Industry to Implement HECM Financial Assessment in Weeks, Not Months

The National Reverse Mortgage Lenders Association talked with industry executives via conference call Wednesday to address the need to implement a financial assessment for reverse mortgage borrowers.

During the call, NRMLA executives and industry participants came to a consensus that the association will spearhead the effort in advance of official guidance from the Department of Housing and Urban Development.

“There was general agreement that this type of action works best if it is handled uniformly across the industry and to facilitate that, NRMLA should develop best practices for financial assessment that could be adopted by industry participants,” Peter Bell, NRMLA president and CEO told RMD in an email. “We hope companies will follow whatever best practices we put out.”

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Bell said the best practices will essentially track the recommendations that NRMLA submitted recently to HUD on a financial assessment. HUD has told RMD it is in the process of developing a financial assessment to be implemented by HECM lenders. But because it could take several months and the need for such guidelines is immediate, it was decided that NRMLA should develop best practices as expeditiously as possible, according to Bell.

“We are expecting to complete our work in a matter of weeks, not months,” he said.

In addition to the financial assessment issue, NRMLA and the industry representatives on the conference call also discussed the broader political environment and its potential impact on FHA and the HECM program.

The financial assesment issue is critical to ensure the program operates on a sound financial basis considering the current political climate in Washington, D.C.

“The industry is in a critical stage and discipline is required to make sure that the loans we originate are sound ones,” he said.

When Wells Fargo announced in June it would no longer originate reverse mortgage loans, tax and insurance defaults came to light as one of the main reasons for its exit from the business, despite HUD’s commitment to developing a financial assessment that would aim to prevent such defaults. Many lenders have expressed support of such an assessment and have said they are already taking some measures toward that end.

Bell also noted analysis by some lenders discussed on the call that showed borrowers who took large initial draws to pay off mortgages in which there were arrears, back taxes and other consumer debts were among the most likely to have a technical default. That analysis, he said, further indicated the need for a financial assessment and possible limitation on payment options for such borrowers.

Written by Elizabeth Ecker

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  • Limitation on payment options for the people who need it the most, wow. However, I’m not sure of just how much of a smokescreen this really is. The proposed DTI is 50% after the loan closes. This would probably only disqualify those individuals who have some sort of enormous, unsecured debt that couldn’t be paid-off during the loan process.

      • 2545,

        What???

        Are you saying that mandated set asides cannot accomplish this goal?  While it is obvious that there is no absolute way to guarantee such payments, historically HECM set asides have clearly been one way to accomplish such a purpose.

        Perhaps you were using the wrong adjective? 

      • Critic,
        How much set aside do you think would be sufficient for a 62 yr old who could have 25 or 30 years of life? So you would set aside funds for T&I for 25 years?? This would take most if not all the funds the senior may qualify for. Again, there is no clear way to ensure T & I payments. Sure a set aside may help for a short period of time for a client. Although, in the end it would be something we as an industry could point at to say “see we are trying to do something to resolve this issue/problem”.
        From the numbers that I have seen this is not a big percentage anyhow especially when compared to the forward side.
        Understandably the reverse lenders are simply scared to foreclose on a senior client because of the bad press that would be focused on our industry. Of course the press would not say the 85 yr old senior who has been in her home since 1968 stopped paying her property taxes and insurance many years ago. But rather she got a reverse mortgage and the lender is kicking her out…I understand.

        If a senior has a major health issue it doesn’t matter how much we
        set aside for T&I they will still default in the end.

      • Critic,
        How much set aside do you think would be sufficient for a 62 yr old who could have 25 or 30 years of life? So you would set aside funds for T&I for 25 years?? This would take most if not all the funds the senior may qualify for. Again, there is no clear way to ensure T & I payments. Sure a set aside may help for a short period of time for a client. Although, in the end it would be something we as an industry could point at to say “see we are trying to do something to resolve this issue/problem”.
        From the numbers that I have seen this is not a big percentage anyhow especially when compared to the forward side.
        Understandably the reverse lenders are simply scared to foreclose on a senior client because of the bad press that would be focused on our industry. Of course the press would not say the 85 yr old senior who has been in her home since 1968 stopped paying her property taxes and insurance many years ago. But rather she got a reverse mortgage and the lender is kicking her out…I understand.

        If a senior has a major health issue it doesn’t matter how much we
        set aside for T&I they will still default in the end.

  • I strongly recommend that commenters read the NRMLA letter.  There is no DTI test per se.  The denominator is supposedly a much broader category of cash receipts, cash flow.  The test is a DSTCF ratio [or monthly debt servicing payments to monthly gross cash inflow (cash flow) ratio].

    Cash flow and income are much different.  Cash flow includes sources such as debt proceeds, gross proceeds from the sale of assets (not just gains and interest), non-taxable portions of annuities, etc.  The NRMLA letter at times confuses income with cashflow and uses a very odd verification of cash flow.    For example it has a test for the inclusion of capital gains, but ignores gross proceeds from the sale of capital assets especially losses.  Cash flow not only includes the gains, it also includes return of capital.

    Another example of the cash flow confusion is land contracts.  How does Schedule B (an IRS form used to declare interest income) verify how much cash was received on a land contract?  Only part of the payment is for interest. 

    Where are non-taxable but regular gifts from friends and relatives?  Where are annuity cash flow from non-taxable medical awards beyond interest?  What about pure annuity payments beyond interest?  What about the non-taxable portion of state income tax refunds?  Where are the non-taxable distributions from partnerships in the form of return of capital or non-taxable income?  What about life insurance annuities as to the non-taxable portion?  What about non-taxable worker’s comp? 

    As a CPA this letter seems to be more about a DSTI test than the DSTCF test it declares it is.  Cash flow is much broader than indicted in the letter and should be as broad as possible.  The letter shows little familarity there is in the mortgage industry in actually understanding the difference.  Minimizing cash flow to the few things listed in the appendix is a great disservice to applicants. 

        

  • Critic,
    I’m not sure what you are talking about…I must have over looked the mandatory assigned homework??

    You stated a mandated T&I set-aside would resolve the issue…right? Ok, let’s not go overboard with my example of 25 yrs…instead use your “TALC” of 21 yrs. This would be a huge set-aside and would greatly reduce the funds to a client. In the end, if we did a set aside for anything between 10 & 21 yrs it would not be worth it to a client because very liitle $$ would be left.

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