FHA Meets With Industry to Develop HECM Financial Assessment

A long awaited HECM financial assessment that would apply to borrowers is still pending the development of Federal Housing Administration staff, but the Department of Housing and Urban Development told RMD this week that the assessment progress is moving forward.

“FHA HECM staff have been holding meetings with industry partners and pursuing research on varying financial assessment tools and ideas,” a HUD representative said in an email to RMD.

The National Reverse Mortgage Lenders Association has taken part in meetings with HUD to provide industry feedback and policy guidance on the assessment, which Vicki Bott told RMD in March would likely consider income and assets, rather than a traditional credit requirement.

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NRMLA has delivered recommended regulation changes that would be required for the enactment of any financial assessment, said Steve Irwin, NRMLA’s executive vice president.

“Currently, the way the regulations read, you can’t do a financial assessment and there is no option available to a lender to limit the payment plan options that might be available to a borrower or the option of requiring a setaside for taxes and insurance,” Irwin told RMD. “The initial steps are that recommendation and pointing out specific regulations that need to be amended and possible additions to be made.”

The financial assessment has been under discussion for several months, with industry speculation and concern as to what it might entail. Concern over the inclusion of a credit score that could potentially rule out some borrowers has been a concern, as has the potential for an assessment that is too tough, again possibly ruling borrowers out.

When RMD spoke with Bott in early March, she estimated the rule could hit the street within 45 to 60 days. Now, at about two months later, the rule could take several more weeks—or months, to develop.

“It’s a very, very complicated issue,” Irwin said. “NRMLA is suporting a cautious approach because we want to ensure that no deserving borrower is denied access to credit.” NRMLA plans to meet again with HUD, as well as conduct working group meetings on the topic with industry participants in order to more fully design what a financial assessment would look like. Under discussion are the ongoing obligations that a HECM borrower must meet, which ones should be considered, and data sources that can be examined to reveal the typical ongoing obligations for HECM borrowers, according to Irwin.

“We know that it’s a priority of Deputy Assistant Bott, and Acting Assistant [Bob] Ryan. it’s coming. We certainly appreciate the cooperation and willingness to dialogue with industry subject matter experts so we get it right,” Irwin said. “it’s not a simple ratio that is cut and dried. There are compensating factors on the income side and on the debt side that have to be carefully considered.”

“While taking longer than originally estimated,” HUD said, “FHA feels the extra time taken will ultimately result in a more beneficial product for use in this critical program for seniors. At this time we do not have a revised timeline, but the project is moving forward.”

Written by Elizabeth Ecker

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  • Regardless of how careful they are with the changes it certainly will limit some of the seniors from qualifying. If it’s credit, income or combo it going to hurt business. No question about it.

  • Is the current system broken at a ratio of 95/5? What’s an acceptable default rate? This has the potential to be the worst change to the industry and at a time when we can’t afford to lose any more business.

  • From a historical perspective, the whole idea of net monthly cash flow and limited asset underwrites are repulsive. Pragmatically they are a lender necessity; however, overkill must be avoided at all costs.

    Like the venom from the bite of a black widow spider, social engineering is eating away at the very fabric of counseling; while I do blame those who support such ideas, I do question why HUD has permitted it. While some of the questions asked during the FIT portion of counseling may be helpful to counselors, who says those questions were not being asked before. FIT in its current overall construction and format is feckless and at times damaging. If it were effective, there would be no need to gather data for a net monthly cash flow and limited asset underwrite. Per the HUD counseling handbook, a primary goal of FIT is the production of a budget. If a reasonably standard budget were actually generated in counseling then it could simply be forwarded to the originator through the borrower and from there on to the underwriter.

    FIT results in a score and an interpretation of that score. It is supposed to help seniors determine if they are suited for a HECM. Part of that suitability determination was supposed to be a review of the ability of the counseling participant to pay taxes and insurance. But not even HUD has much confidence in the effectiveness in that portion of FIT as seen in its current underwrite considerations. The reason is that most of the FIT financial questions are worthless and should be discarded along with the rest of FIT. The budgeting questions are more like Amazon Wish Lists than the gathering of meaningful data. The scoring system is indefensibility feeble and the conclusions are dreadfully misleading.

    To bright FIT results to light, the provider and overseer of the FIT system should summarize FIT findings by scores along with the total number of counseling sessions (some sessions may not be completed all the way through to the end of FIT) each calendar quarter for public release as part of the FHA Single Family Outlook. That portion of the report would tell an interesting tale.

    A 4% default rate regarding taxes and insurance in this economic environment is hardly alarming. Even at that it is being said that 4% is the gross number of defaults. As preliminarily indicated, a good percentage of those borrowers in the test group are able to bring their loans out of default. So while it is understandable that lenders would want to weed out risky borrowers and safeguard borrowers against defaults, this exercise should be based on identifiable characteristics and demographics of those who are not able to recover from such defaults. Even then such characteristics should be compared to the borrower population as a whole to see if those characteristics can successfully indentify just those who default. Loan denials and even mandated set asides of taxes and insurance should only come as a last resort and should involve less than 2% of all applicants. Set asides should never be for more than five years, the average life a HECM in a Ginnie Mae HMBS pool per Jeff Lewis.

    Even the best detection systems fail to identify all those they are intended to spot. Worse, they identify those who should not be included in the group. With low default percentages it is the latter case which needs to be avoided at all costs. Unless the HECM program is restricted to a very small segment, defaults simply cannot be avoided altogether but there are ways to mitigate such defauls while at the time minimizing the chance that those who would not default will be restricted from getting a HECM.

  • From a historical perspective, the whole idea of net monthly cash flow and limited asset underwrites are repulsive. Pragmatically they are a lender necessity; however, overkill must be avoided at all costs.

    Like the venom from the bite of a black widow spider, social engineering is eating away at the very fabric of counseling; while I do blame those who support such ideas, I do question why HUD has permitted it. While some of the questions asked during the FIT portion of counseling may be helpful to counselors, who says those questions were not being asked before. FIT in its current overall construction and format is feckless and at times damaging. If it were effective, there would be no need to gather data for a net monthly cash flow and limited asset underwrite. Per the HUD counseling handbook, a primary goal of FIT is the production of a budget. If a reasonably standard budget were actually generated in counseling then it could simply be forwarded to the originator through the borrower and from there on to the underwriter.

    FIT results in a score and an interpretation of that score. It is supposed to help seniors determine if they are suited for a HECM. Part of that suitability determination was supposed to be a review of the ability of the counseling participant to pay taxes and insurance. But not even HUD has much confidence in the effectiveness in that portion of FIT as seen in its current underwrite considerations. The reason is that most of the FIT financial questions are worthless and should be discarded along with the rest of FIT. The budgeting questions are more like Amazon Wish Lists than the gathering of meaningful data. The scoring system is indefensibility feeble and the conclusions are dreadfully misleading.

    To bright FIT results to light, the provider and overseer of the FIT system should summarize FIT findings by scores along with the total number of counseling sessions (some sessions may not be completed all the way through to the end of FIT) each calendar quarter for public release as part of the FHA Single Family Outlook. That portion of the report would tell an interesting tale.

    A 4% default rate regarding taxes and insurance in this economic environment is hardly alarming. Even at that it is being said that 4% is the gross number of defaults. As preliminarily indicated, a good percentage of those borrowers in the test group are able to bring their loans out of default. So while it is understandable that lenders would want to weed out risky borrowers and safeguard borrowers against defaults, this exercise should be based on identifiable characteristics and demographics of those who are not able to recover from such defaults. Even then such characteristics should be compared to the borrower population as a whole to see if those characteristics can successfully indentify just those who default. Loan denials and even mandated set asides of taxes and insurance should only come as a last resort and should involve less than 2% of all applicants. Set asides should never be for more than five years, the average life a HECM in a Ginnie Mae HMBS pool per Jeff Lewis.

    Even the best detection systems fail to identify all those they are intended to spot. Worse, they identify those who should not be included in the group. With low default percentages it is the latter case which needs to be avoided at all costs. Unless the HECM program is restricted to a very small segment, defaults simply cannot be avoided altogether but there are ways to mitigate such defauls while at the time minimizing the chance that those who would not default will be restricted from getting a HECM.

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