ReverseVision Adapts Software to Address New HECM Underwriting Guidance

Following the announcement this week by the National Reverse Mortgage Lenders Association that the industry has developed guidance on limited underwriting for lenders to use in an effort to prevent reverse mortgage tax and insurance defaults, one software provider has adapted its platform to help implement the changes.

The limited underwriting is based in part on a borrower’s principal limit utilization, or PLU—the amount of principal limit that a borrower uses to pay off liens. The higher the lien payoff is, the less money the borrower will have available to cover expenses and taxes and insurance.

Reverse mortgage software provider ReverseVision now allows users to access a report  showing their companies’ historic PLU over the past year, which should help in the decision-making process when it comes to underwriting for tax and insurance.

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NRMLA members are encouraged, but are not required, to conduct the limited underwriting of property charges, NRMLA’s legal counsel told members on Monday.

A sample PLU report for ReverseVision users (see below) shows the percentage of loans historically which have surpassed a certain level of principal limit use.

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In the sample diagram, about 13% of the loans have total liens to be paid off at closing that are higher than 85% of the principal limit. When limiting it just on the First Lien PLU (First Lien / Principal Limit), then about 10% of the loans have a first lien that is higher than 85% of the principal limit.

Written by Elizabeth Ecker

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  • Using the trend information above as a determinant for modifying or declining an application should be currently suspect. Specifically we have absolutely no idea what the default rate will be for those borrowers who participated in counseling utilizing the new protocol. The dropout rate for certified counselees has risen dramatically under the new counseling protocol and shows signs that it could get worse. Until we understand how the new counseling protocol impacts defaults and default rates, basing any HECM application decision on trend analysis from the last fiscal year (ended September 30, 2011) should be done warily.

    The concern in regard to using the trend information based on data from the last fiscal year is that it could lead to excluding far too many applicants based on faulty criteria. This is a clear example of putting the cart before the horse. However, that does not mean that ultimately when we understand the impact of the new counseling protocol on the default rate, the trend analysis might not prove to be one of the most valuable determinants in making decisions about modifying HECMs or declining applications. The problem is right now, there is insufficient information to reach that conclusion with any substantial level of confidence.

    Further until the current default population is fully analyzed, how will we know if the greatest factor resulting in defaults before assignment arise from changes in significant life events which are not detectable during the pre-closing process or from factors which can be readily identified in the pre-closing process whether a significant life changing event occurs thereafter or not.

    Then we also need to look at the 10% to 13% referenced above. If underwriting results in 50% or 80% of those applicants not reaching closing, what assurance is there that the default rate will go down at all? Also modifications based on this information could result in an overly harsh reduction of proceeds being readily available to borrowers. We need a great deal of information before the industry begins modifying HECMs or declining loans based in any significant part on this potentially distorted graphic trend information. Of course the data could show that the new protocol has absolutely zero impact on the default rate so that the trend information is very relevant to the financial assessment process in light of the historic default rate. The problem is right now, there is no public record of what the default data being gathered and analyzed by HUD shows.

    Currently there is a strong tendency to start lender loan modification and declination. Once accepted as part of the assessment process, it is difficult to drive out misconceptions and poor determinants so be careful in selecting determinants and keep an open mind as to needed changes.

    [In full disclosure our firm uses Reverse Vision and the firm and its representatives to the NRMLA Board fully endorse the newly approved NRMLA financial assessment underwrite as does the commenter. The opinion expressed in this comment is that of the commenter and not of the firm.]

  • I would like to suggest that allot of the information regarding tax and insurance defaults on reverse mortgages are not as bad as the media has portrayed. I believe that many of these defaults were the result of the economy shifting and many seniors having their retirement incomes decimated by losses in the market.

    I haven’t looked at the specific numbers but I am guessing that the percentage of senior defaults is much smaller in comparison to the forward markets.

    This is not to say that we shouldn’t look at each case and see if they currently have the ability to make future tax and insurance payments, we just shouldn’t rush to set new standards because of media hype.

    • Mr. King,

      It is not because of media hype this is being done.  It is because lenders have the secondary responsible for the defaults when Fannie Mae is not the buyer of the HECM note.  In accounting we call these contingent liabilities.

      Wells Fargo made it clear in its public statements that without financial assessment of applicants, the financial risk to Wells made it so that Wells could no longer offer the product.

      Several years ago Fannie Mae stopped buying HECM notes.  HUD has made it clear it will not accept any responsibility for default claims.  That means either lenders and servicers collect it from the borrowers (including through available HECM lines of credit) or receive nothing for those claims.  After all costs, there is not so much profit in a HECM that lenders can swallow those claims without overall losses on those HECM originations.

      When it is said that 5% of all HECMs are in default that is no indication about the number of defaults there are on each HECM in default or the dollar magnitude of those defaults.  

      The situation is much different today than it was in 2006.  Today calls for difficult solutions to different problems than existed five years ago.  Because of fixed rate HECMs, the risk of default loss has grown.

      Again financial assessment is not the result of media hype.  It is a result of real financial concerns of lenders.

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