is supposedly gathering capacity based data in its FIT and BCU segments. HUD in its Counseling Handbook mandates that a budget be generated through the FIT process or the counselor otherwise generate one. A strong budget analysis would provide the information needed.

    Let us be clear. FIT alone is worthless at gathering this data except perhaps (?) in the most modest income and expense cases. BCU could be expanded to provide the additional information needed to do the capacity analysis as well as to incorporate the questions which FIT proponents believe make it so beneficial to counselors in reviewing the overall situation of the prospect. Rather than gathering the same information all over again, why not make the FIT and BCU segments the place where the capacity information is gathered and add this information in a detailed manner to the counseling certificate which goes to the lender.

    Analyzing the financial and overall situation of a senior is a discipline which has already been developed and is used daily by many financial advisors. It has been in use in estate, retirement, and other significant financial planning for many, many decades.

    If it is the goal of HUD and the industry to see the HECM products particularly the Saver expanded into the more affluent senior community, then expect an extreme backlash from such invasions of privacy. Quite frankly, it would seem a strict and well disclosed foreclosure policy would be better.

    • Jim —

      Gathering prospects’ capacity information through FIT and BCU and sending it to lender through counseling certificate is a great idea. But lender has a duty to do its own assessment. Loan quality begins and ends with lender. Counseling financial assessment should be preliminary, not final.

      • Atare,

        Thank you for your reply. I apologize but realizing the response needed to be more pointed and objective, I have greatly edited it. Most of this edited response is not directed to you but rather to common responses on why lenders and counseling cannot work together. I am using your reply as a launching point to make a broader case and appeal.

        How would objective information sharing be any different than that between appraiser and lender? Both must maintain their independence yet the appraiser provides a wealth of information to the underwriter for evaluation. Underwriters evaluate appraisal data and valuations each and everyday. They decide if a vigorous test should be made of the data sometimes culminating in desk reviews by another lender group or even on rare occasions, second appraisals by another independent appraiser.

        We rely on appraisers to provide the value on collateral. What is the matter with having counseling gather the initial data for capacity determination? Underwriters know how to evaluate all kinds of data; they do it all of the time. In fact like appraisers, underwriters should be able to communicate with counselors. What is expressed too commonly in the counselor and lender relationship is something akin to fiefdoms, not independence.

        No, counselors should not share confidential information but neither do appraisers. All I am suggesting is that raw numbers be exchanged and underwriters be permitted to address initial questions about those numbers with counselors. As presented to John Smaldone above, no one seems to believe that the joint efforts between lenders, servicers, FHA, NRMLA, and counselors will destroy the independence of counseling. Nor should data sharing be any different.

        Let’s tear the fiefdoms down, maintain independence, and start paying our attention to helping seniors at the inception of HECMs without all of the unnecessary duplication of data gathering. Why put seniors through the wringer for what seems to be little more than maintaining fiefdoms?

  • I annoys me that my comments are never posted. Apparently admin disagrees with me disagreeing with certain “important people” in the industry.

    • I think I only missed one of your comments, it was just approved… sorry for missing it, its tough to sort through them all sometimes.

      I dropped you an email as well.

    • Atare,

      The concern in your blog is well taken. However, is the originator the right person to be involved in all of the things you address? It seems some aspects of your concern are better suited to social workers and other professionals who deal with these exact problems everyday.

      Certainly there is nothing wrong with originators following up with borrowers and reporting concerns to their superiors and those who can provide the care the originators believe is needed.

      Since much of the data you discuss would be the information covered in counseling, it would seem sharing that information and permitting discussions between underwriters and counselors would be appropriate in mitigating the problem you present.

      There are more basic issues your blog does not address. With so much lending being done by correspondence these days, it seems your ideas are premised on a face-to-face relationship. The harsh reality is that may become less and less commonplace as time goes by. In fact the only person who MIGHT see the borrower is the appraiser.

      Many lenders today have significant call center operations. I have dealt with many originators placing HECMs in California over the phone from Michigan, New York, Florida, and other states. How would you readdress your blog in those circumstances?

      • Jim —

        It is a sad day for this business if the appraiser is the only person that sees the borrower. For reasons I advanced in Think Reverse, I believe local HECM lending built on solid face-to-face relationship with the senior borrower is a more sensible approach. Call-center-only HECM lending model violates my first rule of reverse mortgage lending: Know your borrower beyond immediate needs. You can’t do that by phone and e-mails. Those who are building their businesses on that model will not endure in this business in this new era. Thanks, Brother!

      • Atare,

        The call room approach may be a great business model but provides little care for the borrower. That was not the appeal which drew many of us to this industry. Much grace to you.

  • How about breaking the issue of T&I into two separate issues:

    Real Estate Taxes in most counties are forgiven or deferred if the homeowner’s income is below a certain level. This means the homeowner may need help with the annual filing to obtain tax relief. This may take care of many possible default situations.

    That leaves us with the HOI payment default which should be dedected fairly quickly and can be proactively addressed either with the borrower or the alternate contact.

    The way I see it is that the loan servicer may be the likely place to proactivly help borrowers avoiding default and I am sure that efforts in that direction are already taking place.

    • ReverseMoments,

      While there may be counties where deferral of real estate taxes is available, new deferrals have ceased in places like California. There are also application deadline issues. While it is great to remind originators about possible deferrals, they are not automatic, qualifications vary, and the rules are changing as states find themselves in deeper and deeper financial trouble. Many times the minimum age for participation in deferral programs is higher than 62.

      What many like you do not seem to understand is that the servicers have many times had to pay the property taxes despite deferral eligibility. The default took place because the senior failed to act, the bills were paid, and now the servicer must be repaid.

      The default is not with the county or the insurer it is with the note owner and the agent of the owner, the servicer. As to the loans owned by Fannie Mae the situation is slightly different but with most securitization, lenders have contingent liabilities for these payments.

      Proactive would have been for the borrowers to have worked with the servicers to have taken advantage of the programs which were available to them BEFORE the amounts were due. Like many things in life, this is a serious matter not one which has such simple answers.

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