For HECM Investors, New Underwriting is Icing on the Cake

Following the recent announcement by MetLife that it will begin implementing a borrower financial assessment for its reverse mortgage loans, the investor market reaction is largely positive, although the decision is unlikely to have overwhelming implications.

“I don’t think the impact on the secondary market will be as significant or as business changing as it would be on the loan side,” says David Fontanilla, Pioneer Analytics & Consulting Group.

The primary comfort to investors is the government guarantee, Fontanilla says. To the extent that the new underwriting will boost the government support of the program, that could be seen as a positive for investors, he says, but the main draw is the fact that their investment will be protected against future losses.

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“It’s a step in the right direction,” Fontanilla says. “For the secondary market, it’s a small net positive. Anything that helps ensure the long term viability of the program is important.”

Another potential benefit, he says, could be that if the changes are viewed to help provide sustainability, they might attract new private investment—as long as the underwriting component doesn’t impact volume to a large degree.

As for whether investors will favor some loan pools over others due to the underwriting discrepancy, those who buy and sell the loans say it is unlikely.

“I would think that only the marginal investor, especially ones that are new to the asset, will be more inclined to buy MetLife pools,” says Jeff Traister, managing director for Cantor Fitzgerald.

There is unlikely to be much of a premium on the loans from an investor standpoint, even though the changes do bode well from an overall perspective.

“It’s hard to see right now how all the dominos are going to fall,” Fontanilla says. “The initial instinct for a lot of the investors is they will view as a net positive, but won’t pay more.”

Written by Elizabeth Ecker

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  • That is unless the MetLife pools are more reliable as to when the investment lives of HECMs within the pool terminate.  Pools with loans more likely to default and be foreclosed upon before they are expected to terminate will most likely have shorter overall investment lifespans.  If that turns out to be significantly different, a higher premium might be paid for MetLife underwritten HECMs.  The question is will there be a noticeable or significant difference which merits a price difference.

  • MetLife’s decision to implement some unexpectedly tight Financial Assessment guidelines starts to lok like a pattern to optimize servicing and/or investment portfolios. This FA move would be consistent with their earlier aggressive HECM Saver market share, both tend to look like an effort to use their position as the big duck in the puddle to cherrypick the HECM loans least likely to represent a HUD mortgage insurance claim.

    Maybe someone whose understanding of the servicing or secondary market is better than mine can shed some light on whether these steps might be “portfolio balancing” moves. Could these be at least partially understood as countermeasures appropriate to offset MetLife’s big entrance into the HECM marketplace with 5.56% Fixed Rates at pre-recession property values, both of which heighten potential insurance claims?

    • Bill,

      Were the tight qualifying standards all that unexpected for a bank like MetLife Bank?  The business plan and agenda of MetLife are much different than a lender whose principal activity is HECM origination.  It is highly unlikely that the steps MetLife has taken are that much different from what Wells or B of A would have done.

      While some may view this as a portfolio strategy, others look at it as setting in place a risk adverse policy towards HECMs.  How is risk reduced for the MMI Fund, IF another lender originates most of the castoffs from MetLife Bank?  The risk on defaults on HECMs not acquired by Fannie Mae is principally that of issuers and servicers on down to the originating entity and of course lenders to the extent HECMs are retained rather than sold into the secondary market.  No doubt, MetLife has retained most Savers and at least for now is keeping them in their mortgage portfolio.

      As to your second paragraph, I dare not tread into those waters.

    • Raymond,

      But to whom is the risk significantly reduced? 

      The risk to investors does not SIGNIFICANTLY change due to MetLife financial assessment underwriting.  All it means to investors is that a HMBS with MetLife only originated HECMs will generally have a marginally higher average life expectancy than other HMBSs. 

    • A few big questions:
      -How much will FA reduce risk?
      -How will that risk reduction be spread across issuer/servicer, investor, and HUD?

      It would make sense that investors might wait to pay more for something until they have numbers to prove the goal of lower risk has been realized.

      The risk reduction would seem to primarily benefit the issuer/servicer and HUD through lower loan losses (hard dollar costs), whereas the benefit to investors through greater term certainty extending interest horizon is good but smaller incremental impact.

  • The title of this article says it all. This is about the investors not the senior homeowners. I deal with many seniors facing foreclosure and have used the reverse mortgage successfully in helping them save their homes. I fear these homeowners will be unable to attain a reverse mortgage in this new environment.
    Leaders will be looking at the low hanging fruit to entice investors. More stringent underwriting guidelines equates to more senior homeowners being shutout in their attempts to stay in their homes. The homeowners that truly need a reverse mortgage will suffer the greatest.
    .

    • gciungan,

      We live in a world of “feeling” great satisfaction in “saving” someone from foreclosure.  While that is clearly an achievement, perhaps we need a more holistic view.  Our job should be to provide security and help insure that in saving the home we do not put the senior in the position where they lose the home two years later due to HECM covenant violations.

      Financial assessment is part of the latter process.  It is not perfect and could end up eliminating far too many originators.  But the question is why are you not more upset about counseling and its awful inceasing dropout rate of certified counselees.  What you are speculating about is something which is going into effect TODAY at one lender and so far only one lender.

      If we have a less than 10% problem with loans, why is the percentage of certified counselees exceed that percentage and in fact the percentage increase in the number of dropouts has gone up by over 33%.  Why? 

      • I think the issue with the counselors speaks to a larger problem. The reverse mortgage industry, with the implementation of underwriting based on the financial assessment, is following the same path that has cause so much consternation in the forward mortgage world. Because of underwriting overlays it is very difficult to tell a potential client, with any certainty, which FHA guidelines should be followed for loan approvals.  If I were a reverse mortgage counselor this would weigh significantly on my decision to offer counseling. I think the financial assessment is a needed tool for the reverse mortgage industry. My problem is the lack of clarity from HUD for implementing the financial assessment into the individual lenders underwriting guidelines. If lenders are left to their own devices for creating underwriting overlays, as they have with forward mortgages, we are going to experience the same uncertainty qualifying clients that forward mortgage originators have. The new battle cry for originators will be more lenders to choose from when originating. The loan originators that have a variety of lenders they can originate reverse mortgages through will be the winners in the brave new world of reverse mortgages.

      • To some degree you are right.  However, what percentage of prospects are we talking about?  I doubt if it is more than 20%. 

        BUT I absolutely and positively agree, HUD must quickly institute strict guidelines and rights to modify HECMs so that we don’t end up in the mud of not knowing what lenders are doing what when.  Sometimes mud covers quicksand and in those situations where some prospects get dragged into the mud, some get lost.

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