HECM Financial Assessment Now In the Hands of Special Task Force

A special task force has been appointed by the National Reverse Mortgage Lenders Association to review the latest draft of the industry financial assessment that would be used to assess whether borrowers can meet the tax and insurance payments on their loans. The task force, a seven-member committee of NRMLA board members, will identify data sources and help direct analysis that will aid in developing an assessment further.

“The committee has identified a number of data elements that would be useful to analyze to discern characteristics of borrowers and behavioral patterns that might be indicators of higher likelihood for technical default,” Peter Bell, NRMLA president, told RMD. “Analyzing such data, to the extent it is available, is intended to help fine-tune the draft Recommended Best Practice that NRMLA is at work on.”

The committee, led by 1st Reverse Mortgage USA Vice President Dan Harder and Pete Engelken, president of Genworth Financial Home Equity Access, held its first call last week, toward that effort. Other committee members include HomeChex Founder Mark Browning, MetLife Bank Assistant Vice President Joe DeMarkey, Gregg Smith, President of One Reverse Mortgage, former Senior Lending Network CEO David Peskin, and Wells Fargo Home Mortgage Assistant VP Diane Coats.

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Through bi-weekly meetings, the group will work with industry analysts to determine the direction of a best practices document. It will convene in a late-September meeting in Washington to discuss whether the draft needs to be modified based on the data collection, Bell said.

The financial assessment, which has been discussed by Department of Housing and Urban Development officials in recent months, is now being spearheaded by an industry effort toward best practices that lenders can use to help ensure borrowers do not end up in tax and insurance default. While NRMLA previously indicated to RMD that the assessment would move forward swiftly, the task force is not scheduled to convene with its findings until September 22.

Written by Elizabeth Ecker

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  • While not knowing all of the members on this committee, the ones I do have proven their leadership both in NRMLA and in the industry.  The product they are capable of producing should be a credit to all and will no doubt form the basis for a Mortgagee Letter if FHA chooses to utilize its content.

    This committee is a step in the right direction.

       

  • While not knowing all of the members on this committee, the ones I do have proven their leadership both in NRMLA and in the industry.  The product they are capable of producing should be a credit to all and will no doubt form the basis for a Mortgagee Letter if FHA chooses to utilize its content.

    This committee is a step in the right direction.

       

  • Financial Assessment as currently framed will not sufficiently capture the range of life-stage issues that could lead seniors to default on taxes and insurance. The quantitative tools we prefer in the lending business are inadequate as recently history has amply demonstrated. And I guess we are not looking for quick-fixes.That is why the committee needs a consumer-centric representation and perspective. The tools for  whole-person reverse-mortgage-lending  assessment are available. Let’s stretch our imagination a bit.

  • The best answer might very well be to use simple but objective financial  tests for those older than 69.  For those under 70, a more dynamic approach might provide a better measure of the ability of these seniors to meet their obligations in the long run.

    Perhaps the worst financial tool in use in the reverse mortgage industry today is FIT.  It is static, poorly designed, and its scoring and conclusions lack precision and reasonableness.  While the concept has some merit, the questions are confusing and illogical and the actual product provides misleading results.  The most recent CFP could do a better job designing and creating a more suitable test.

  • Atare,

    How can you capture a potential life-stage issue that could lead a senior to default on taxes and insurance?  Can you provide more information, as you state that this information is available?

    This is, at a minimum, a very big step in the right direction.  However, I don’t see how you could reliably forecast for a life-changing event that could result in diminished income to pay taxes or insurance (such as medical issues, downturn in the stock market, loss of a spouse, etc.)

    The folks on this committee have an extremely difficult task ahead of them and they should know that, in my opinion, a majority of the industry is behind them.

  • It seems to me that a DTI test using sustainable, reliable income would make sense.  Similar to forward mortgages, excluding the PI since there is none, and excluding employment income.  Social security income needs to somehow be considered for those not yet taking it.  Impossible to forcast future life-stage issues as Atare has suggested.

  • Some in this thread show how much they have swallowed the “lifelong” propaganda this industry recklessly promotes in its ads.  How many terminations are caused by death versus other reasons?  Marketers rarely separate their own irrational propaganda from known facts when it counts.  Several comments in this thread reflect “marketer’s folly.”
     
    It is hard to believe that with so many “needs based seniors” expecting to work long into retirement and the average HECM lasting about seven years, anyone in this thread would promote not looking at employment income.  One could argue that only 50% of the amount of employment income be included or some other percentage but not 0%.  Some people are obviously not the age where their short-term retirement plans went up in the smoke of the dive in values in the stock and housing markets.
     
    We need a system which mitigates losses.  It will NOT be perfect.  That is why all of the parties need to understand that whatever is created should be as good as reasonably possible at the time of adoption but it should be reviewed quarterly for tweaking or scrapping purposes.  Once the test is found to be satisfactory (NOT perfect) then it should be reviewed at least annually depending on the economic environment.
     
    Until we get a Mortgagee Letter on the subject, all we need is a system which will not exclude no less than 4% and no more than 5% of all applicants.  It should be designed so that no more than 30% of those excluded would be those who would not otherwise have defaulted.  Yes, I am advocating a system which could exclude up to 1.6% (1.5%/95% — assuming over 5% of borrowers ultimately default) of those individuals who would have never defaulted.  I am against a system which would only exclude 3% of applicants even if it could be guaranteed that the entire 3% were those who would default when the total defaulting is 5% or rmore of all borrowers.  I am also against a system which would result in a system which ends up declining 10% of applicants but could guarantee it caught all of those who would default.
     
    If the industry adopts a declination standard, it is time to demand that FIT be  thrown out.  At that point counseling should be focused on helping seniors understand REAL budgets and future financial obligations.

  • OK, I understand why we are going through all this nonsense, and that is because we’re afraid that the FHA will do something stupid – really stupid – if we don’t add some common sense to the task.
    The problem is that we are dealing with the declining mental – not financial – state of our clients. Financial Freedom was paying taxes or insurance for clients who still had enormous credit lines. The clients simply wouldn’t pay them anymore, and they probably weren’t paying for public utilities or drugs they needed, either. Why? The reasons are almost all mental in origin.
    Basically, as people get very old, they can act in strange ways.
    You don’t honestly believe that a system can be developed to predict this and, thus, do what? Deny loans that clients need today to improve their financial situation? Dream on. 

  • OK, I understand why we are going through all this nonsense, and that is because we’re afraid that the FHA will do something stupid – really stupid – if we don’t add some common sense to the task.
    The problem is that we are dealing with the declining mental – not financial – state of our clients. Financial Freedom was paying taxes or insurance for clients who still had enormous credit lines. The clients simply wouldn’t pay them anymore, and they probably weren’t paying for public utilities or drugs they needed, either. Why? The reasons are almost all mental in origin.
    Basically, as people get very old, they can act in strange ways.
    You don’t honestly believe that a system can be developed to predict this and, thus, do what? Deny loans that clients need today to improve their financial situation? Dream on. 

  • OK, I understand why we are going through all this nonsense, and that is because we’re afraid that the FHA will do something stupid – really stupid – if we don’t add some common sense to the task.
    The problem is that we are dealing with the declining mental – not financial – state of our clients. Financial Freedom was paying taxes or insurance for clients who still had enormous credit lines. The clients simply wouldn’t pay them anymore, and they probably weren’t paying for public utilities or drugs they needed, either. Why? The reasons are almost all mental in origin.
    Basically, as people get very old, they can act in strange ways.
    You don’t honestly believe that a system can be developed to predict this and, thus, do what? Deny loans that clients need today to improve their financial situation? Dream on. 

  • roxie1,
     
    If the universe of defaults on insurance and taxes were solely seniors, your points are reasonable but it is across the board.  NRMLA has promoted a plan that is not strictly declination but to get that plan approved, HUD must issue a Mortgagee Letter.
     
    Lenders today are in a much different situation than they were in 2007.  Today a default is not a simple payment issue because Fannie Mae will ultimately foot the bill if the borrower cannot.  Today on some loans Fannie Mae has a contingent responsibility on the HECMs it bought but on Ginnie Mae issued HMBSs, lenders are contingently liable, not Fannie Mae.  Also most HECMs today are full draw fixed rate HECMs meaning a default cannot be cured through the unused line of credit.
     
    Lenders need to mitigate their contingent liabilities.  Wells openly complained about the situation in the June 17th NYT interview with Mr. Franklin Codel of Wells.  The only way to mitigate contingent liabilities for lenders is to allow lenders to modify HECMs or decline HECM some applications.
     
    As confirmed by Karin Hill, lenders can decline applications right now if they believe that applicants can not comply with loan covenants.  Lenders as the first step are making sure they create standards for declination which will not overly disqualify or result in charges of discrimination.  Since lender modifications to HECMs must be approved by HUD, NRMLA presented a letter to Karin Hill in June suggesting some things it would like to see in a Mortgagee Letter allowing lenders to modify the terms of a HECM (with the criteria it believes should apply) for the purpose of reducing the incidence of default.

  • What the Critic fails to understand is the mental aspect. Most younger  borrowers stop paying taxes and insurance because either  they no longer have the funds or they so far under water. These are decisions logically arrived at. Not so for reverse mortgage borrowers. I have been to potential clients’ homes where unopened mail (like tax and insurance bills) sits stacked everywhere. I wrote loans where back taxes and insurance had to be paid to close. I also called on clients where the wife had never written a check in her life. Guess what happens when these folks get a reverse mortgage, and add the effect of a life event (almost always unpleasant) that occurs later.
    The point is that seniors are not typical borrowers and they are much closer to mental decline than typical borrowers.
    As the financial requirements for a RM are tightened, the effect will be to eliminate those for whom this program was intended, and is most needed.

    • Roxie,
       
      What you first describe is default by choice and is called “strategic defaults.”  That is old news.  It is a characteristic of a significant and long-term decline in home values.  Many older seniors are also making strategic defaults.
       
      You state:  “I have been to potential clients’ homes where unopened mail (like tax and insurance bills) sits stacked everywhere. I wrote loans where back taxes and insurance had to be paid to close. I also called on clients where the wife had never written a check in her life. Guess what happens when these folks get a reverse mortgage, and add the effect of a life event (almost always unpleasant) that occurs later.  The point is that seniors are not typical borrowers and they are much closer to mental decline than typical borrowers.”
       
      I am not questioning your experience but rather the inappropriate practice of making your anecdotal experience the foundation for reaching conclusions about the HECM borrower population as a whole.  This committee is not trying to gather anecdotes, it is trying to understand and analyze objective statistical evidence from which one can reach relevant conclusions about the HECM borrower population as a whole.  From that it hopes to create a rational approach to declining applications in a way so as to maximize exclusion of those who would default and minimize the exclusion of those who would not. 
       
      It is very doubtful if the committee wants a high declination rate.  In fact the first committee made it clear that lenders want the right to modify HECMs so as to mitigate defaults but the lenders are helpless at doing anything other than decline applications until FHA gives them the right to modify HECMs.  All things being relatively equal, expect the first phase of the work of this committee to result in a higher declination rate than if and when FHA permits HECM modifications for such things as mandatory set asides for taxes and insurance.
       
      What is at stake is not helping some seniors who have a propensity to default but rather the prospect of huge contingent liabilities eventually wiping out all net profits from HECMs.  Wells is not the only lender not wanting to remain in that potential environment.  Remember just because only 5% of HECMs are in default status does not indicate the number of times those borrowers have defaulted or the total dollar amount of all such defaults. 
       
      Right now lenders are NOT permitted to foreclose for taxes and insurance defaults alone.  While it is clear that lenders have no contingent liabilities for T & I defaults on HECMs which Fannie Mae acquired, the same is not true on Ginnie Mae issued HMBS securities.  Those contingent liabilities are growing and growing far too quickly.  If you have an idea on how to mitigate these growing contingent liabilities please let us all know.  If not, understand the committee does not want to exclude anyone who will not default and if FHA will permit, modify HECMs to reduce the likelihood that those whose factors indicate they would, will.

    • Roxie,
       
      What you first describe is default by choice and is called “strategic defaults.”  That is old news.  It is a characteristic of a significant and long-term decline in home values.  Many older seniors are also making strategic defaults.
       
      You state:  “I have been to potential clients’ homes where unopened mail (like tax and insurance bills) sits stacked everywhere. I wrote loans where back taxes and insurance had to be paid to close. I also called on clients where the wife had never written a check in her life. Guess what happens when these folks get a reverse mortgage, and add the effect of a life event (almost always unpleasant) that occurs later.  The point is that seniors are not typical borrowers and they are much closer to mental decline than typical borrowers.”
       
      I am not questioning your experience but rather the inappropriate practice of making your anecdotal experience the foundation for reaching conclusions about the HECM borrower population as a whole.  This committee is not trying to gather anecdotes, it is trying to understand and analyze objective statistical evidence from which one can reach relevant conclusions about the HECM borrower population as a whole.  From that it hopes to create a rational approach to declining applications in a way so as to maximize exclusion of those who would default and minimize the exclusion of those who would not. 
       
      It is very doubtful if the committee wants a high declination rate.  In fact the first committee made it clear that lenders want the right to modify HECMs so as to mitigate defaults but the lenders are helpless at doing anything other than decline applications until FHA gives them the right to modify HECMs.  All things being relatively equal, expect the first phase of the work of this committee to result in a higher declination rate than if and when FHA permits HECM modifications for such things as mandatory set asides for taxes and insurance.
       
      What is at stake is not helping some seniors who have a propensity to default but rather the prospect of huge contingent liabilities eventually wiping out all net profits from HECMs.  Wells is not the only lender not wanting to remain in that potential environment.  Remember just because only 5% of HECMs are in default status does not indicate the number of times those borrowers have defaulted or the total dollar amount of all such defaults. 
       
      Right now lenders are NOT permitted to foreclose for taxes and insurance defaults alone.  While it is clear that lenders have no contingent liabilities for T & I defaults on HECMs which Fannie Mae acquired, the same is not true on Ginnie Mae issued HMBS securities.  Those contingent liabilities are growing and growing far too quickly.  If you have an idea on how to mitigate these growing contingent liabilities please let us all know.  If not, understand the committee does not want to exclude anyone who will not default and if FHA will permit, modify HECMs to reduce the likelihood that those whose factors indicate they would, will.

      • The_Cynic,
         
        Thanks for responding to roxie1 but there are a few fine points, I disagree on.  I am not so sure if the real default rate is 5%.  It is hoped that after all of the work servicers and counseling is putting into the effort, the rate may drop below 4%.

        You also did not discuss the contingent liabilities lenders have on HECMs which lenders may be holding in their mortgage portfolios.  Also on those lines of credit which have a balance available you did not discuss how taxes and insurance can be reimbursed from that source.  Due to the predominance of fixed rate HECM Standards many of us forget about available portions on lines of credit.

      • The_Cynic,
         
        Thanks for responding to roxie1 but there are a few fine points, I disagree on.  I am not so sure if the real default rate is 5%.  It is hoped that after all of the work servicers and counseling is putting into the effort, the rate may drop below 4%.

        You also did not discuss the contingent liabilities lenders have on HECMs which lenders may be holding in their mortgage portfolios.  Also on those lines of credit which have a balance available you did not discuss how taxes and insurance can be reimbursed from that source.  Due to the predominance of fixed rate HECM Standards many of us forget about available portions on lines of credit.

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