What Should HUD’s Reverse Mortgage Financial Assessment Look Like?

The move toward an industry-wide assessment for reverse mortgage borrowers has been pending for many months, as an effort to prevent future tax and insurance defaults. With MetLife having implemented an assessment and then pulling back from it, Urban Financial now seeking commentary on its own drafted version of a new policy, and still others using less formal means to assess borrowers, many lenders and originators are left wondering: What is the best way to go about conducting a financial assessment, and what should it entail?

“We don’t want to create tomorrow’s foreclosure today,” says Jeff Taylor, president and CEO, Wendover Consulting. It’s a common sentiment in the industry. No one is disputing the need for some way to prevent tax and insurance defaults, but lenders do vary in their thoughts on what a tool or method looks like.

“No one benefits from a senior getting into a product or program that could harm them financially later on,” says Josh Shein, vice president of Maverick Funding. “The changes, however, should be incremental. A ‘shock’ to the system would not help anyone and could harm the industry and borrowers.”

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An incremental approach that incorporates small changes over time is desirable, Shein says, so that the industry can absorb and analyze the changes and ensure they benefit and protect borrowers in the best possible way.

MetLife’s version of financial assessment, implemented in November and later suspended in January, included a thorough assessment of previous mortgage late payments, credit requirements and cash flow analysis. Many say the company went too far and ruled out many borrowers that should have been able to qualify, and would have qualified previously, or under a different lender’s requirements. Some components of the assessment, however, should be included, lenders say.

“We’d like to be able to modify the offering,” says Gregg Smith, President and CEO of One Reverse Mortgage. “It would be good if a lender could dictate the terms that a client gets,” he says.

Most agree that an assessment of past tax payment history as well as a look into whether the borrower has a current or new insurance policy can be used as a tool, but shouldn’t make or break the loan.

“The economic times have radically changed,” Taylor says, of the recent history for reverse mortgages. “The industry would be doing the borrower and lending community a disservice if they don’t go at least one layer deep,” he says.

But lenders continue to seek control over the process, with their own ability to accept and reject borrowers as they have done in the past.

“I want it to make sense for me and the borrower that if they are at a higher risk of default based on statistical analysis, there need to be some compensating factors that would allow them to still get a reverse mortgage,” says Paul Fiore, vice president of sales for American Advisors Group. “I’d like to be able to take care of the borrower regardless of credit score,” he says, “and make it simple enough for those it should be simple for.”

The topic of set-asides for tax and insurance has also been discussed as a possible solution in light of the MetLife financial assessment, but with HUD prohibiting escrows for tax and insurance, the idea is complicated.

“Where someone needs 100% [of funds] to pay off mortgage, then doing set asides is not really an option,” says Taylor. “The discussion of escrows has run the gamut.”

Many lenders agree that having control over the process is important, but they are also partly left with their hands tied because there is no industry standard. The competitive landscape with different versions of financial assessment makes the move toward implementation a slow process.

However, market conditions along with the promise that HUD is working on a financial assessment rule for mortgagees should lead lenders to the solution over time, they say.

“I don’t think there’s any lender out there saying ‘no’ to this,” says Gregg Smith, president of One Reverse Mortgage. “They just want it to happen from the top.”

As for the potential for several versions of an assessment being introduced to the market simultaneously, Taylor says the market will take care of itself.

“Market dynamics will determine the best execution,” he says. “Volumes were shifting from one lender to another… we’re going to reach more common ground over time.”

Written by Elizabeth Ecker

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  • “We don’t want
    to create tomorrow’s foreclosure today.”  If that was really true, then
    financial assessment underwriting would be in full force for the purpose of
    preventing this problem at all lenders. 
    But guess what?

    “I want it to make sense for me and the borrower….”  What does this have to do “with me?”  This guy is a VP of sales.   Is he in charge of the situation at AAG?  We need REAL leaders stepping up, not leader wanna
    be’s. 

     

    “The discussion
    of escrows has run the gamut.” 
    Run the gamut?  Escrows are a nonstarter
    without HUD changing one of its handbook (4330). 

     

    “They just want
    it to happen from the top.” 
    Happen from the top?  That already
    happened when HUD clearly and definitely stated that lenders have always had
    the right to create their own financial statement underwriting standards.  Like it or not, that is THE uniform standard.  The problem is with just ONE exception in the
    PAST, we have leadership which just sits there doing nothing other than
    gathering opinions. 

     

    “An incremental
    approach that incorporates small changes over time is desirable….”   If one sees a person standing in a burning
    house, is it a great idea to say to them, “Let us take slow deliberate baby
    steps?”  That is not being concerned
    about creating foreclosures TODAY.

     

    We need lender
    leadership not waffling.  The time for
    philosophizing ended three years ago.  Yet the debate is going to a VP of sales who is all about “me?”  Has the responsible leadership in the industry vacated their duties to allow this kind of ridiculous argument in?  Once HUD gave the go ahead, except for MetLife it was as if the industry
    had never heard of underwriting particularly in financial assessment.  Now even MetLife has returned to the “do nothing” leadership.  

     

    Jeff, the
    problem is not “wanting or not wanting;” the fact is that is what lenders are
    knowingly doing TODAY, creating obvious future foreclosures.  The choice is in their hands.  After three years, the market has not
    adjusted.

     

    Leaders need to
    create rational and reliable policy with the tools at hand.  Instead what we are seeing is leadership
    which is vacillating and whining, not leading. 
    It is all right to be wrong.  It is
    not all right to stand watching homeowner after homeowner go into funding
    knowing the likelihood of future foreclosure is high.

  • This issue will be around for some time. There is no easy solution to the problem. I hear statements like “Escrow Accounts has run the gamut”! My question is why has it run the gamut and why can’t it work. I understand why a set aside would not be feasible but why not an escrow account? Why is HUD not allowing it, it does not make sense, unless I am missing something here?What is a common sense answer to my question. I have surveyed many seniors over the past 6 months. Everyone I surveyed agreed that if they were to pay into an escrow account monthly, it would make their finances much easier to manage!   
    Thanks all,John A. Smaldone

    • John,

      The escrow decision was not recent.  Experience shows that escrow accounts do not prevent or necessarily reduce the likelihood of default.  They are, however, an early alarm to servicers that trouble could lie ahead.

      Unproven responses are not evidence.  We all expect 90% of all borrowers will comply.  Of the remaining 10% a significant minority will comply until life altering event occurs.  The rest may be well intentioned but demographics of those who have defaulted indicate that their performance will fall short.  Why change the habits of the over 90% and why not provide those who show all of the signs of defaulting at origination the wherewithal to make it through?

      Those who fail financial assessment, fail.  Lenders must protect themselves even if some prospects are not helped.  Lenders are not social welfare companies.  If Congress wants to underwrite such potential losses, lenders will not complain.  Lenders want to help more, not less but cannot afford to do so if the risks and associated losses are sufficiently high.  

      • I appreciate you Jim. I should have known that HUD does not allow escrows. However, I still believe that an escrow account will work. We have not experienced an escrow account history with seniors or with a reverse mortgage. What ever statistical records you may be referring to would have to come from the forward mortgage world. What we have here are seniors on a fixed income with circumstances completely different than those people with traditional mortgages!

        Your points are well taken and I learned something I did not know from you but I usually learn a lot from you most of the time.

        PS: I STILL OWE YOU A CALL!

        Thanks Jim,

        John A. Smaldone

  • This is the way to go: a common HUD-mandated standard, assess tax and insurance payment history, make a three-to-six-year contingency set-aside if borrower has troubled T&I payment history, and scrap HUD escrow prohibition, among other ideas.

    • Atare,

      With the history of defaults in hand and being able to isolate traits of those who have a propensity to default, why not utilize that information to provide help?  Why send a borrower into all but certain foreclosure with inadequate resources to avoid it?  

      The NRMLA approach if crafted to what is currently known seems to provide a better result.

  • I searched HUD’s HECM Handbook (4235.1) and the servicing handbook (4330.1) for references to a prohibition against escrow accounts.  4235.1 contains a statement that “The borrower will not be required to establish an escrow account for the purpose of collecting annual payments for property taxes and hazard insurance.” and 4330.1 states that “The mortgagee will not maintain an escrow account.”  Is that it?  Does anyone know of other places where this is spelled out further?

    It seems to me like this could be pretty simply addressed via a mortgagee letter stating that the lender is permitted to require an escrow account for borrowers with a history of delinquent payments for taxes or insurance prior to getting the RM, or for any borrower that is delinquent after obtaining the RM.  If they can require a payment plan for taxes in arrears, it seems to me that it’s a very small step to requiring an escrow.   A T&I set-aside could be an alternative for those borrowers who have available LOC, but the escrow would be available for those without an LOC to draw from.  If HUD doesn’t like the word “escrow”, they could call it a mandatory prepayment to establish a T&I set-aside.   I agree with John Smaldone that many seniors would have much greater success with a monthly escrow payment than with the expectation of a payment in full on an annual basis.  Of course it won’t eliminate all defaults, but I think it would help significantly.

    • rmcounselor,

      You are agreeing with a number of us that escrow accounts are little more than mandatory prepayments to be used like set asides.  “If HUD doesn’t like the word ‘escrow’, they could call it a mandatory prepayment to establish a T&I set-aside.”

      So what would you do with someone who has gone through foreclosure but they were never delinquent about insurance or property taxes?  What if they were only late with HOA dues and assessments?

      What if a renter was getting a home for the first time with a fixed rate HECM yet their monthly debt service payments to monthly cash inflow ratio was 78%?  What would be done then?

      Could lender decline applications under your version of financial assessment?  If not, then that would require yet another change.

      I do not remember Mr. Smaldone ever stating he would support set asides for T & I under any condition.

      To put it plain and simple, while I believe in escrow accounts, their place should be limited to situations where the borrower is in actual default and there are insufficient available LOC funds to reimburse the servicer.  I disagree with any position which does not require set asides in situations which would otherwise result in the applications being declined or disallows lenders the right to decline an application if financial assessment guidelines are not met and cannot be met through set asides.  I do not believe escrow payments from borrowers are a reasonable substitute for set asides where a high potential for default is indicated at origination.

      • My thinking is that the best predictor of future behavior is past behavior.  If the borrower has previously been delinquent on any mandatory property charge, then there should be some way to make it more likely that they will keep up their obligations after getting the HECM.  When LOC funds are available, I would recommend a “rolling set-aside” — transferring money from the LOC each month, like an escrow payment, to be placed in a T&I set-aside, from which the required charges would be paid when due.  If the borrower exhausts the funds in the LOC, then this would convert to a mandatory pre-payment plan.  Mandatory pre-payments would also be established for any borrower that gets a fixed-rate loan (and thus has no LOC to draw from), if they have a history of delinquent property charges in the past.

        What I would NOT do is require a set-aside at closing of 3 years worth of property charges, since this would make the loan impossible for borrowers who need to use all the loan funds to pay off an existing mortgage.  I think this is the kind of set-aside that Mr. Smaldone objects to, although he can speak for himself if I’m wrong about that.  The idea of using an escrow or mandatory pre-payment is that it would allow those borrowers a chance to use the HECM to meet their needs, while making it as likely as possible that they will succeed in keeping up with their property charge obligations. 

        I believe that HUD has already said that lenders are free to decline applications, and I have no problem with that as long as reasonable and consistent standards are used to decide which applications are declined.

      • rmcounselor,

        Escrow accounts are not a reliable way to avoid defaults.  Mandatory set asides are predictable, controllable, and reasonable.

        It seems you are not familiar with my position or that of NRMLA.  In the NRMLA approach the credit history of the borrower is evaluated for payment history emphasizing payment of property charge obligations.  Then a capacity test is made.  Those applicants who fail those tests would have their applications declined unless they accept specific modifications to their loans.  One of the suggested modifications is set asides.  

        The NRMLA approach is embodied in a June 24, 2011 NRMLA letter to Ms. Hill at HUD.  You make it clear by your first two sentences you have not read that letter.  Also  please read my response to Atare yesterday where I specifically reference the NRMLA approach.

        John Smaldone suggests that lenders only use escrow accounts.  Ultimately you get to the same place in your reply just above, especially when it comes to fixed rate HECMs.

        Escrow accounts should be used when defaults have occurred to help those who have defaulted prepare for the next and future payments due.  This is the ONLY place where I support their use when it comes to HECMs.

        Under the current HECM structure, set asides are the unique way to provide a predictable means to mitigate (not eliminate) defaults among those who show the propensity to default.  Escrow accounts are laden with risk when looking at this group.  What people like me are arguing for is reducing the number of loans which should otherwise be declined due to responsible analysis of applications.

        Have you spent much time studying the NRMLA approach?  You might disagree with  details but the approach is sound.  Rather than coming up with your own approach, read it for its ideas.  You just may agree with its substance.   

        http://services.nrmlaonline.org/NRMLA_Documents/Financial_Assessment_Letter.pdf

      • As a matter of fact, I am quite familiar with the NRMLA proposal.  I find it peculiar in its seeming unwillingness to address a large group of HECM borrowers — those that use all, or nearly all, available loan funds to pay off an existing mortgage.  For those borrowers, as you know, the use of a mandatory set-aside or mandatory term payment (which amounts to almost exactly the same thing) is not possible.  The NRMLA proposal does nothing at all to address this issue.  That is where the idea of an escrow as an ADDITIONAL option comes in.  I am not rejecting the NRMLA approach completely, only suggesting that there may be a way to supplement it that permits more borrowers to make use of the HECM.  Rather than simply rejecting those borrowers outright, an escrow system would at least give them a chance to prove that they could succeed. 

        It’s interesting that you say that “escrow payments are not a reliable
        way to prevent defaults.”   Yet, as far as I know, a system of escrow
        payments has never been tried in the HECM context, so it’s unclear what
        data supports your statement.  Also, if they are so unreliable, it’s interesting that so many forward mortgages require escrows for taxes and insurance. 

        I also find no clear definition of the “monthly debt” that is to be included in the “debt to cash-flow” ratio.   Tax/insurances costs are not “debt” and yet they are presumably included.  The MetLife approach included an estimate of utilities costs as part of their ratio — is that envisioned here?  Are payments on unsecured debt included?  What if the borrower has a perfect record of paying their mortgage and property charges, but has defaulted on credit card debt in order to maintain that?

        I think that the NRMLA approach provides a starting point, but I do not think it is the last word on the issue, and I hope that HUD will come up with something that better balances the need to avoid defaults with the goal of helping senior homeowners.

  • HUD needs to step up now and provide some guidance. The problem with most government regulation is the one size fits all mentality. The mortgage industry is too complex to regulate in this manner. The unintended consequences often cause more harm than the regulation does good. Since all reverse mortgages are manually underwritten the lenders can adopt common sense guidelines when dealing with financial assessment criteria. I can review a client’s credit report and, more often than not, determine if the client had a circumstance beyond their control that caused their financial woes or if they just have a pattern of not paying their bills on time. It should be this determination coupled with their financial situation that determines if they qualify and if they qualify does an escrow need to be established. When I started in the mortgage industry this is how all FHA loans I originated were underwritten.

     I understand fear of buybacks is driving lenders decisions regarding the amount of exposure they are willing to take. The new FHA indemnification rule adds another layer of fear to an already paranoid industry.  For their own good lenders need to bring back a degree of sanity to underwriting standards. There is only so much low hanging fruit. I know lenders must protect themselves but you only have to look to our forward mortgage brethren to view our future if we continue to allow fear to dictate our guidelines. Most lenders have adopted underwriting guidelines far more stringent than HUD’s. Advocacy groups and even FHA are starting to question the lenders motives. As the economy starts to expand the wealth divide will be even more accentuated. I guarantee you if a disproportionate amount of poor and minorities are denied loans there will be huge outcry directed towards the lenders and banks. The same government that created this situation will, in the name of the common good, force lenders to provide loans to individuals with poor credit. This has happened before.
     
     The reverse mortgage industry can develop underwriting standards based on common sense or based on fear. In the short term fear based standards will be better for their bottom line but will be detrimental to the long term success of the reverse mortgage industry. 
     

  • I wanted to add to my previous comment. As I was trying to qualify one of my forward mortgage clients for a conventional loan a thought occurred. Why not utilize tier risk based pricing similar to what Fannie Mae has adopted to fund the escrows. The overage from the higher rate could be used to fund escrows for those clients that are deemed a higher risk. If the overage will not provide a sufficient escrow then the borrower will have to finance the rest in the reverse mortgage. This would benefit borrowers in areas that have low property values but high taxes. This would allow lenders the ability to hedge against borrowers that have bruised credit but the income to pay their taxes and insurance. Senior homeowners with better credit could be rewarded by not requiring them to escrow their taxes and insurance for a marginal hit to the rate.
    We do not want one size fits all regulation. We need common sense underwriting that will provide the greatest benefit to our borrowers while protecting lenders bottom line. This is why we so desperately need HUD to lead the way. For common sense underwriting to work HUD will need to provide some kind of a safe harbor to get lenders on board.

    • Greg,

      If the expected rate exceeds the floor, then a higher rate will reduce the available proceeds.  Compared to Loan-To-Value ratios in the forward industry our Principal Limit Factors (“PLFs”) are much lower for younger borrowers to start with.  So based on the same amounts needed to fund the set aside, the increase in the interest rate will have to be much higher at least in the early years.  For example, on a HECM for purchase say the home price is $200,000 and the property taxes plus insurance are approximately 2%.  If the Principal Limit (“PL”) is $130,000 then the interest rate would have to be 3.1% higher.  Now the PLF would drop requiring an even higher additional rate.

      Since this is your idea, you work out the problem.  The ultimate PLF will be so low that the HECM will not work.

      If you are saying that the PLF should not change and that the HECM will work, you do not understand the problem within the MMI fund.  Quite frankly, I do not understand how or for whom your idea will work.  FHA insurance would have to go sky high to make it work.  

      Try an illustration with actual numbers.  The proof is not in concepts but in the math.  It does not work if the borrower needs a substantial portion of the proceeds.  A set aside would be cheaper and leave more PL.

  • rmcounselor,
    You have to remember to whom the letter was written, HUD.  The reader must possess a minimum understanding of the mortgage industry as a whole to understand the depth of the leniency contained in that letter.  Because the percentage is so high, there is little doubt that this is the back-end debt service payment ratio.  Please name one forward lender who would make a loan other than a HECM with the ratio at 50%.You cry that because escrow accounts have not been tried no one can say they are unreliable.  Reliable means it is dependable and will result in the same results time after time.  Something which has not been put to the test is by definition unreliable.You are asking lenders to experiment.  OK, you get the funds to protect lenders from exposure to loss and no doubt, they will.  NRMLA is the association of lenders, not originators, counselors, or HUD employees.  Their members bear the risk and any related loss. You say that you believe escrow accounts will work because you have seen them in the forward mortgage world.  Well, the default rate in the forward world is high.  So how do escrow accounts protect lenders in the forward lending world against defaults for nonpayment of taxes and insurance?  Defaults in the forward industry occur long before taxes and insurance are due.  They occur while the monies are being collected to pay the next tax and insurance bills.Months ago HUD analyzed the initial characteristics of those who default.  Mr. Colin Cushman presented that information in October.  One of the biggest indicators is that they take all or almost all proceeds at funding.  So if their debt service payment ratio is still over 50% after funding, that should send red light warnings to anyone in the industry that by funding the loan today we are probably creating the foreclosure of tomorrow.  Yet the NRMLA letter does not stop there.  It takes into consideration other factors as well.  If after all considerations, nothing seems to work, the answer is to decline the application.Times have changed.  Lenders are no longer protected by Fannie Mae from T & I default losses.  Wells Fargo left over this exposure.  You are looking to unreliable approaches to fix a very difficult issue.  The NRMLA approach will no doubt end up with some unnecessary declinations; no system is perfect.  But NRMLA is suggesting a ratio level which no other general mortgage lender in their right mind would accept.  The NRMLA approach is very lenient.  No commercial lender would approve a 40% debt service payment ratio for a borrower making less than $100,000 per year with or without escrow accounts.  The NRMLA ratio is lenient to a fault.  It is only if the borrower has a bad credit history as to property charge obligations AND a high ratio with no mitigating factors that set asides are required.    

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