A new proposed set of guidelines to determine a borrower’s ability to meet the obligation of his or her HECM loan was released this week by the National Reverse Mortgage Lenders Association. In a letter to Department of Housing and Urban Development officials, NRMLA stressed its support of a financial assessment and provides details, including a debt-to-income test, of what such an assessment could look like.
Additionally, the letter included a request request that the Federal Housing Administration allow lenders to mandate a set-aside for taxes and insurance and/or limit the borrower’s payment plan options and changes to those payment plans.
The financial assessment, which has been the topic of ongoing discussion between industry professionals and HUD, is scheduled for release later this year, and aims to address the issue of borrowers who receive HECM loans but subsequently cannot meet the tax and insurance obligations.
The assessment should determine the capacity of the borrower once he or she has closed the loan, to meet the loan obligations, NRMLA said in its letter which also states parameters regarding which borrowers should undergo such an assessment.
“The additional burden on the consumer and the lender will be substantial,” NRMLA writes. “In other words, there should be an automatic ‘pass’ for those with an established capacity and propensity to meet their obligations. A more thorough review should be reserved only for those with less obvious capacity or propensity.”
The details of the proposed financial assessment include verification of income and cash flow that satisfies a total-monthly-debt-to-cash-flow ratio of 50% or less along with an acceptable credit history. If those criteria are met, the borrower will pass such an assessment.
Further, NRMLA proposes compensating factors to be considered in the event that a potential borrower does not meet the assessment.
While the industry has expressed some speculation surrounding a HUD financial assessment rule being built into the HECM process, many say the timing is right for increased standards.
With respect to a potential additional underwriting component, NRMLA requests an underwriting fee be approved for each case number, not to exceed $500.
“NRMLA remains supportive of the concept of a financial assessment for HECM applicants,” NRMLA wrote. “The association acknowledges that such an assessment will help mitigate credit risk and reduct the impact to the FHA insurance fund.”
View the letter from NRMLA.
Written by Elizabeth Ecker