Reverse mortgage lenders across the nation are concerned over the effect that new underwriting guidelines will have on their business, now that MetLife has announced a shift toward new underwriting for borrowers and other lenders have said they will implement their own guidelines in the coming weeks. While it’s impossible to determine at such an early stage, it’s likely the new financial assessment could most impact states with high tax and insurance default rates.
As one broker told RMD, it’s all about “location, location, location.”
“There are geographic aspects to this. In California, the defaults are near zero,” said Mehran Aram, president of Carlsbad, California-based brokerage Aramco Mortgage, Inc. “Texas has some of the highest defaults, and it has extremely high property taxes.”
Aram doesn’t expect his area to be too deeply impacted by a financial assessment, especially as many lenders are already using their best judgment according to “common sense” standards when considering an applicant for a reverse mortgage, he says.
However, the areas that do have high default rates may see a drop-off in endorsement volume once an assessment is implemented, he said.
Department of Housing and Urban Development data presented at the National Reverse Mortgage Lenders Association (NRMLA) conference last month in Boston reveal Texas, Florida and Michigan to have major concentrations of insurance defaults; on top of that, Texas has one of the highest tax default rates.
California, Texas, and Florida are the top three states for reverse mortgage endorsement volume, but California remains largely unaffected by tax and insurance defaults. However, the state has relatively high property values, combined with relatively low tax rates, compared to other states, a combination that has resulted in low default rates.
“If you presume that someone lives in a higher property charge environment, you also need to assume that that individual likely has earned more money in that area, and that the properties are worth more money,” says David Wind, president and CEO of Guaranteed Home Mortgage.
And although more expensive homes are generally subject to more taxes, higher-valued properties with reverse mortgages are actually less likely to default than those with home values below the median, according to HUD data released at the conference.
It remains to be seen how a financial assessment will affect states with high default rates.
“These are two things that ideally would be linked,” says John Lunde, president and co-founder of Reverse Market Insight. “If you look at where the defaults are happening, you would hope the financial assessment would mean that there are fewer loans in places where there are more defaults.”
However, he continued, it depends on how an assessment is implemented. Cutting down on defaults is the goal, but it will be hard to determine its success until a track record is established.
And, since MetLife is still the only lender that has come out with specific underwriting guidelines, the industry needs other lenders to come out with what their financial assessment is going to look like before an impact can be felt geographically or on a national basis, Lunde says.
Written by Alyssa Gerace