New Reverse Mortgage Underwriting: Will it Rule Out a Significant Number of Borrowers?

Will changes to the way lenders qualify borrowers for reverse mortgage loans rule out the average borrower of the past?

Many in the industry have responded to recent underwriting changes implemented this week by MetLife that assess a borrower’s ability to meet his or her tax and insurance payments with that concern.

It may be too soon to tell, but there are lots of ideas on exactly how many past borrowers would not qualify under the new guidelines—some say the difference could be very significant, with the concern being that those who need a reverse mortgage most will no longer be able to qualify for one.

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“The widow who has $1300 a month in social Security income (the average borrower a few years ago) will no longer be able to get a Reverse Mortgage,” says Jack Belles of Reverse Mortgage of New England.

The changes, which according to MetLife’s guidelines, including an assessment of credit, principal limit use and cash flow, could have a big impact on lenders whose business models are built around helping seniors save their homes from foreclosure. Some have told RMD it could impact upwards of 70% of their business.

Educated guesses on the overall percentage that might not qualify are less than that, but still surpass the percentage of actual defaults that program has seen. The estimates depend largely on the types of borrowers that lenders are marketing to to begin with.

“If people’s business model is to mail [marketing] to people who miss mortgage payments or who are entering foreclosure, then absolutely 70% or 100% wouldn’t qualify,” says John Lunde, co-founder and president of Reverse Market Insight. “That’s probably not unintentional.”

Given the history of defaults in the program over recent years and the nature of the underwriting that MetLife will conduct, Lunde’s guess as to the actual proportion who will be disqualified is in the range of 10% to 30%.

“I think the bigger question is: where does the rest of the industry go?” Lunde says. “Are there Saver borrowers or other segments the industry hasn’t tapped that can create loans and keep the industry growing going forward? The biggest opportunity is those who don’t have a mortgage today. Maybe this is part of the way, not by choice, but to appeal to households that don’t have a mortgage.”

One such organization that could see a major impact is the Foundation for Homeowners, a non-profit organization that works specifically with senior homeowners who are in danger of losing their homes due to tax delinquency, insurance default, or both.

“Most of my clients will not qualify,” said Lolita Stevenson, foundation president, of the MetLife guidelines. The Foundation is still seeking detailed information about how the changes may impact its work with seniors, but Stevenson says she suspects her business will shift toward education.

“We have to educate people a lot more than we have been doing. It will probably reduce the number of people that will be willing to use [a reverse mortgage].”

Some acknowledge that some of those who don’t qualify under MetLife’s new rules shouldn’t have been eligible in the first place.

“I think this will knock a lot of people out of qualifying, but I guess we’ll see as we start working through the numbers with clients and prospects,” says Lance Jackson, president and CEO of Castle Reverse Mortgage. “But maybe a HECM isn’t the best choice for some of them anyway.”

Upon announcing its financial assessment in early November, MetLife acknowledged that some won’t qualify, but that the shift was in the interest of the best loans possible.

“It’s an unfortunate element,” Craig Corn, vice president of MetLife and head of its reverse mortgage division told RMD at the time. “Some people just may not qualify.”

The number remains an unknown, but most agree the impact will be felt by most who work with reverse mortgage borrowers. The National Council on Aging is still in the process of determining the precise impact, but the agency does have some concerns.

“We are still reviewing the new MetLife guidelines, and are not sure how these will actually be implemented in the field,” says Barb Stucki, vice president of Home Equity Initiatives at the National Council on Aging. “As a result, I don’t know what the potential impact might be. We are concerned that people with modest home values who may have some existing debt will not be able to get a reverse mortgage.”

Written by Elizabeth Ecker

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  • I can easily see this “underwiting” resulting in two calamities. First, many clients who need the RM to improve their existing financial situation so they can become current on their taxes and insurance will be denied. Second, there will be little improvement in the default rate because many defaults on existing RMs occur because of life events beginning well into the loan life.
    The assumption that this group of borrowers behaves like younger clients is bogus.
    This loan product is destined to follow the student loan program into government hands. The underwriting standards will simply hasten the process.

    • MetLife’s new rules aren’t law. It sounds like Met has decided to ignore the “need based” borrowers now and target the people who would fit into the qualifications of clients that work with financial planners. Other lenders will have the ability to pick up the business.

    • I would not agree with your assessment that ‘this group of borrowers behaves like younger clients is bogus.’

      There is a Realtor who is THE Realtor of choice (hands down based on sales statistics) for an entire Del Webb retirement community.  I got an ‘in’ with him from a forward mortgage broker at my BNI group.  When I went to meet with this Realtor – he LITERALLY had 7 reverse mortgage horror stories right off the top of his head that were all related to senior clients behaving like ‘younger clients’ (as you suggest.)

      These people basically refused to face reality that they could not satisfy the cost of living in these very nice homes.  And when it came down to it – the turned to reverse in order to ‘float’ their tax bill.  Well that only lasts so long when you had a mortgage to begin with and the remaining left over only gives you a couple to five years of payments.  Then the inevitable happens – they run out of reverse money – still don’t have enough to pay the taxes (same as BEFORE they got the reverse) and then they are put with their backs against the wall.

      Then what happened?  Housing crash and you have people that are left with NO equity – and still forced to sell and move on – all with their ‘lumps’ and everything.

      This Realtor – who is absolutely an authority in this market about what is happening with senior clients in the trenches – said just that:  80% of people are money stupid – then you give them a reverse loan which allows them to spend their assets without any concern because there is no immediate cash-flow pain – but in the end run – since there was a cash-flow problem – it will catch up to those people and then they are worse off because of it.

      I can tell you this is one Realtor who is going to be THRILLED at the prospects of MetLife’s more responsible lending ‘initiative’ when it comes to reverse mortgage.  I wouldn’t be surprised if he doesn’t change his tune completely from ‘a poisonous toxic’ product to ‘a senior’s best friend’ product.  At least HE will feel more responsible in recommending MetLife to his clients (with whom he has ASTOUNDING relationships.)

      • David,
         
        Were the same guy who was declaring at Linked In that every senior should have a Saver?  Do you still subscribe to what you wrote there?  I looked for it but now it seems to be missing.  What has happened in the last ninety days for you to paint such a different picture.

        As to your realtor buddy, you start off by telling us that he is going to be thrilled and then throttle it down to his felling responsible in recommending….  It is not the tune of the Realtor which will change as much as your tune which HAS changed.

        Didn’t you say over at Linked In that seniors should be allowed to spend their money any way they want even if it gets them in trouble?  Now you argue just the opposite.  I feel like I am watching a tennis match with only one player vainly trying to run from one side of the net to the other just to keep up a great volley. 

        So please tell us what it is you believe not what you think MetLife would like you to be saying.

    • The student loan comparison is apt, but for almost the exact opposite reason you’re suggesting.  Federal student loans have never had ‘capacity to repay’ underwriting, but rather were solely offered based on need.  Our industry has always had ‘capacity to repay’ underwriting based almost entirely on collateral value and is now moving to add capacity to meet ongoing obligations.

      This step moves us that much further away from the bad precedent of ‘need’ based underwriting that crippled the student loan industry, which is a good thing for us as long as we still have enough loans that still qualify.

      I continue to believe that this industry’s future growth is to be found in households without an existing mortgage, which is roughly 60% of age eligible homeowner households.  As long as we can appeal to those households with a product that benefits them and cost effective marketing that allows a profit, there will be a business here.

  • Shutting out the seniors that need our help most is sad to see. We know seniors tend to be more trusting and that trust was exploited during the heyday of subprime originations. Many seniors were put into 2 and 3 year arms as well as option arms. Some senior homeowners I have worked saw that their house payments rise significantly after the arms reset. They faced foreclosure because they could not maintain the house payments not because they mismanaged their money or were spend thrifts. I have utilized the proceeds of a reverse mortgage over 35 times to fight foreclosure. Only one has defaulted on his reverse mortgage and that was when the VA discontinued his payment due to a dispute. The comment in this article: “Some acknowledge that some of those who don’t qualify under MetLife’s new rules shouldn’t have been eligible in the first place.” Is very disturbining to me. It reveals a lack of understanding concerning senior homeowners that struggle financially. One couple I spoke with told me the loan officer that originated their refinance, who had come highly recommended, convinced the homeowners an option arm would be their best financial solution. When they tried to contact the loan officer after the refinance closed he had quit as a loan officer in Michigan and moved to Florida with no forwarding address. Their payment eventually doubled and when they fell behind foreclosure proceeding were initiated. The mortgage audit I performed uncovered numerous RESPA and TILIA violations that would have sent the loan officer to prison had he been prosecuted. Adding insult to injury the homeowners were underwater. The servicer agreed to a principle reduction and the proceeds of the reverse mortgage paid off the new loan balance. Good thing that was last year. Under Met Life’s current underwriting guidelines they would have lost their home. Are we, as an industry, willing to turn our backs on helping senior homeowners facing financial difficulty when they have the ability to pay their taxes and insurance? I am fully supportive of qualifying income to verify homeowners have the ability to pay their taxes and insurance but it seems to me Met Life’s guidelines have gone over the line. I know corporations have a fiduciary to their stockholders and I am a hard core capitalist but I believe you can be morally responsible and still make money. Working to save a seniors home from foreclosure is the best of capitalism. You do an immeasurable good and get paid. If the reverse mortgage industry shuts out the financially vulnerable seniors and only chooses to approve the easy loans then the only example they are setting is one of greed. What legacy would you rather leave?

    • MetLife will still look at every single one of these scenarios you just mentioned – and it is still possible they would allow for the loan to pass if ‘extenuating circumstances’ prove to be the benefit you claim these people found after Reverse.  Yes – there will be more scrutiny – but with everything else being in check – a hiccup in the financial history won’t by default disqualify those people.

      • David,

        I find your reassurances bogus.

        You are an originator — not a MetLife underwriter, not a MetLife spokesperson, not a MetLife executive, and most certainly not Craig Corn himself.  .

        The management at MetLife will do what is in their own best interests.  Their policy statement made that clear.

        No one is accusing you guys at MetLife of being bad guys.  We just do not see you as caring much for the financially less fortunate homeowner.  That is OK but please, do not make it out like you are really not that way.

  • Are we at the starting edge of seeing the reverse mortgage becoming something completely different than what we have believed in and passionately sold over the years. Are we at the beginning of the end of a program that has been a saving grace for so many seniors over the years?Is the HECM not to be the bail out program for many seniors going into foreclosure? Will the HECM not be the program that will head off bankruptcies for many of our seniors?
    At one time, seniors in the positions I mentioned above would qualify for a reverse mortgage and be able to improve the quality of their life’s. Will new underwriting guidelines implemented by lenders remove this luxury for our seniors?I am concerned what the future holds for our senior citizen population. We are seeing the greatest surge in seniors turning age 62 daily than ever before in the history of our country. The reverse mortgage as it was structured in the past will be needed more now than any other time during the existence of the program.The reverse mortgage is moving closer and closer each day toward the forward lending world. Lets ask our selves, who is the cause for what is taking place today with the HECM and the reverse mortgage program? Why were measures not taken many years ago to head off the inevitable, why?? John A. Smaldone

    • John,

      These are questions for HUD, Congress and the White House, not lenders who have been forced to take on the risk which was always inherent in the program but was taken on by Fannie Mae in bygone days.  Perhaps the program needs to be adjusted to pay for such defaults but I fear MIP must increase in that case.

      Remember this “self-sustaining” “private industry” program has received over $2.2 billion in indirect subsidies from HUD through transfers from the MMI Capital Reserve Fund in less than 24 months.  In my book that means the program is neither self-sustaining nor a private industry solution.

      This program was never designed to operate in an extensive period of significant declines in home values.  For a while, we may have to abandon our ideals due to the economic realities.

      The proper name for the last four years is the Great Housing Depression.  The question is when will it end?  The Great Depression lasted until the start of World War II, some nine years later.  It took an international war and maximum tax rates of over 90% to rescue the country back then.  Our current and last President have tried war to no avail.

      When is the last time you can remember a single economic recovery where housing prices showed no let up on a national level of continued decline.  Warren Buffett is no longer positive about housing.  It is bad and only getting worse in most areas of the country. 

      • Critic and to all those reading this, Sure these are questions for HUD but also to the lenders that have been blessed with this burdon. How can you say abandon our ideals for a while due to economic realities? Our entire program (The Reverse Mortgage) is based on ideals, ideals for our senior citizens. Our seniors did not create the economic environment we are in.The problem we have today with the reverse mortgage has to do with many years of mistakes by reckless foolish people that have had no regard for the American people or our capitalistic way of life.Our seniors will suffer dearly because of this, no, I can’t set aside my ideals, if I must do that than this industry no longer needs me! We can spend Billions of dollars in foreign aid to countries that want to kill us and hate us but we can’t spend it here at home on a program that will benefit the pioneers of our country, those who gave their life’s, fought on the battle field in defense of our great nation. We are a very screwed up society, we should be very proud of ourselves for what we have become!!!!!!John A. Smaldone

      • John,

        I hope we are in agreement.  

        What I said was we may have to give up our ideals of being self-sustaining.  We are no longer that.  It took over $2.2 billion in indirect subsidies for the ending actuarially measured value of all outstanding HECMs in the MMI Fund to come to $1.3 billion per the actuarial report.  Even then, the report is not consistent from one year to the next in the way the ending value for last fiscal year was reported.  If we were on the same method of reporting, the ending value would have been hundreds of millions of dollars less than $1.3 billion.

        We are no longer a self-sustaining private industry solution for the problems of seniors.  We are now supplemented by other HUD programs.

        How can we honestly declare we are self-sustaining or without government financial support?  Even counseling is subsidized by the government.  It is those ideals which I hope are only suspended during this time of home value upheaval.  Can we get the ideals back?  Right now, the answer is pragmatically no!!!

        I am sorry if we do not agree but how can I word this reply any differently? The program is not what it used to be.

  • There are two sides to our industry, social work and business. This is one of those rare industries where both could go hand in hand as long as Fannie Mae was buying our products.

    Those with a social agenda may eventually have to look elsewhere to find their former level of satisfaction.  Many of us hope that HUD will provide financial assessment guidelines that will allow us to work with seniors with financial problems so that they find a way to reach their goal of staying in their own homes.
    MetLife has shown its strategic agenda.  This is a business decision, not a pattern or an industry model.  It is not law, regulation, or governmental ruling!!!   It seems Snoopy is less friendly to needy senior homeowners today than just a month ago.  There is nothing wrong with that unless you believe Snoopy should stand for something different.  (Yeah and FIT scoring and its results report “should mean something too.”)Lenders in this industry are right now making risk assessments on how they can pick up some of the loans MetLife will be declining without picking up more risk than they can tolerate.  That is what businesses do.

    Who this decision impacts the most are TPOs tied to MetLife who have targeted those most likely to default and MetLife retail originators who have a social work agenda.  While the TPOs targeting the likely to default will feel abandoned, the originators with a social work agenda will find work elsewhere.

    In between will someone please find Linus his “blankie.”

    • I agree with your assessment of Social Agenda vs. Business.  I was searching for the words and you picked them up perfectly.

      Here’s the problem with the Social Agenda (helping the so called ‘needy’ seniors) that I don’t believe people fully think through (because it is a very emotional topic.)

      If the people who are causing the defaults are allowed to continue through the system – there will continue to be ‘toxic’ loans that get into the system.  As an investor – there will be less inclination to get involved in an investment known to have ‘toxins’ vs. an investment that does not.

      If the defaults in reverse continue to grow at the ‘epidemic rate’ that many people in the media have touted – then eventually investors will completely turn away from reverse and you are left with NO market.

      However – then if the government picks up the tab – well I for one don’t like being ‘forced’ into an investment that is considered ‘toxic’ by all the ‘smart money’ that won’t put a dime into it.  So the government should not have that authority or ability to take my money (through taxes and inflation) in order to subsidize a program that otherwise would fail if it were left up to making it’s own free and responsible decisions.  (You know – like we all have to do with our own personal budgets when we sit down to count the cost every month of income vs. expenses?)

      The actions that MetLife have taken are fully responsible and highly sound for the sake of the entire industry.  If other banks want to disagree and take more ‘risky’ paper in the reverse space – that’s the beauty of free market and competition.  To be able to MAKE those decisions FREELY and either suffer the consequences or reap the rewards for those decisions and actions.

      • Guest,

        Everything in the comment was going great until I got to your first use of the word “toxic.”  That is gibberish.  These are not toxic loans to investors and defaults are NOT epidemic in HECM land.  Despite what you think, even with the new MetLife policy, there WILL BE defaults. 

        Rather than making up some nonsense why don’t you read the HECM actuarial report just posted by HUD.  You might learn something.  Your writing content is atrocious and harms the industry. 

        Please stop the inflammatory, derogatory, and irresponsible statements.

    • fun123,

      HUD default information indicates that certain demographics can be linked to defaults occurring within the first FOUR years of closing.  Those of us with income but with family obligations up to retirement feel quite differently.

  • In my opinion, the move that Met Life made, is all about being selective who they choose as clients.  Big Corporations don’t care about the fact that many seniors need a helping hand.  I believe the solution for making sure taxes and insurance are paid is for the servicer to collect impounds on a monthly basis, just like we do on the forward mortgages.  Senior’s can afford 1/12 of their taxes and insurance from their monthly income but I feel where the problem comes in is when they get a tax bill for $1,800, as an example, they cannot make that payment all at once, same applies to their insurance annual payment.  They can afford to pay $350.00 monthly, and would do so if they were told this when they took out the reverse mortgage…

    • ladyforreverse,

      While this is a great idea for seniors, it lacks the protection which lenders need. 

      By the way, insurance companies will accept monthly payments.  Most states provide for semi-annual payment of real estate taxes.  So I have never understood much of the clamour about escrow accounts when those have to be paid much in ADVANCE of actual escrow payout.

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