No Need to Go Overboard With New Reverse Mortgage Underwriting, NRMLA Says

Some originators raised questions during an industry webinar last week as to how much qualifying is actually necessary in the process for underwriting reverse mortgage borrowers for property charges. Under guidance from the National Reverse Mortgage Lenders Association regarding the new financial assessment, it’s important to qualify the borrower, but not overcomplicate the process, the association says.

“It’s recommended that you verify only enough [income sources] to qualify,” said Steve Irwin, executive vice president, policy for NRMLA. The association’s committee on financial assessment has been referring to such measurements as “circuit breakers,” he said.

Irwin reiterated NRMLA’s guidance on the capacity and condition tests in an email to RMD.

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“The NRMLA Guidance on Limited Underwriting states: ‘The lender should gather only the minimum amount of information necessary and appropriate to perform and document the Capacity Test and the Applicant Condition tests,’” he said.

The qualification process, so far, has added time and steps for MetLife borrowers, working with the one and only lender that has publicly implemented changes based on the recommendation from NRMLA. The company told RMD in November that it had added resources to aid in the process and address questions for originators as they adapt to the new procedures.

Under the NRMLA guidance, which has yet to be formally adopted by other lenders, originators are encouraged to verify a borrower’s income sources to ensure that he or she has the capacity to pay for property charges including tax and insurance.

But what many have called stringent new guidelines shouldn’t rule out borrowers unnecessarily, NRMLA says. The recommendation is to use them as much as needed and not further.

“We don’t want to make this overly complicated or burdensome. Verify enough to qualify and then stop,” Irwin said during the webinar. “…require only the minimum amount of information necessary and appropriate,” he told RMD. The circuit breaker concept, he said, would enable to lender to stop collecting documentation from the applicant who demonstrated the ability to pass the capacity test and the applicant conditions tests.

Many originators have speculated that the new underwriting is likely to rule out a good number of borrowers, with industry analyst Reverse Market Insight estimating that the changes implemented by MetLife could rule out as many as 10% to 30% of borrowers that would have qualified prior to the changes.

Written by Elizabeth Ecker

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  • Metlife’s overzealousness on qualifying now makes it more difficult to qualify for a reverse than for a conventional mortgage. The idea of factoring in utilities, is only 1 example. Another is the fact that a borrower cannot pay off debt with proceeds as is done in the forward market. The idea of using compensating factors (which are never given in terms of contribution to ratios) and a committee to re evaluate is superfluous. 
    In addition, they do not recognize that a reverse is still mainly a financial tool of need and not want. A senior, who may have to scrimp to pay for an appraisal should be credit qualified first and then once the credit side is approved an appraisal should be requested.
    Should this process lessen the number of borrowers qualified by 10% to 30%, then the number of originators still in the business will also decline by a significant amount as well. The unintended consequence of this decline can and probably will lead to more abuse by originators who do not understand or care about the senior and simply view the reverse as just another vehicle to make money.

    • chefking,

      MetLife has made a simple business decision.  If the number of loans MetLife places into the secondary market goes down by 30% or MORE, how much do you think that will hurt the consolidated net profit at MetLife?  Your complaint falls on deaf ears.  

      Do you actually believe that MetLife does “not recognize that a reverse is still mainly a financial tool of need?”  That seems highly unlikely and a rather naive and silly view of a company like MetLife.

      What does the number of originators in the industry have to do with the way MetLife conducts its business?  Then you conclude that the MetLife policy will be responsible for increaed senior fiancial abuse by HECM originators?  Quite frankly I find your statement insulting and ignorant. 

      The entire industry did not blindly follow the MetLife example.  It sounds like the MetLife policy is hurting you.  If it is, move to a different lender.

  • Seems to me that basic income underwriting to determine that the homeowner has adequate sustainable income to cover taxes and insurance should suffice.  For example, is tax and insurance payments divided by social security and pension income equal to or lesser than 50%?  That alone would be a big step in the right direction.

    • Lance,

      I find your approach too easy to pass.  The NRMLA letter in June to HUD is much more comprehensive and much more appropriate.

      As a California mortgage broker you have a fiduciary responsibility to the borrower; your lender has no responsibility.  You of all people should be very careful about what you are suggesting.  If in the eyes of the courts you should have foreseen foreclosure, had the right to decline the application, and did not, you might have an interesting claim for your E & O insurance carrier if the home is foreclosed.

      If the taxes and insurance total less than $1,500 per year, all the borrower would need is $3,000 in Social Security income and pension income to pass your test no matter what total debt payments might be.  How hard is it to believe that a senior with just $3,002 in total income per year would not go into foreclosure especially if after paying all liens, the borrower had just $5,000 paid to him at closing on a fixed rate HECM?  On top of that are you measuring Social Security and pension income before or after withholding?

      The NRMLA letter is a much better proposal even as to both the appropriate threshold and ratio test. 

  • The answer is to set aside a portion of funds in an annuity to cover taxes and insurance. To eliminate the segment of seniors who need a reverse mortgage most makes no sense whatsoever.

    There are discussons to use reverse proceeds to cover medical costs, long term care insurance, etc. But it won’t happen if people can not qualify to begin with.

    Peter Klamkin
    President
    Southwest Senior Planning
    Flower Mound, Texas

    • Peter,

      Your proposal would do almost as much damage as the MetLife approach.  The NRMLA letter to Karin Hill in June is a much better proposal.  But it also has flaws.

  • I feel this whole issue has become blown out of proportion and made complicated.Most of the necessity for the financial assessment has come from the concern and fear the borrower will default on the T&I. Sure, that will happen but lets look at the financial assessment portion of the equation.Can we honestly say that by underwriting the senior today will guarantee or assure the lender the borrower can pay the T&I down the road.Lets face it, the majority of seniors live on a fixed income. With the economy the way it is and the lack of increases in social security checks each year, does the financial assessment really work? Especially for what will tomorrows economical conditions be.I have said this many times and I say it again. A major problem a senior on a fixed income has is to face the lump sum payment of the taxes and insurance each year. Why can’t we treat this like a forward loan. Establish an escrow account at closing. Collect 3 months of T&I to establish the account. Issue the borrower a coupon book at closing and each year after that. The coupon would reflect 12 months of monthly payment for their T&I.Our senior will be more equipped to budget their money on a monthly basis rather than to have to face the large lump sum payment each year. Folks, we would eliminate a great percentage of defaults by going to this method and it is not a complicated procedure to implement!!!Thank you, John A. Smaldone

    • John,

      The flawless approach is to mandate set asides for taxes and insurance through assignment for fixed rate HECMs and through life expectancy for adjustable rate HECMs.  The amounts should not be discounted (time value of money concept) but permit the amount in the set asides to adjust in the same way the servicing fee set asides does; these last two steps should offset increases in taxes and insurance.  BUT  HUD would have to approve this approach.

      Your way depends on seniors remembering to make payments on time and having the wherewithal to make the payments as they are due.  While there are several in the industry who agree with you, the default rate in the forward industry has had a few problems over the last few years as well.  How would the costs for such monitoring be paid? 

      Some have questioned if HUD will permit your suggetion.  What have you found out?

      But the goal is not to eliminate this risk but to mitigate it.  The NRMLA approach while needing work is a good compromise.

      • I don’t agree with you on this. A senior who has a coupon book to make a monthly payment will fit it in thier budget. The problem is the large sum to anualy.

        Set aside fees will never work, you know it and I know it. I feel NRMLA’s approach will hurt the senior in the long run and the “Financial assesesment” process is going to wind up becoming an out of control frieght train going down the track!

        John Smaldone

      • John,

        [LOL, this is getting narrower and narrower]. 

        Please see my comment to you below.

        Thanks.

  • Hi John,
    Your upfront escrow account to service T&I is the best plan of all
    I have seen. Every homeowner is use to the PITI method of repayment of a forward mortgage.Seems like an easy and likely
    most welcomed solution for all concerned,senior homeowners and
    lenders. Of course there is no monthly servicing of P&I. 

    • Mr. LaFay,

      There are two general types of borrowing units defaulting.  There are those who are setup for failure at funding and then there are those who default because of unanticipated devastating life events following funding.  The concept promoted by Mr. Smaldone could help mitigate against defaults by the latter but not the former. 

      If permitted by HUD, how would the alternative Mr. Smaldone advocates help lenders in the case where it is clear that borrowers would in all likelihood default because of a lack of cash flow when loan proceeds have been spent?  Mandated set asides of taxes and insurance as NRMLA advocated to HUD in a June letter would seem reasonable in such cases.

      However, the system Mr. Smaldone advocates would allow for a systematic budgeting approach in the situation where things get unexpectedly tough in the financial sense after funding.

      Thus all new borrowers would be required to participate in the system Mr. Smaldone proposes except those who have had all anticipated taxes and insurance payments set aside at funding.  For example, if the NRMLA method established a set aside for partial insurance obligations that borrower would still have to participate in the method Mr. Smaldone advocates for the amounts not covered by the set aside.

      The foregoing has definite appeal.  What objections do you have with a combined approach?

      • Hi James,
        It is so nice of you to forward a reply to my reaction of the escrow set aside. I read your participating articles and enjoy immensely your insight to this opportunity for equity holders of positive numbers to avail themselves of financial solutions to independent living.
        My concern ,at present, is how can financial institutions factor workable escrows for T&I ,when the majority of HECM funding is currently happening at fixed interest? Question? Will the Seniors set aside enough funds to service T& I and not fall into the stultifying trap of no return.?

        With interest earned for money deposited in most banks today, approaching zero, it is not a long reach to forecast, relatives or friends whom with good intent offer a profitable solution:::if you will loan me ,name your figure} I will pay you X percent per annum.
        Due to totally unpredictable circumstances converging upon the unsuspecting, repayment of principal seems so far away and perhaps, servicing of interest may have to be postponed for an indefinite period of time.
        Perhaps, Met Life is on the right track,by projecting ability to service T&I as a pre qualifier for the (HECM) loan. I have read reports that about 7% of all HECM loans are in default due to non payment or underpayment of Real Estate Taxes. I fail to believe that much ,if any,is due to delinquent Insurance Payments.
        What was the shouting match between (HUD} and Bank of America and Wells Fargo about? Who has the Moxie to serve foreclosure and eviction notices to Seniors in their late 80? And if you do, you still are stuck with tainted paper,that is not marketable.
        I am for any solution that addresses the concerns of Senior Homeowners.The program today for (HECM) loans is the best it has ever been, in my opinion. I feel certain it will continue to be an Oasis in the middle of Desert.
        Thanks for caring,it is people like you who care about America’s Seniors,
        Respectfully , Bob LaFay

      • Mr. LaFay,

        As to your first two questions, I am not quite catching on.  Can you please expand?

        I was not aware of the shouting match.  What went on?

        I am sorry to be so slow to respond.

      • Hi James,
        It is nice to hear from you. I appreciate your response to my overview,while I will stick to my reading of what transpired between HUD,FHA and the two major lenders who vacated the market::Bank of America and Wells Fargo .
        As of JUly,2011,the delinquency rate for all HECM’ was right at 8.2% of the total loans outstanding. I am not privy as to the conversations that took place between the two lenders and FHA,however certain sources have reported that FHA was trying to leave those loans dangling with the lenders. As a fast summery of the events that followed is both lenders decided Reverse Mortgages were not a significant contributor to their profitable operations. So they quit. I am certain that some of their thoughts were : Do we want to be tainted by a reputation of a Lender who forecloses on elderly Senior Homeowners? As we know, FHA recanted,so where the soul saving solutions lies has not appeared in my line of vision.
        I do not want to spend your valuable input,by rambling,so will conclude by saying, I have yet to see a workable solution to the need for escrowing T&I. I certainly feel that some plan has to evolve. The last number ,I am aware of ,is approximately 46,000 delinquent T&I’s as of July, 2011.

        Thanks for your guidance in helping America’s Seniors.

      • My dear friend James,

        I can’t agree with you on this one. Set asides I am dead set against. I feel a set aside will only reduce the amount of funds a senior will get. In fact in many cases it may put a reverse mortgage out of reach!Sure, their is always the chance the senior will default, even if they are put on a structured monthly budget plan. However, what says that the senior who may qualifies today under a financial assessment underwriting procedure, will be qualified tomorrow?

        At least under my approach, the senior has a chance to live within a fixed budget, commensurable to their fixed income! I agree with you James, all borrowers would have to live within this budget proposed system of mine. However, so will all borrowers have to live within a set aside requirement and a financial assessment requirement! Think about that one.

        Thanks James,

        John A. Smaldone

    • QuanAdora

      I appreciate your comment. To me it sound as simple as it gets. People seem to always want to make things complicated and it does not have to, in order to be good!

      Thanks again, I appreciate you,

      John A. Smaldone

    • QuanAdora

      I appreciate your comment. To me it sound as simple as it gets. People seem to always want to make things complicated and it does not have to, in order to be good!

      Thanks again, I appreciate you,

      John A. Smaldone

  •  How the financial assessment guidelines are implemented will be
    directly proportional to the exposure each lender chooses to accept.
    Reverse mortgage underwriting guidelines already vary from lender to
    lender. Without clearer financial assessment guidelines from HUD we may
    end up like our brethren that originate
    forward mortgages. All FHA lenders have developed underwriting overlays
    that are more stringent than existing FHA guidelines much the way Met
    Life has done. Most seniors gather reverse mortgage
    information from a variety of sources prior to making a decision.
    What happens if a senior is denied a reverse mortgage due to lender
    overlays when the information they gathered contradicts the denial?
    This could destroy the trust in the reverse mortgage industry we have
    worked so hard to gain. Whether lenders chose to add underwriting
    overlays, as Met Life has, is their choice. The consequences of
    guidelines varying significantly among lenders will only cause
    confusion among homeowners and cast our industry in more of a negative
    light than already exist.

  • In Illinois people over 65 and AGI on their 1040 is less than $55,000 currently have what is called a senior freeze on their R.E. taxes. Many of this age and above at least South of I-80 in their counties reduce their amounts owed to where some in their respective counties ever year zero out their amount owed. H.O.I. is an other story.
     
    All that being said how can Met-Life put these overlays and for that matter anyone else on such open ended profiles of people. As for the couple with a 1600 Sq. Ft. ranch your RENT (e.i. R.E. taxes $100 a month) cheaper to live in your home than going to an institutional setting (Gov. Housing, Assited living, Nursing Home, on public aid) where it is costing the Gov. (e.i. all of us working tax payers) much more than to let them continue to live in their homes.
     
    These over lays will throw these people out of their homes and their dignity along with it. Their pride is to be independent not wanting a Goverment hand out which is what is going to happen. it is very very sad to be sitting at their kitchen table and tell them I am sorry but you do not qualify as tears run down their faces and they keep saying that is not what your company and others mention in their ads. Very sad in deed.
     
    In the Christmas song when the Red Baron has ol Snoopy is his sites to shoot him down and the church bells are ringing out down below in a quant little town even ol Baron had compassion forced ol Snoopy to land popped a cork did a toast and flew off to fight another day. So my take this year so many years after that wonderful song was sung in 2011 is the only cork popping this year will be the one out of ol Snoopy’s back side. As the air deflats what was once a grand plan for seniors to retire in place. Funny how history repeats its self.
     
    Mery Christmas to All and to All a Good Night.
     
     

  • my, hasn’t this been a somewhat heated stream of comments.I find it of interest that there has been no discussion of the senior that has applied for the reverse mortgages discussed in the above comments ability to handle his financial responsibilities as they currently exist. Perhaps the situation exists where the senior has just plain run out of sufficient assets to maintain his lifestyle and his residence. The use of a reverse mortgage will only postpone the inevitable. I realize that no one wants to be that person to have that frank conversation with a senior to help them come to this conclusion.
    There are other social issues involved here. The cost for this person to actually move their belongings to another dwelling. The fact that the rent that they may have to pay is greater than with their existing HO I and taxes are. The fact that the toll on the social services coffers may be 3 to 4 times the expense to allow the senior to continue to reside where they have spent the majority of their life.
    I need to leave my office for a meeting at this moment but wanted to leave these thoughts in an effort to hopefully stimulate more comments on the subject.

    • Burgess,

      It would be great if you would state your position so that we can get a better sense of what it is you believe should be done.  Right now one can reach a few very different conclusions about your view.

      Thanks.

  • John Smaldone,
     
    The one thing we should all be in agreement on is that if Fannie Mae were buying HECMs on the terms they did in 2005 we would not be debating this issue.  All applications which met required financial assessment underwriting standards would be sold in the secondary market where profits are higher and those which did not meet that criteria would be sold to Fannie Mae.  That is simple risk management.  It worked in the past and would work now if the 2005 policies of Fannie Mae were in tact today.  Unfortunately with live pricing, higher margin requirements, lower Fannie Mae mortgage portfolio requirements, and higher standards now required at Fannie Mae, those days are in our past.
     
    In the old Fannie Mae environment 100% of those who qualified under the HUD requirements could be helped.  Without Fannie Mae buying HECMs under the old system, lenders have new risks which are difficult to shake off.  Wells Fargo and most likely Bank of America were fed up with the situation and left our industry. MetLife seems to have used the current situation to go beyond mere risk mitigation to using the situation to achieve business objectives.  Why shouldn’t MetLife do that? 
    If I was one of the MetLife retail originators who markets to our traditional market, I might be calling other lenders to find work but what is new about that? 
     
    If there were no payment defaults on the forward side, my mouth would be shut about your plan for the reverse side.  None of us want to turn down business if there were assurances we were not responsible for defaults or if the potential losses were capped at a specific total dollar amount per loan which was acceptable to risk managers.  If I went to my risk committee and said, John Smaldone told me we could do this (with no verification from HUD that it can be done) and he personally believes it will work, no matter how admired you are in this industry (and you are) I would be laughed out of the room.
     
    These are business decisions.
     
    A committee at NRMLA came up with some good answers.  Perhaps your idea should have been considered with theirs but it was not in the letter.  You should appeal directly to HUD.  I have no faith that your proposal will mitigate losses; in fact if anyting additional costs will be incurred by lenders for its oversight. But my beliefs do not make me right.

    Your proposal will definitely work with those who are good at budgeting and have no earth shaking events in their lives.  As to others, well, look at the forward industry.  There have always been payment defaults.  People do not get more disciplined with age.  They are who they are by the time they reach 62.  Some are very disciplined financially; others are not.

    We may have differing views on this topic but I know where your heart is.  Unfortunately, I view the lender concerns as having greater priority right now.  After all if the deals are bad for the lenders, the lenders will not be in the industry long-term.  So either way we are trying to help the borrowers but we definitely view the solution much differently.

    • Cynic,

      I do agree with you, if this was 2005, we would not be having this debate. Overall, I agree with about 90% of what you said. I appreciate the time you took to outline your position.I still feel our seniors would be more apt to make their T&I payments if it was structured for them, with coupon books ETC. However, what you say makes sense.I do view the HECM of today and tomorrow not being the same or doing all the good it had done for our seniors in the past. On the other hand, I do understand what you mean by “The concerns of the lender today”!

      Good debating job my friend. See, I can be swayed if the arguments back to me are logical and make sense. You make it a great day.

      Thanks Cynic,

      John Smaldone

      • John,

        Even when we do not agree, I know you are doing what you believe in your heart is the best for our borrowers.  The industry is a better place because of people like you.

      • Thank you my friend, I feel the same about you as well. Make it a great weekend Cynic!

        John

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