HUD Official Says HECM Lenders Can Underwrite for Tax and Insurance

Even though lenders are not currently required to “better” underwrite reverse mortgages and make allowances for property charges, there’s nothing to stop them from doing so, a Department of Housing and Urban Development official told attendees of a recent mortgage regulators conference.

National Mortgage News reporter Lew Sichelman wrote that Karin Hill, director of HUD’s Office of Single Family Program Development, addressed the issue of policy changes that would require reverse mortgage lenders to underwrite the loans for borrowers’ ability to meet tax and insurance payments associated with the loans, stating that lenders are already able to do so under current law.

“There’s nothing wrong with that,” Hill told the conference attendees. “There’s nothing to say they can’t do it now.”

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According to Hill, National Mortgage News reported, HUD has concerns about the health of the HECM program and its development of policy changes will address that.

“We really need to be sure (HECM borrowers) understand their obligations, and have sufficient cash flow,” Hill said.

The article noted the recent exits of Bank of America and Wells Fargo from the reverse mortgage business as well as the shift from adjustable rate reverse mortgages to fixed rate loans, which now comprise close to 70% of reverse mortgage borrowers.

“HUD is considering a number of ideas covering a range of issues,” National Mortgage News wrote, based on Hill’s comments. “Among other things, it is looking into requiring lenders to perform a full financial assessment of potential HECM borrowers, giving lenders wider latitude in requiring set-asides for property charges, and giving borrowers the option of allowing lenders to escrow for the taxes and fees.”

Read the National Mortgage News article.

Written by Elizabeth Ecker

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  • Thanks to NRMLA and the authors of the recent letter to HUD, through the fog clarity is beginning to arise.  Much can be said both pro and con about the NRMLA letter to HUD but it is good to see its basic point has struck a chord of harmony with its intended recipient at HUD. 

    One thing rings true and that is the letter states that lenders should decline applications of those who fail basic objective and somewhat subjective standards.  To that I give my wholehearted support.

    In emails to NRMLA, I have made my concerns known but also my strong support of the overall concept.  It is good to see Ms. Hill has confirmed the basic thought in the letter and she recognizes the basic need to underwrite for potential default issues.

    I say this to myself as well; originators do not lose heart.  These steps are needed to keep the program viable for borrowers, lenders, and originators.  Yes, some will properly be excluded and some will be inappropriately excluded but hopefully, the number inappropriately excluded will be minimal while the vast majority will be those who should be excluded thus greatly reducing defaults for taxes and insurance. 

  • Thanks to NRMLA and the authors of the recent letter to HUD, through the fog clarity is beginning to arise.  Much can be said both pro and con about the NRMLA letter to HUD but it is good to see its basic point has struck a chord of harmony with its intended recipient at HUD. 

    One thing rings true and that is the letter states that lenders should decline applications of those who fail basic objective and somewhat subjective standards.  To that I give my wholehearted support.

    In emails to NRMLA, I have made my concerns known but also my strong support of the overall concept.  It is good to see Ms. Hill has confirmed the basic thought in the letter and she recognizes the basic need to underwrite for potential default issues.

    I say this to myself as well; originators do not lose heart.  These steps are needed to keep the program viable for borrowers, lenders, and originators.  Yes, some will properly be excluded and some will be inappropriately excluded but hopefully, the number inappropriately excluded will be minimal while the vast majority will be those who should be excluded thus greatly reducing defaults for taxes and insurance. 

  • So what are the credit/income requirements to prevent tax and insurance default? This is something in my mind that doesn’t exist. Seniors will always default if they have major health issue or a spouse that passes and their income is reduced. Any upfront underwriting will not prevent all cases of default. Currently, our default ratio is very low.
    Are they just going to say in writing or it’s just “ok, lenders do it?”. It’s a lender by lender decision how to underwrite? Lets see the underwriting standards then we can discuss how it will effect our industry…until then it’s just speculation on how it’s going to effect us.

    • 2545,
       
      I am no authority on this point but it is my understanding it will be done in two steps.  NRMLA will spearhead NRMLA best practices as a guideline for the industry.  At the same time NRMLA will work with HUD to create a long-term policy on how lenders should approach financial assessment and modify loan terms so as to protect consumers against default.
       
      HUD agrees with NRMLA, lenders should be declining applications when it appears applicants will be in trouble in trying to pay ongoing taxes and insurance but NRMLA will not recommend that members change loan terms before HUD can approve such action.  In the first phase we will see loan declinations, voluntary set asides, but little more.
       
      In the second phase, NRMLA will work with HUD to find some common ground upon which other measures can be used like mandatory set asides and tenure payments into impound accounts.  The purpose of this phase is to find proactive steps to help seniors meet their home expense obligations.
       
      Ms. Karin Hill seems to agree that lenders can decline loans in this first phase; that is a huge step forward.  What lenders must be careful about is avoiding the appearance and far more importantly what could be found to be the practice of loan discrimination.
       
      NRMLA has taken a huge step forward in this regard.  Let’s hope the next steps will be as fruitful.

    • Tom,

      How would that work?  How does one “just escrow monthly for taxes and Insurance build it into service costs?”  Who will be providing this monthly cash flow?

      Lenders do not have the right to require such set asides or escrow payments.  So how will this be done?

  • It would be interesting to see what percentage of applications would be declined given a reasonable DTI test, and even more interesting to subject those loans that have gone into default to the same DTI test in an attempt to measure how many of these defaults are strategic on the part of homeowners.  At least a DTI test at application would show that we are doing more due diligence up front than we currently are, and show those homeowners that fail it that a reverse mortgage may not be their best choice.

    • Mr. Jackson,
       
      The problem with doing the test after the default is that the borrowers may not have provided the information needed to perform that test.  Even if the needed information could be obtained, it would be based on situations where the economic environment was far less dismal. 
       
      Although I have problems with the June 17th NRMLA letter to Ms. Karin Hill, the general content is understandable and seems reasonable based on the current economic environment.  Unfortunately the portions regarding loan modification and borrower disbursement modifications cannot be utilized without FHA approval despite endorsement, unless lenders are willing to risk loss of 1) ability to assign the loan to HUD or 2) reimbursement in case of loss at termination.
       

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