NRMLA Board Approves Limited Underwriting to Prevent Reverse Mortgage Defaults

The 31-member board of directors of the National Reverse Mortgage Lenders Association and its special financial assessment task force today approved and published guidance on limited underwriting for property charges for HECM lenders.

“NRMLA members are encouraged, but are not required, to follow NRMLA guidance including this guidance of limited underwriting of property charges,” said James Brodsky, NRLMA legal counsel in a presentation to attendees of the associations annual conference in Boston on Monday.

The news comes after a letter from Acting Commissioner Carol Galante stated there was nothing prohibiting HECM lenders from underwriting for property charges.


The underwriting guidance suggests that issuers examine a reverse mortgage applicant’s capacity and willingness to pay ongoing property—including taxes and insurance associated with the loan.

Lenders are encouraged to look at payment history of the applicant and a principal limit calculation to determine how much of the initial principal limit the borrower will need.

Based on a lender’s findings, other compensating factors can be considered.

NRMLA says it hopes lenders will implement practices based on the underwriting guidance is “as soon as possible.”

“Those who choose to adopt this guidance should do so as soon as possible,” Brodsky said, noting ongoing communication with the Department of Housing and Urban Development concerning HECM defaults due to tax and insurance delinquency.

HUD has been active in conversations with the industry regarding the development of addressing HECM tax and insurance defaults, with the department’s Karin Hill, Office of Single Family Program Development director, being present during a portion of NRMLA’s board meeting.

Board members told RMD the decision took place quickly and without opposition.

RMD will post the offical guidance once it has been published by NRMLA.

Written by Elizabeth Ecker

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  • There is no question that lenders need to be allowed to perform a financial assessment underwrite but has the cart already been placed before the horse?  Should this be implemented before the financial risk assessment portion of counseling is revamped?
    Counseling has yet to provide a reasoned response as to why the certified counselee dropout rate has risen so dramatically (from just over 30% to just over 40%) in the last fiscal year.  Based on that trend the dropout rate this next fiscal year could rise to over 45% for this fiscal year.  The reason is the endorsements of the loans of those who first partook in the new counseling protocol would not be expected to have occurred until mid-January 2011 and at least my analysis is based on a twelve month period.  Will we be satisfied with an increase of 50% in the certified counselee dropout rate (to over 45%) from January 1, 2011 to December 31, 2011?
    Lenders have a vested interest in paring down the default rate on future originations without unnecessarily paring down endorsements.  The financial assessment letter should reflect that concern.  In a comment on Saturday to a RMD article dated October 16th, 2011, titled FHA OKs Reverse Mortgage Financial Assessment, Now What?, NCOA shows it has NO genuine concern about the certified counselee dropout rate as long as NCOA believes it is knocking out those who would default and why would it? 
    It is my opinion that if the underwrite is done properly, the default rate should drop substantially.  In turn most applicants who want the loan can be salvaged.  If that opinion is reasonably correct, the financial assessment in counseling should be revamped to a simple review of the BCU results (based on originators gathering and imputing required information) and a discussion of the FIT questions with an emphasis on the requirement of paying taxes and insurance but without the FIT scoring system and without the FIT report.  The time for counseling would be reduced and the goal of cutting down defaults while avoiding excessive endorsement reduction can be achieved.
    As of yet there is no public indication that all of the default information has been gathered by HUD and analyzed.  If appropriate, the NRMLA letter just approved by the Board should be revised upon the release of that information.
    What is troubling is that lenders and originators have not risen up to question the financial risk assessment portion of counseling.  Until we do, we will continue to experience unnecessary dropout of certified counselees.

  • I’m puzzled by your assumption that the “dropout” rate after counseling is somehow related to the FIT assessment.  As a counselor, I can tell you with some certainty that no client of mine has dropped out of the process because of anything that came out of the FIT.  FIT is useful as a way to bring up issues that might otherwise not have been considered, such as whether a surviving spouse will have enough to live on if the other dies, but it is not, and has never been, a tool for talking anyone out of getting a reverse mortgage.  At least, if that is the intent, it has never been successful, in my experience.  I agree with you that the score and the report are both quite expendable, but I also think that eliminating them would save almost no time at all, since they are probably rarely discussed at any length in the counseling session.

    Where are you getting your figures about the dropout rate, and what do they mean?  Are you simply comparing the number of borrowers who go to counseling to the number of borrowers who actually get a HECM?  If so, would not a better explanation be that borrowers continue to get lower-than-expected appraisals which make them unable to proceed with the loan?  Or do you have some source of data about dropouts after counseling but before the appraisal?

    I also don’t understand how you think an underwriting process can cause the default rate to drop unless it also eliminates a group of borrowers who are most likely to default.  In fact, I am somewhat doubtful that the underwriting process will work all that well, since significant percentage of defaults appear to arise from life changes (illness, unemployment, death of a spouse, financial hardship of a family member, etc.) that cannot be foreseen in the underwriting process.  However, underwriting may very well eliminate a group of borrowers who are most in need of the HECM and may very well have been quite able to keep up their responsibilities under the loan agreement.  Depending on how underwriting is implemented, it is likely to cause significant numbers of both false positives (people eliminated unnecessarily) and false negatives (people who will still go into default despite underwriting.)

    • rmcounselor,
      It is up to counseling to explain the increased dropout rate.  Surprise in appraisals has been around for YEARS now; yet there was no significant difference in the dropout rate between fiscal year 2009 and 2010 despite the huge drop in endorsements.  The change in protocol is the only significant change in the lending process which accounts for the increased dropout rate during the last fiscal year.  The only aspect of counseling which changed was the introduction of FIT; BCU is not mandatory for all.  Maybe BCU is at fault but that seems ridiculous. 
      It is absolutely negligent and derelict that counselors admit to not covering the FIT report DURING counseling and yet provide it to certified counselees.  The action you confirm has caused some of our prospects great consternation. Either counseling should provide it and tell counselees about their own personal reservations about the results or put it into the round file where it BELONGS.  I have even modified my challenge to FHA – “FIT report it must go.  Decouple BCU now.”
      As to stats, that is being developed by more mathematically gifted people than I.  Enough about that for now since it was presented in my comment.  My advice is to read the May RMD article.  That article seemed to have made little dent into anyone’s thinking.  It is incredible more people did not respond to what it revealed and has since revealed; some knowledgeable people in the industry are attacking this issue but so far, not enough have grasped its significance.
      Now we will move to underwriting.  The primary concern of lenders is not defaults in general.  Not all defaults can be prevented.  Anyone who believes that counseling or underwriting can remove defaults altogether is fooling themselves.  So what is the concern of lenders?  It is to mitigate the dollar amount of defaults before assignment or termination.  It is in that period they have a contingent risk; however, lenders are working with HUD so that their contingent risk can be mitigated as well.  Where is counseling in this discussion?  It should be there.
      Lenders see borrowers who lack the financial capacity to pay taxes and insurance at the time of closing and in the past believed they had to ignore them and just close the loan without taking any action.  It is these which lenders want to underwrite.  Few if any are silly enough to believe that ALL defaults come from lack of capacity at funding OR ALL are due to life changes.  Not even counseling can change the latter but we both can work together to mitigate the former.  Your comment displays little concern for the former and yet that is where we can do the most good but still at the same time provide the financing for many of these borrowers through mandated set asides and required tenure payouts.
      As to the majority of defaults coming from life events, where are your stats?  Can you point to anything?  Are you sure your evidence is not anecdotal rather than the result of an accepted statistical method of analysis of the population of the defaults?  The latter should be the basis of such claims.  It is this analysis which is being developed as to the counselee dropout rate last fiscal year.

  • You still have not clarified what your definition of dropout rate is and where your data comes from.  Evidently I missed some revelation about this in a previous RMD article?  As far as I can discern, you are talking about anyone who has received counseling but does not close on a reverse mortgage.  Has it escaped your attention that the other thing that changed last October was the reduction of principal limit factors?  This, in combination with the continuing slide in home prices, may very well account for the entire increase in dropouts, and counseling may have nothing whatever to do with it.  This is certainly the impression I have gained from discussions with lenders about why fallout is occurring.  Focusing on the FIT is a red herring.

    As for the FIT tool, HUD mandates that counselors complete the instrument, and mandates that we provide the report.  I cannot speak for other counselors, but I personally find the report essentially useless, so I abide by the letter of the HUD mandate but do not go beyond it.  I do not disparage the tool or the report, but I do not spend a lot of time on it either.  I will qualify that by saying that the kind of issues discussed in the FIT report are ones that I have been discussing at length with clients all along, well before FIT was introduced, and which I continue to discuss with them in more natural ways.  This may be why I find it so irrelevant to my practice.  For other counselors, who were not previously accustomed to confronting these issues with clients, it may indeed be a valuable awareness-raising tool and a stimulus for discussion of important issues.

    Regarding underwriting, I am not actually disagreeing with the premise that more underwriting should happen, I was simply trying to understand the idea that you could have meaningful underwriting without effectively eliminating a whole class of potential borrowers.  I am very aware that some clients are setting themselves up to fail because of lack of capacity to fulfill the covenants of the mortgage.  Unfortunately, these are rarely the people who have available credit for a set-aside, or for a mandated tenure payment.  To the contrary, it seems obvious that the people most likely to fail are the extremely low-income borrowers who are using all of their loan proceeds immediately to pay off an existing mortgage or other debt.  It seems inevitable that any meaningful underwriting will have to eliminate these borrowers from eligibility for a HECM, since based on any standard (income, cash-flow, past payment behavior, etc), they are high-risk borrowers.  The one idea that I have heard that holds any hope for them is the notion of a mandatory escrow payment — not a set-aside since they have no available credit, but an actual payment to the lender. 

    Regarding reasons for defaults, I am making no claims whatsoever to have definitive statistics on this matter, but based my comment on the early results of surveys being done by counseling agencies providing default counseling.  I did not claim that the majority of defaults were due to life changes, only that a significant proportion were, and I believe that is factual.

    • rmcounselor,

      Many of your points are well taken.  In some aspects I misread or misunderstood what you previously wrote.  There are four points which deserve further comment:  1) the influence of PLFs on the dropout rate, 2) the need to rid counseling of the FIT report, 3) the loss of the most needy due to a financial assessment underwrite, and finally 4) the May RMD article I referenced but failed to cite.

      Let us be clear about lowered PLFs.  The first lowering took effect on October 1, 2009.  It was huge.  The second took place on October 4, 2010 and resulted in overall lower PLFs still but only slightly so; HOWEVER for many borrowers at the expected interest rates experienced during most of fiscal year 2011, the PLFs increased!!! HUD literally lowered its floor from 5.5% to 5.0% so if anything, the dropout rate should have decreased not increased due to higher PLFs available last fiscal year versus PLFs available the immediate fiscal year before.  Further the interest rates on the fixed rate Standards were generally lower this year than last. 

      Despite the huge PLF drop on October 1, 2009, the certified counselee dropout rate was approximately the same for the fiscal year ended
      September 30, 2010 when endorsements were less than 80,000 as it was for the fiscal year September 30, 2009 when endorsements were almost 115,000.  Then for almost all of last fiscal year, the vast majority of prospects had higher PLFs offered to them on Standards than for the fiscal year ended September 30, 2010.  So PLFs should not be much if any of a factor for the increased certified counselee dropout rate during the last fiscal year.

      No, nothing substantially changed from prior years other than counseling protocol.  It is the only thing which substantially changed.

      The dropout rate seems to have little to do with the questions in FIT.  It is in the FIT scoring, the FIT report, and the phony concept of a budget which FIT allegedly results in.  Counselors have little idea what impact the FIT report has on borrowers since they do not speak to counselees once they have received the written report.

      Be straight.  Is the FIT report a benefit to counselees?  Everything you write says “NO!”  I agree.  So why have it if you, like other counselors and most originators, believe it is useless and ones, like me, who believe it is far, far worse?  Yes, the powers that be do not want to be bothered by it but there are other issues they do not want to be bothered by about as well.  I believe this is one which drastically needs their immediate attention.

      You are correct that the most needy will be cut out of the HECM program through financial assessment. Like others who have made the same claim, monthly prepayments of taxes and insurance are a very uncertain means of PREVENTING defaults where there is no
      discernible capacity to make those payments.  In fact one individual
      claims HUD has officially written that they are not permitted under the HECM program but he never specifically cited his source.  Since I believe they will do no good, I have not bothered to look.

      The RMD article on certified counselee dropout rates was written by
      Elizabeth Ecker, posted on May 18, 2011, and titled:  “Clients
      Who Don’t Obtain HECM, Could Cost Counseling Agencies.”  I have referenced it so many times before I apologize for assuming it was in this thread.  I am not involved in the actual calculation of the dropout rate.  Some of the information on the dropout rate is public like the May article and some of it is not.  I will be happy to follow up on your questions where possible but until final information is released nearer year end, there is not much I am free to discuss.

  • I’ve had a Reverse Mortgage application in with Metlife for 60 days now, starting on October 10th, before their big change on November 14th. At the outset I was told “there’s no qualifying or underwriting on a Reverse Mortgage”. I’ve applied for a PURCHASE Reverse, so I was told I only “had to provide evidence of down payment funds to close”. So now 60 days later, I still don’t know if I have a loan or not. I’ve already lost the property where I had an accepted offer because I didn’t have a loan approval, therefore, an extension was not granted. I’ve provided 2 years tax returns to show a 24 month history of income, 24 months bank stmts for both my SEP/IRA and my checking account. I plan to use the Reverse Mortgage to buy a condo in a retirement community and rent out my current primary residence after close. Metlife still doesn’t know what to do with the projected rental income and whether or not they can even consider it. Converting one’s current primary  residence to a rental property after close of escrow is hardly unusual and is a very common transaction. I know because I was a loan officer for 25 year before retiring two years ago. I am disgusted with the whole process at Metlife and feel I was misled and that no one at Metlife seems to know what they’re doing or what their own underwriting guidelines are. The property on which I had an accepted offer is lost now and it was a short sale with an under market sales price and is $50,000 – $60,000 less than current listings, so I have suffered financial damages due to Metlife’s change of policy midstream through my escrow period. I’m just left hanging in the wind. I  lost the first property and now I’m reluctant to make another offer without a loan commitment. Metlife has been very unprofessional and waffled throughout the process. I’d think more of them if they could just make a decision. I’m being told  the field office of FHA is the big hangup, but in reading this article, I can see it’s all Metlife and the big change in their own internal underwriting policy.

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