Answer to a HECM Financial Assessment in the Data?

With the reverse mortgage industry starting to make strides in an effort to preventing tax and insurance defaults for HECM borrowers through a financial assessment, some industry players are beginning to shed light on the problem—and its solution.

While some fear an industry-wide financial assessment geared toward preventing tax and insurance defaults could rule out some borrowers who still would stand to benefit from reverse mortgages, most lenders are keeping a very close eye on the problem, starting with looking for the answer through data analysis.

“It makes a lot of sense to look at what the past has shown us,” says John Lunde, president of Reverse Market Insight. “For example, the cash flow numbers we’re talking about as an industry—we haven’t gathered that type of data in the past.”

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When it comes to the some of the characteristics of borrowers who may be predisposed to tax and insurance default, there are a few knowns, Lunde says.

“When folks draw all the cash upfront, they’re significantly more likely to go into default later,” he says. While it is important to distinguish between ARM full draw borrowers and fixed full draw borrowers, Lunde says, for ARM full draw borrowers, they have about 50% higher default rate.

Other considerations include the state and year of the HECM loan.

In states where the taxes and insurance costs are higher, borrowers are more likely to default, Lunde says. In Florida and Texas, for example, the default rates are about 40% higher than the national average, he says. The same goes for certain years; some have a significant difference in terms of what percent of loans are in default now.

Some servicers, likewise, are taking a look at their data to see whether there are any clear indicators that can serve to guide to addressing the issue.

Reverse Mortgage Solutions, the Spring, Texas-based loan servicer, lender and Ginnie Mae issuer, sees loans from origination to securitization—and all the stages in between.

“We are very much involved in the sense that we buy loans and we are a servicer,” says Marc Helm, RMS chief operating officer, of the effort to combat T&I defaults.

“It’s certainly a concern of ours. On the origination side, if we see a person is going to come to closing with any tax defaults or a new insurance policy, we are quick to talk to the borrower as much as we can and try to ascertain why they have not had an insurance policy before and why they have not paid their taxes. We spend a lot of time in what amounts to a second tier of counseling with this person about their loan obligations.”

And RMS has found that these extra efforts have paid off, resulting in some of the highest success rates in borrower repayments. “We’ve put a lot of work into our systems, the training of our people and the processes we use to manage T&I default and the re-payment process.

“We have grown staff in that area. It has been very successful.”

By looking into the HUD-1 documents for borrowers, problematic tax and insurance issues can be unveiled. However, the HUD-1 documents aren’t everything.

While the HUD-1 can help by providing this borrower history, there are other considerations, says Ryan LaRose, chief operating officer of reverse mortgage subservicer Celink.

“It’s not always a stong indicator,” he says of the HUD-1. “A lot of times it’s a life event that happens [that leads to default].”

And for Celink, the repayment plans have shown some signs of success, LaRose says, but it will take time before the full picture is known.

“It has really been six or seven months since HUD provided specific guidance for a payment plan,” he says. “We are just starting to see some of these loans paying off.”

The National Reverse Mortgage Lenders Associaton is also waiting for HUD data, which it hopes will help hone in on the solution.

“We are still waiting for data reporting on an aggregate level out of HUD,” says Steve Irwin, NRMLA executive vice president. “That’s forthcoming. NRMLA is also participating in a loss mitigation advisory group that is sharing default counseling experience with HUD and with servicers and with counselors.”

The association has reported that based on conversations with HUD officials, that data should be available by the end of August. In the meantime, NRMLA is continuing its efforts, Irwin says.

And more data may be on the way.

“We are taking an analytic approach to our whole portfolio and looking very hard at loans, where we have acquired servicing, for tax defaults or a new insurance policy or tax lien that indicates we’ll have problems with defaults in future,” Helm says.

As for a financial assessment that could become commonplace in the industry, a reasonable level of agreement on what data needs to be collected and the exact definition of what that data is is necessary, Lunde says.

“There’s a lot of data we can use intelligently,” he says. “We don’t have all the data, but I think we have enough to inform the process.”

Written by Elizabeth Ecker

This edition of RMD Report is brought to you by Landmark, a leading national appraisal management and compliance company serving the reverse mortgage lending industry.

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  • As a CPA, the words of Mr. John Lunde ring true just on the surface.  Mr. Ryan LaRose is also right to describe the need to look into the results servicers are achieving through their remedial work with those in default.  Mr. Marc Helm as a full service lender should be quite concerned about defaults and makes an excellent point about communicating with the borrower.  The point Mr. Steve Irwin brings up about gathering all relevant data HUD has related to defaults is both crucial and critical to this type of analysis. 
     
    Kudos to all for bringing up so many good points EXCEPT ONE.
     
    There has been a dramatic increase in the dropout rate from counseling to endorsement between early September 2010 and now.  The dropout rate has gone from the low 30% range to the low 40% range.  If the dropout (or its corollary, the conversion rate) remained the same as last fiscal year, expectations would be for about 80,000 endorsements this fiscal year rather than less than 73,000.  Imagine a 10% increase in endorsements with no additional marketing effort and no additional marketing cost.
     
    Has counseling actually succeeded at weeding out the 5% who would be expected to default?  Did they discover it is closer to 10% and effectively got rid of that entire group?  Why is it that none of the industry leaders described the important role counseling plays in mitigating defaults?  Are they ignoring the dropout rate or is it that they have little to no confidence that counseling is capable of doing that job?
     
    If counseling was actually achieving real results on default related issues, why is there no significant rise in voluntary set asides for taxes and insurance?  For a product with an over 90% satisfaction rate, why would we allow this situation to persist unless the new protocol is effectively mitigating contingent losses from defaults?  Let it stay the way it is if it is mitigating defaults in an effective and efficient way.  BUT it is hard to believe that this job would be more effectively handled by anyone other than lenders.  It is their contingent liability not that of counseling.  Who will do the better job?
     
    The best way to minimize contingent liabilities for defaults is to 1) identify the characteristics of those who default; 2) allow the lenders do objective testing to separate out those who are most likely to default based on the characteristics indicated in the first step; 3) determine through verification if there are mitigating factors which would nullify any concern about default or allow for less stringent action than described hereafter; 4) modify the payouts or mandate set asides for taxes and insurance, 5) if nothing else works decline the application.  To modify the HECM features will take approval by HUD.  Unlike prior suggestions, mandatory set asides should not exceed the period from closing through anticipated assignment as if a full draw lump sum has been taken at closing.

  • As a CPA, the words of Mr. John Lunde ring true just on the surface.  Mr. Ryan LaRose is also right to describe the need to look into the results servicers are achieving through their remedial work with those in default.  Mr. Marc Helm as a full service lender should be quite concerned about defaults and makes an excellent point about communicating with the borrower.  The point Mr. Steve Irwin brings up about gathering all relevant data HUD has related to defaults is both crucial and critical to this type of analysis. 
     
    Kudos to all for bringing up so many good points EXCEPT ONE.
     
    There has been a dramatic increase in the dropout rate from counseling to endorsement between early September 2010 and now.  The dropout rate has gone from the low 30% range to the low 40% range.  If the dropout (or its corollary, the conversion rate) remained the same as last fiscal year, expectations would be for about 80,000 endorsements this fiscal year rather than less than 73,000.  Imagine a 10% increase in endorsements with no additional marketing effort and no additional marketing cost.
     
    Has counseling actually succeeded at weeding out the 5% who would be expected to default?  Did they discover it is closer to 10% and effectively got rid of that entire group?  Why is it that none of the industry leaders described the important role counseling plays in mitigating defaults?  Are they ignoring the dropout rate or is it that they have little to no confidence that counseling is capable of doing that job?
     
    If counseling was actually achieving real results on default related issues, why is there no significant rise in voluntary set asides for taxes and insurance?  For a product with an over 90% satisfaction rate, why would we allow this situation to persist unless the new protocol is effectively mitigating contingent losses from defaults?  Let it stay the way it is if it is mitigating defaults in an effective and efficient way.  BUT it is hard to believe that this job would be more effectively handled by anyone other than lenders.  It is their contingent liability not that of counseling.  Who will do the better job?
     
    The best way to minimize contingent liabilities for defaults is to 1) identify the characteristics of those who default; 2) allow the lenders do objective testing to separate out those who are most likely to default based on the characteristics indicated in the first step; 3) determine through verification if there are mitigating factors which would nullify any concern about default or allow for less stringent action than described hereafter; 4) modify the payouts or mandate set asides for taxes and insurance, 5) if nothing else works decline the application.  To modify the HECM features will take approval by HUD.  Unlike prior suggestions, mandatory set asides should not exceed the period from closing through anticipated assignment as if a full draw lump sum has been taken at closing.

  • As a CPA, the words of Mr. John Lunde ring true just on the surface.  Mr. Ryan LaRose is also right to describe the need to look into the results servicers are achieving through their remedial work with those in default.  Mr. Marc Helm as a full service lender should be quite concerned about defaults and makes an excellent point about communicating with the borrower.  The point Mr. Steve Irwin brings up about gathering all relevant data HUD has related to defaults is both crucial and critical to this type of analysis. 
     
    Kudos to all for bringing up so many good points EXCEPT ONE.
     
    There has been a dramatic increase in the dropout rate from counseling to endorsement between early September 2010 and now.  The dropout rate has gone from the low 30% range to the low 40% range.  If the dropout (or its corollary, the conversion rate) remained the same as last fiscal year, expectations would be for about 80,000 endorsements this fiscal year rather than less than 73,000.  Imagine a 10% increase in endorsements with no additional marketing effort and no additional marketing cost.
     
    Has counseling actually succeeded at weeding out the 5% who would be expected to default?  Did they discover it is closer to 10% and effectively got rid of that entire group?  Why is it that none of the industry leaders described the important role counseling plays in mitigating defaults?  Are they ignoring the dropout rate or is it that they have little to no confidence that counseling is capable of doing that job?
     
    If counseling was actually achieving real results on default related issues, why is there no significant rise in voluntary set asides for taxes and insurance?  For a product with an over 90% satisfaction rate, why would we allow this situation to persist unless the new protocol is effectively mitigating contingent losses from defaults?  Let it stay the way it is if it is mitigating defaults in an effective and efficient way.  BUT it is hard to believe that this job would be more effectively handled by anyone other than lenders.  It is their contingent liability not that of counseling.  Who will do the better job?
     
    The best way to minimize contingent liabilities for defaults is to 1) identify the characteristics of those who default; 2) allow the lenders do objective testing to separate out those who are most likely to default based on the characteristics indicated in the first step; 3) determine through verification if there are mitigating factors which would nullify any concern about default or allow for less stringent action than described hereafter; 4) modify the payouts or mandate set asides for taxes and insurance, 5) if nothing else works decline the application.  To modify the HECM features will take approval by HUD.  Unlike prior suggestions, mandatory set asides should not exceed the period from closing through anticipated assignment as if a full draw lump sum has been taken at closing.

  • As a CPA, the words of Mr. John Lunde ring true just on the surface.  Mr. Ryan LaRose is also right to describe the need to look into the results servicers are achieving through their remedial work with those in default.  Mr. Marc Helm as a full service lender should be quite concerned about defaults and makes an excellent point about communicating with the borrower.  The point Mr. Steve Irwin brings up about gathering all relevant data HUD has related to defaults is both crucial and critical to this type of analysis. 
     
    Kudos to all for bringing up so many good points EXCEPT ONE.
     
    There has been a dramatic increase in the dropout rate from counseling to endorsement between early September 2010 and now.  The dropout rate has gone from the low 30% range to the low 40% range.  If the dropout (or its corollary, the conversion rate) remained the same as last fiscal year, expectations would be for about 80,000 endorsements this fiscal year rather than less than 73,000.  Imagine a 10% increase in endorsements with no additional marketing effort and no additional marketing cost.
     
    Has counseling actually succeeded at weeding out the 5% who would be expected to default?  Did they discover it is closer to 10% and effectively got rid of that entire group?  Why is it that none of the industry leaders described the important role counseling plays in mitigating defaults?  Are they ignoring the dropout rate or is it that they have little to no confidence that counseling is capable of doing that job?
     
    If counseling was actually achieving real results on default related issues, why is there no significant rise in voluntary set asides for taxes and insurance?  For a product with an over 90% satisfaction rate, why would we allow this situation to persist unless the new protocol is effectively mitigating contingent losses from defaults?  Let it stay the way it is if it is mitigating defaults in an effective and efficient way.  BUT it is hard to believe that this job would be more effectively handled by anyone other than lenders.  It is their contingent liability not that of counseling.  Who will do the better job?
     
    The best way to minimize contingent liabilities for defaults is to 1) identify the characteristics of those who default; 2) allow the lenders do objective testing to separate out those who are most likely to default based on the characteristics indicated in the first step; 3) determine through verification if there are mitigating factors which would nullify any concern about default or allow for less stringent action than described hereafter; 4) modify the payouts or mandate set asides for taxes and insurance, 5) if nothing else works decline the application.  To modify the HECM features will take approval by HUD.  Unlike prior suggestions, mandatory set asides should not exceed the period from closing through anticipated assignment as if a full draw lump sum has been taken at closing.

  • I’ll say it again – a DTI test for T&I seems like the most logical approach, using verifiable retirement income/cash flow that will continue forever (social security, pension, etc). 

    Set asides from loan proceeds are likely too large and the correct size of such amounts is too difficult to estimate.  Monthly impounds would add a signficant expense to servicers, add a layer of complexity, and require a monthly servicing fee or higher rate (probably best to avoid this option).

    If a borrower can’t reasonably prove they can afford to remain in their home a RM isn’t a good choice and they should be looking at other options.  This would provide a reasonable due diligence test, but some defaults would still occur (impossible to eliminate all).

    • Mr. Jackson,

      Over the years, I have met seniors who would rather starve than miss a single tax or insurance payment. I have also met seniors who would if they had a home underwater because of a nonrecourse mortgage not pay a dime to keep the home but instead save their dimes for their next home.

      In principle there is much to commend the NRMLA June letter to Ms. Hill at HUD proposing not just financial assessment but also HECM modification. There are also many problems with that letter. For example, the authors of the letter could not decide if the ratio test is cash flow or some form of modified income which excludes annuities and gifts from family members as sources of cash flow. Of course it never states if retirement income which comes from an IRA whose principal asset is an annuity should be modified for exclusion of the annuity or not.

      It would seem that the purpose of qualification testing should be to qualify as many applicants as possible without any modifications to the current HECM structure. That best can be achieved through a broad based monthly debt servicing payout to cash inflow ratio test plus a somewhat stringent review of historical payments of taxes and insurance. Such testing should be tempered by a review of assets, appraised home value in excess of lending limits, length of other loan obligations, and other relevant factors.

      Those applications which cannot get past the testing phase should be moved to the next phase which is HECM modification. Such modifications could include:

      1) legally binding a) unalterable tenure payouts and b) elected debt payoffs  to the extent either or both allow the applicant to pass the testing phase, or

      2) mandated set asides for taxes or insurance as described in the June NRMLA letter to Ms. Hill BUT the set asides should not be based on any length of time exceeding the period to assignment based on a theoretical full draw in a lump sum at the time of funding.

      If after all testing and because of required mortgage and other lien payoffs, HECM modifications cannot be permitted, the application must be declined.

      Unlike what you suggest, I do not believe in a pure pass or fail system. Again much in the June NRMLA letter to Ms. Hill is to be commended and worthy of consideration. The main purpose of financial assessment is not for HUD, applicants, originators, HMBS holders, or anyone else other than LENDERS. It is for the sole purpose of mitigating lender contingent risk for defaults on taxes and insurance. If as to an otherwise disqualified application, a modification to the HECM structure will allow that applicant to get a HECM, my question is why not? If that had been done for the majority of HECMs now in default status, there is a real question as whether they would now be in that status.

      • Jim – I haven’t read the letter to Ms. Hill, but I disagree with some of what you have said.  Having spent many years in the forward and reverse businesses, I’ve seen the results of complicated qualification requirements and complex programs.  Hopefully the end result is an approach that can be easily understood and implemented in practice, that helps to ensure that HECM borrowers can afford to pay their T&I.

      • Jim – I haven’t read the letter to Ms. Hill, but I disagree with some of what you have said.  Having spent many years in the forward and reverse businesses, I’ve seen the results of complicated qualification requirements and complex programs.  Hopefully the end result is an approach that can be easily understood and implemented in practice, that helps to ensure that HECM borrowers can afford to pay their T&I.

      • Mr. Jackson,

        You really should read it.  You can find it at:  http://services.nrmlaonline.org/NRMLA_Documents/Financial_Assessment_Letter.pdf

        Be aware the letter was not written by Mr. Steve Irwin but a committee using his signature.  I have shared my concerns about the letter with both Mr. Irwin and Mr. Peter Bell.  The standard is NOT easily applied and is very confused in the letter.  I like the concept but had a hard time with details.

        I am all for using a cash flow standard but I am not really sure the committee understands the work that entails.  It seems they wanted a modified income standard but mistook it for cash flow.  As you know converting even cash basis “income statements” to cash inflow is not a simple process especially since it requires adjustments and based on the content of the letter and the appendix is not cash flow as we know it so it will require a lot of delineation of what is to be included and what is not. 

        When a CPA likes the standards of a mortgage qualification test you know the underwriters are in for a lot of work from the “get go” (except for the rather simple cases).  BUT the thresholds for passing the ratio portion looked reasonable.  See what you think.

      • Mr. Jackson,

        You really should read it.  You can find it at:  http://services.nrmlaonline.org/NRMLA_Documents/Financial_Assessment_Letter.pdf

        Be aware the letter was not written by Mr. Steve Irwin but a committee using his signature.  I have shared my concerns about the letter with both Mr. Irwin and Mr. Peter Bell.  The standard is NOT easily applied and is very confused in the letter.  I like the concept but had a hard time with details.

        I am all for using a cash flow standard but I am not really sure the committee understands the work that entails.  It seems they wanted a modified income standard but mistook it for cash flow.  As you know converting even cash basis “income statements” to cash inflow is not a simple process especially since it requires adjustments and based on the content of the letter and the appendix is not cash flow as we know it so it will require a lot of delineation of what is to be included and what is not. 

        When a CPA likes the standards of a mortgage qualification test you know the underwriters are in for a lot of work from the “get go” (except for the rather simple cases).  BUT the thresholds for passing the ratio portion looked reasonable.  See what you think.

    • Mr. Jackson,

      Over the years, I have met seniors who would rather starve than miss a single tax or insurance payment. I have also met seniors who would if they had a home underwater because of a nonrecourse mortgage not pay a dime to keep the home but instead save their dimes for their next home.

      In principle there is much to commend the NRMLA June letter to Ms. Hill at HUD proposing not just financial assessment but also HECM modification. There are also many problems with that letter. For example, the authors of the letter could not decide if the ratio test is cash flow or some form of modified income which excludes annuities and gifts from family members as sources of cash flow. Of course it never states if retirement income which comes from an IRA whose principal asset is an annuity should be modified for exclusion of the annuity or not.

      It would seem that the purpose of qualification testing should be to qualify as many applicants as possible without any modifications to the current HECM structure. That best can be achieved through a broad based monthly debt servicing payout to cash inflow ratio test plus a somewhat stringent review of historical payments of taxes and insurance. Such testing should be tempered by a review of assets, appraised home value in excess of lending limits, length of other loan obligations, and other relevant factors.

      Those applications which cannot get past the testing phase should be moved to the next phase which is HECM modification. Such modifications could include:

      1) legally binding a) unalterable tenure payouts and b) elected debt payoffs  to the extent either or both allow the applicant to pass the testing phase, or

      2) mandated set asides for taxes or insurance as described in the June NRMLA letter to Ms. Hill BUT the set asides should not be based on any length of time exceeding the period to assignment based on a theoretical full draw in a lump sum at the time of funding.

      If after all testing and because of required mortgage and other lien payoffs, HECM modifications cannot be permitted, the application must be declined.

      Unlike what you suggest, I do not believe in a pure pass or fail system. Again much in the June NRMLA letter to Ms. Hill is to be commended and worthy of consideration. The main purpose of financial assessment is not for HUD, applicants, originators, HMBS holders, or anyone else other than LENDERS. It is for the sole purpose of mitigating lender contingent risk for defaults on taxes and insurance. If as to an otherwise disqualified application, a modification to the HECM structure will allow that applicant to get a HECM, my question is why not? If that had been done for the majority of HECMs now in default status, there is a real question as whether they would now be in that status.

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