FHA OKs Reverse Mortgage Financial Assessment, Now What?

By releasing a recent statement in support of Home Equity Conversion Mortgage (HECM) lenders conducting a financial assessment for borrowers, has the Federal Housing Administration put the ball back in the reverse mortgage industry’s court?

The financial assessment concept has been a topic of discussion for many months, with statements of support this year from HUD’s Vicky Bott in April, and more recently by Bott successors in the single family department at HUD. While the industry races to come up with a “best practice” for the financial assessment directed by the National Reverse Mortgage Lenders Association, it seemingly got its green light in the form of a letter published this month by Carol Galante, FHA acting commissioner.

The letter stated that “HUD’s HECM criteria represent the mandatory baseline requirements for approval of a HECM. HUD does not prohibit the inclusion of additional financial capacity and credit assessment criteria and processes in the origination and approval of HECM transactions.”

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It this the statement the industry has been waiting for? Many in the past said lenders’ hands were tied and they had to accept qualifying loans until HUD submitted a statement in writing stating otherwise.

In coming to terms with the assessment, lenders have expressed different views. Some believe it is best to wait until HUD issues specific guidelines, while others think that the lenders are responsible for making sound loans and should do so in their own way in advance of a formal HUD rule.

Regardless, FHA has given the financial assessment the OK, and NRMLA has said a “best practice” is on the way.

Once that best practice is developed, does it solve the problem, or create additional lender discrepancies?

“I prefer that FHA issues tax and insurance underwriting guidelines similar to what they have for traditional loans,” one originator told RMD. “Otherwise lenders’ procedures could vary because some lenders may not go with what NRMLA recommends. Hopefully FHA is temporarily allowing lenders to adopt their own optional guidelines in an effort to avoid lender fallout until FHA is able to issue formal guidelines,” he said.

The industry’s development of a financial assessment has been pending a written statement from HUD, and now with that statement, the industry’s assessment is pending a decision by NRMLA, supported by industry members and discussion.

NRMLA’s board is scheduled to meet on the issue during its annual conference in Boston, beginning October 24.

Written by Elizabeth Ecker

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  • Many in our industry express their fear of change but on October 5th the barn door was not just opened but torn off its hinges.  The notice puts the matter in the hands of the individual lenders.  Any well defined rule by NRMLA can be read as an act by lenders to excuse discriminatory practices.  It is doubtful if it will have clear and well defined rules; if anything it will provide somewhat vague “guidelines” with a few bright lines like:  “Lenders shall not decline applicants based on criteria which violates existing federal, state, and local laws and regulations.”   
     
    Those entities which are publicly traded are accountable to shareholders and must act in the best interests of shareholders without violating law.  Based on the notice by the acting Commissioner, these lenders either must quickly implement financial assessment or be held accountable to their shareholders for their lack of action.  These are the clear and required duties of their officers and board of directors.
     
    Although the financial assessment structure may end up looking the same at all lenders, even the June letter from NRMLA to Ms. Karin Hill made it clear that declination is ultimately a subjective decision of each lender.  Originators of brokers who have several lenders will be in the enviable position of being able to place marginal applicants with those lenders who will be most likely to approve their loans.  This will permanently change the face of our business operations.
     
    Lender shopping, here we come.

  • I feel this will create to many varied underwriting approaches amongs lenders and it will have an adverse reaction againt the image of lenders that they lack standardization.The confusion this will cause our seniors will be unnecessary, especially in the environment we are in today. As lance Jackson said, it is important for underwriting guidelines to come directly from HUD in order to keep lenders uniformed in their approach. Is HUD trying to skirt its responsibilities, do they not want to look like the bad guy?John A. Smaldone

  • This is an attempt at a WAKE UP CALL.
     
    What is incredible is that originators are complaining about financial assessment by lenders and seem fully satisfied with financial assessment by counseling.  Where is the outcry from the industry about the unbelievable increase in the dropout rate from counseling.  It is clear from the statistics that financial assessment is resulting in an increase of over 33% of those who drop out from fully qualified and certificated counselees; it was in the low 30% before financial assessment and is now in the low 40%.
     
    The counseling financial assessment was supposed to provide guidance to counselees as to their ability to meet their HECM obligations.  Yet despite an over 90% satisfaction rate in the product and tax and insurance nonpayment default rate of somewhere between 5% and 8% (per SVP Michael Kent at RMS), how is it we as an industry are satisfied with a counseling dropout rate at now over 40%?  It seems as if HECM detractors not counselors are running counseling.
     
    Lenders in a vote of no confidence in the ability of counseling to screen those who would default for nonpayment of taxes and insurance decided to issue the June letter to Karin Hill.  In this regard lenders demonstrate absolutely no trust in counseling to eliminate or substanially decrease such defaults.  Even more importantly statements from Karin and the FHA Commissioner make it plain and clear they do NOT either.  There is absolutely no one outside of those at NCOA who claim to believe that the risk assessment scoring system of FIT is anything more than a money maker for NCOA.
     
    By going to the NCOA website, I was able to take BCU for FREE.  Why is it that BCU is part of counseling?  88% of all counselees are taking it.  It is now a built-in cost of counseling.  By a simple process, the time of counseling can be substantially cut down and as a result its cost — and yet counselees could still take BCU for free or in seeing its value, voluntarily donate either then or at the time their HECM closes.
     
    Counseling has NO financial risk when it comes to defaults for nonpayment of taxes and insurance; lenders do.  The situation should be turned on its head and lenders should do financial assessment and counselors should help borrowers recognize their responsibility to pay taxes and insurance.
     
    The current situation is not only irrational but it is also a repugnant disservice to HECM counselees.

  • This is an attempt at a WAKE UP CALL.
     
    What is incredible is that originators are complaining about financial assessment by lenders and seem fully satisfied with financial assessment by counseling.  Where is the outcry from the industry about the unbelievable increase in the dropout rate from counseling.  It is clear from the statistics that financial assessment is resulting in an increase of over 33% of those who drop out from fully qualified and certificated counselees; it was in the low 30% before financial assessment and is now in the low 40%.
     
    The counseling financial assessment was supposed to provide guidance to counselees as to their ability to meet their HECM obligations.  Yet despite an over 90% satisfaction rate in the product and tax and insurance nonpayment default rate of somewhere between 5% and 8% (per SVP Michael Kent at RMS), how is it we as an industry are satisfied with a counseling dropout rate at now over 40%?  It seems as if HECM detractors not counselors are running counseling.
     
    Lenders in a vote of no confidence in the ability of counseling to screen those who would default for nonpayment of taxes and insurance decided to issue the June letter to Karin Hill.  In this regard lenders demonstrate absolutely no trust in counseling to eliminate or substanially decrease such defaults.  Even more importantly statements from Karin and the FHA Commissioner make it plain and clear they do NOT either.  There is absolutely no one outside of those at NCOA who claim to believe that the risk assessment scoring system of FIT is anything more than a money maker for NCOA.
     
    By going to the NCOA website, I was able to take BCU for FREE.  Why is it that BCU is part of counseling?  88% of all counselees are taking it.  It is now a built-in cost of counseling.  By a simple process, the time of counseling can be substantially cut down and as a result its cost — and yet counselees could still take BCU for free or in seeing its value, voluntarily donate either then or at the time their HECM closes.
     
    Counseling has NO financial risk when it comes to defaults for nonpayment of taxes and insurance; lenders do.  The situation should be turned on its head and lenders should do financial assessment and counselors should help borrowers recognize their responsibility to pay taxes and insurance.
     
    The current situation is not only irrational but it is also a repugnant disservice to HECM counselees.

    • Zorro – You and I sometimes disagree, but this is interesting.  How do you know that the financial assessment piece of counseling is resulting in high fallout?  Our post-counseling fallout rate is much lower than the stats you are quoting (knock on wood).  Could it be that many loan officers are not doing a good job of educating their clients prior to counseling?  Also, a default rate of 5 – 8% is very high for a mortgage that requires no monthly payments, at least as compared to historic mortgage delinquencies (this is another reason why FHA should be giving us T&I underwriting guidance).

      • Lance,
         
        Who is Zorro?  Are you confusing me with The_Critic?
         
        I follow what James Veale writes.  At times he indicates data sources and his methods of computation.  From the information available on the Outlook report and the four month rule of thumb and using twelve months of data, the conversion rate just from case number assignment to endorsement has gone from 73% for the fiscal years 2009 and 2010 to just 69.5% for last fiscal year. 
         
        Elizabeth Ecker also stated in a RMD May 18th article:  “Using data from HUD to estimate the actual number is tricky as well due to the lag time between counseling, application, closing and endorsement data explains Jerry Wagner, of Ibis Software Corportation, which tracks counseling data. Wagner provided an example: When only considering the last 12 months with a two-month lag between counseling and endorsements, 41% of those counseled never closed a loan.”
         
        James has stated that he has followed up on these issues and believes the situation has grown worse.  Counselors in RMD comments have stated that the 33% increase in the drop out rate has to do with less preparation by originators than in the past.  It is my belief by info I have seen much of it has to do with the financial risk assessment portion of FIT.  Since prospects can take BCU free of charge on their own, there is a huge question why it is even included as part of counseling.  So here is my ongoing battle cry:
         
        “FIT, FIT it must go!  Decouple BCU now!”

      • Some clarifications on FIT and BCU –

        The primary purpose of FIT is to help both clients and counselors better understand the life challenges – such as health issues, isolation, or barriers in the home – that could affect the ability of borrower to stay at home. These risks, which are common among counseling clients, can result in higher-than-expected expenses in the future, which often makes it difficult for them to pay the required taxes and insurance.

        FIT is the only tool that helps older homeowners consider both long-term risks as well as immediate cash shortfalls in deciding to take out a RM. 
        Given the devastating impact of foreclosure, if fewer seniors are taking out this loan inappropriately as a short-term fix to long-term problems, then FIT is doing its job.

        HUD requires counselors to discuss alternative financing options. The BCU analysis helps counselors fulfill this requirement quickly and thoroughly. The value of this analysis is significant – 88% of those who go through a BCU are found to be eligible for at least one public benefit. These benefits can make a RM a more viable option for seniors with sizable debt, and provide supplemental resources which can reduce the risk of default. 

        NCOA provides FIT and BCU free of charge to all RM counselors. Given the recent defunding of the HUD counseling program, these tools are not a “money maker” for our organization.

        Home equity and reverse mortgages will be an increasingly important component of retirement security in the future. We strongly urge lenders and originators to discuss FIT and BCU reports with their clients, as part of a holistic assessment of using a RM to meet a homeowner’s financial goals. These reviews also help to quickly identify clients for whom a fixed rate loan may not be appropriate, because they already receive public benefits or are likely to qualify for these benefits.

      • You give responses but offer no evidence. That is very disturbing. If you were excluding those who would result in default, why is it necessary to have a lender financial underwrite? The qualified counselee dropout rate is double the 5% default rate. Does that bother you? Why have the lender underwrite if your programs are doing the job you claim they are?

        As told to me by those who attended 2010 NRMLA — West Coast (summer 2010) your representative, Dr. Stucki, assured attendees that based on NCOA testing, we should not expect any appreciable increase in the qualified counselee dropout rate due to FIT or BCU. Yet there is an appreciable increase in the dropout rate and it is significant. You should be answering the question – WHY? That was not what even you anticipated or represented to anyone about FIT or BCU.

        Some counseling agencies seem to be moving to a two session counseling approach. You seem to be convinced that BCU should be part of counseling. Why not have the HECM information segment including the general upfront cost discussion before application and the financial risk assessment segment after application? Why not have originators gather the BCU data and input it BEFORE the segment of counseling on financial risk assessment? That would improve consumer oversight and protection regarding a proposal package versus actual application and make financial gathering a one step process rather than two. It would also reduce the time in counseling.

        Now as to the FIT scoring system and report, it is a disaster. Counselees are scored the same whether their monthly budget is $1 or $3,000 over their cash inflow; how is that risk assessment? That is the most obvious problem but the scoring problem saturates FIT. Basing a report on this suspect system is irrational and results in what we see today as the greatly increased qualified counselee dropout rate. The FIT aspect of counseling is so ridiculous that some counselors are not even entering the data until AFTER the whole counseling process is done. One of my prospects had to beg the counselor for his FIT score only to be told he would get it and the related report with his counseling certificate.

        There is much more to say but it is no doubt falling on deaf ears. So here I stop except to say: I hope someone writes an article on this in the near future. But I will also modify my call for change to:

        “FIT report, it must go. Decouple BCU now.”

      • John,

        I admire your willingness to speak out on many issues.  Thank you for your vote of confidence.  We all need to speak out on the important changes and the missteps which sometimes result.

  • What is really needed is a financial assessment that helps borrowers determine the consequences for the specific circumstances and if a reverse mortgage is suitable in the long term for the borrower.  If this was done there would be no need for a financial assessment to determine if the borrower could pay their insurance and taxes.  When will the borrower’s long term best interest ever be a factor in reverse mortgages? 

  • Are the folks at HUD and NRMLA all drinking the same KoolAid? This incredibly heavy handed response is little short of eliminating the entire program.  All because insufficient attention has been paid to ongoing housing obligations.  The only thing more insane is the notion that counseling agencies – or anybody – possess the skills to identify clients predisposed to default for nonpayment of taxes and insurance.  

    The issue is communication to avoid, not a need to foresee, such defaults.  Most of these people have been handling taxes and insurance by themselves for years before Reverse Mortgages came along…and things were going just fine, thank you very much; or the costs were included as impounds to their current mortgage.  In either case, the obligation was handled.  The problem lies in the aging process.  The cure is in regular communication with both borrower(s) AND the identified Alternate Contact.  And better job of counseling on the importance of this requirement.

    As they age, HECM borrowers – like everyone – experience health and life changes that have profound effects on their living dynamic.  Anything from memory and cognitive loss to the death of the “monthly bill” partner to a prolonged illness of a sole mortgagee suddenly render important but somewhat obscure obligations “out-of-sight, out-of-mind”.  The answer is greater communication NOT haphazard investor determined means testing.

    HUD has sadly missed the boat on this one and NRMLA has marched blindly of the end of the dock.  One can only imagine what was in the KoolAid.

    •  
      Jon,
       
      As to defaults occurring due to short-term memory loss and similar factors you are correct but there are many other causes as well.  There are financial problems, strategic considerations, lax policies which have encouraged subsequent defaults after the initial ones, mental disease, changes in caregivers and services provided, and on and on.
       
      Lenders, servicers, and counseling agencies are working together to find ways of resolving these issues for those currently in default.  Most of these HECMs were purchased by Fannie Mae where lenders and servicers have no real financial contingent responsibility for defaults.
       
      Where the problem lies is in those HECMs not owned by Fannie Mae.  Lenders and servicers are responsible for defaults if they do not resolve the situation with borrowers.  That is why foreclosure in default cases where the situation cannot be resolved with the borrower or through unused credit lines, will occur.
       
      But foreclosure does not mitigate losses incurred; it only reduces exposure to future losses.  Some may argue that it also prevents appreciation from mitigating the size of losses but there is no guarantee that it will.
       
      Lenders want to reduce the possibility of such loss through modifications and if necessary, declinations.  HUD has stated that lenders can decline applications but has NOT given lenders the right to modify HECMs or their payouts.  Lenders want to avoid declination and mandate modifications wherever possible.  They do not want less HECM closings but they do need less exposure to losses from defaults at the start of the loan.
       
      Forgetting about the nonsense some in the industry promote about why Wells left the industry and focusing on what it officially stated, it is the potential losses from this source without clarification from HUD that Wells could decline loans over perceived lack of financial capacity of borrowers which was the final nail in the coffin.  No doubt other factors came into play but this is the one which Wells in its press release and its official spokesperson on the issue, Franklin Codel, provided.

  • You continue to make the cure much worse than the ailment.  For the 22,000 that are supposedly already in default and even the ones that may come to that point, the horse has already bolted from the barn.  Banks need to sucked it up, take the hit (mitigated of course by taxpayer funds), and make your decision to stay or get out.  They shouldn’t be allowed to heap their losses on future borrowers.  If new requirements are required, it should come down on the side of greater involvement by families and more frequent communications all around.

    As for the current and pending cases of housing cost defaults, I was shocked that you would even give a moments consideration to the modification process.  What on earth would make you think that lenders will come to the Reverse Mortgage negotiating table with any more intention of an equitable modification than those same lenders do in forward scenarios.  As for why Wells (and AMEX) got out, it appears they have been successful in laying a giant smokescreen on the public and policy makers.  Ask a former Wells Reverse Mortgage manager why Wells got out and you’ll get a wholly, different, more reasonable response…profit or lack there of.  They’re tired of waiting on the last to die to make any money.  If that fits your definition of “nonsense”, there’s not much more to be said.

    • Mr. Sias,
       
      Do you understand when profit is earned at a public entity like Wells or B of A?  It is on the accrual method of accounting which recognizes income as it is earned not when the related cash is received. 
       
      Jon it appears as if you are not familiar with our industry.  The letter from NRMLA to Ms. Hill presents the modifications which are being proposed.  As long as the initial qualification rules are set at a reasonable standard  (as proposed in the letter), the modifications being promoted are no different than the set aside concept HUD developed for monthly servicing fees and as proposed, much more straight forward.
       
      The modifications will result in slightly lower income to the banks but will also mitigate losses which might come from defaults.  It will also allow more loans with no additional costs to lenders or borrowers. 
       
      These comments are far too short to be able to discuss the concepts adequately.  You should contact NRMLA and discuss your concerns.  They specifically know where things currently stand with FHA.  Because of the annual convention, the best time to reach them is early next month.

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