For Reverse Mortgage Defaults, Do Answers Lie in 2012?

Prevention of reverse mortgage defaults has been one of the biggest—if not the biggest—issue the industry has worked on in 2011. The department of Housing and Urban Development has publicly endorsed the implementation of a financial assessment to determine a borrower’s willingness and ability to pay tax and insurance, and one major lender has already put such underwriting into play.

When we will see results of those actions, however, may still be a long way off.

“We won’t know for a year, but in 2012, especially toward the end of the year, we will start to get our first indications of [how effective] financial assessment 1.0 has been at changing the default pattern,” says John Lunde, co-founder and president of Reverse Market Insight.

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That problem, HUD reported in November, was roughly 8% of outstanding reverse mortgage loans on Federal Housing Administration books.

The financial assessment, which has been implemented by MetLife to include a look into borrowers’ tax and credit history, as well as their expected cash flow following the reverse mortgage, has been in place for just a month, with little data on the number of borrowers whom it has impacted.

Further, Lunde says, and a bigger issue, is that lenders are beginning to foreclose on tax and insurance defaults and that trend will continue into 2012, setting a tone for borrowers who may be in default but who still have the option to resolve that default through repayment.

“When other borrowers start hearing about this, do we see cures improve? Do they realize there really is a penalty here?”

With a smaller number of borrowers who actually go into foreclosure than the number of defaults themselves, through different resolution methods including default counseling and repayment plans, one of the issues in the default conversation has been willingness versus ability to pay tax and insurance. This issue may come to light, Lunde says.

“The silver lining might be that some of these defaults cure when they realize there’s a penalty. It’s borrower choice as opposed to ability. The financial assessment is targeted at winnowing out those who can’t afford to pay and how many can pay but choose not to. We may get the answer to both of those.”

Written by Elizabeth Ecker

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  • We could see a lot of intriguing issues arise in the current fiscal year.  Could this be the first fiscal year that more HECMs become due and payable than are endorsed?  Could terminations exceed endorsements this fiscal year?  Could more servicers like B of A sell off the HECMs they service just to avoid the stigma of default foreclosures?  Will HUD actually issue financial assessment guidance this fiscal year?  If not, what will lenders do? 
     
    Will AARP sue HUD this fiscal over assigned HECMs which have terminated where a surviving, non-borrowing spouse owned the home either directly or indirectly through the estate of the deceased borrowing spouse?  Will there be a month this fiscal year where the HECMs endorsed in a single month exceed 5,000 endorsements and if so how many months will that be?  Will industry leaders make exaggerated and ridiculous predictions about industry endorsements at this year’s national NRMLA convention like what happened in New Orleans in 2010?
     
    Will defaults grow to 12% of all outstanding HECMs?  Will the conversion rate of certified counselees fall to under 50%?  Will HUD reject FIT and reorganize counseling?  Will we see any positive results from the financial risk assessment portion of counseling in the growth in defaults as was promoted by counseling agency leaders?  Will industry marketing come under much greater scrutiny by regulators?  Will the CFPB issue its report on reverse mortgages this fiscal year?  Will the CFPB provide reasonable bright line definitions on what constitutes impermissible cross-selling?
     
    Will the fiduciary originating standard established in California and Minnesota spread to other states?  Will the percentage of Savers to total endorsements be even 8% by the end of this fiscal year?  Will HECMs for Purchase increase as a percentage to total endorsements?  Will fixed rate Standards be over 70% of all Standards endorsed during this fiscal year as was the case last year?
     
    Will MetLife Bank be the industry endorsement leader by the end of this fiscal year on a combined retail and wholesale basis?  Will it even be the retail leader?

    Yes, fiscal year 2012 could be a very interesting year for the foregoing and even more reasons.  “Expect the unexpected.”

  • Thanks, John

    Although I am often wrong, ask my wife, I made the same point in an earlier comment with an originator who was decrying the FA step as a mortal blow to reverse mortgages and borrowers. Lender Financial Assessments, unpleasant as they may be, will help us gather more pertinent data to improve the longevity and resilience of our young industry. I hope it will show that we need to do some minor tweaks here and there, but can forego major and wrenching re-engineering of the program aims and design.

    FA can have another silver lining for some: if you are able to submit loans to different lenders with different FA standards and processes, that could be the first new competitive advantage that wholesale or multiple correspondent originators have had over retail originators in a long time.

  • My friend the Cynic brings up some very interesting “Could This Be The year” points? I hope the Cynic is wrong but on the other hand, a lot of what the Cynic’s what if’s are lurking out there to make them come true!

    As I had said many times before, I still feel there is a much easier solution to the T&I and financial assessment issue. Some agree with me and many do not. I feel a great majority of our seniors could manage monthly payments being made on their T&I rather than being faced with a large lump sum payment at the end of the year!In short, the escrow account (Not a set aside fee) I propose being set up in the same fashion as the forward , traditional loan is set up! I know I sound like a broken record but I can’t understand why it is not being researched thoroughly? That is my two cents worth for the day.

    Thanks,

    John A. Smaldone  

      • rmcounselor, 

        I appreciate your support. I have sounded like a broken record because thus far, no one has made a good argument against what I have been proposing. I just don’t understand why it is not being taken seriously?Thanks again rmcounselor, I appreciate you!John A. Smaldone

    • John,
       
      Wow!!  Just because you do not like the answers does not mean they are not “good arguments.”  It means you think your argument is better.
       
      Let me repeat my broken record.  There are a higher percentage of forward mortgages in payment default than reverse.  So how is the forward market working so well?  Many forward mortgages are structured the same as reverse as to the payment of taxes and insurance.
       
      It makes absolutely no since that seniors will be able to make one kind of payment versus another.  In fact, the payment system you propose requires prepayments.  Why can’t seniors pay insurance monthly today?  Real estate taxes are paid twice a year in most states.  Yet all we hear about is how these payments are annual but that is not necessarily true at all.
       
      So how is it any of you suggest the cost of administrating your idea should be paid?  Should it mandatory or voluntary?  Should default come when a monthly payment is missed as in the forward industry or only after the related tax or insurance payment itself cannot be paid from the escrow account?  Should there be one escrow account or more?  Should there be penalties for late payments as in the forward industry?  Should partial payments be rejected as is the case in the forward market?
       
      Your presentation is skeletal and as always, the devil is in the details.  Not one of you who propose your concept has advocated default at the time when a monthly payment is missed, payments be rejected if not in full, or a penalty for failure to not pay the amount timely or in full.
       
      I have no problem with your concept but only when combined with set asides for obvious problem cases at inception.  What I want to hear are the details of your solution and what teeth it has as to default, penalties, and partial payments.

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