In response to market and regulatory factors that are leading to a “new phase of HECM,” (Home Equity Conversion Mortgage) the National Reverse Mortgage Lenders Association today laid forth guidance for the Department of Housing and Urban Development toward a financial assessment of reverse mortgage borrowers.
In order to determine whether borrowers are at risk for falling into default on reverse mortgage loans prior to their taking one out, NRMLA’s policy committee studied borrower data past and present including credit profiles and tax and insurance histories.
“[The program is going to require a bit of retooling in response to the lessons that have been learned, to make the product more specific to consumers’ needs as well as their capacity to have a successful experience,” said Peter Bell, NRMLA president and CEO before attendees of NRMLA’s west coast regional conference in Irvine, California this week.
HUD has stated it is working on possible program changes pending congressional authority that, if granted, would allow the agency to make adjust the program through mortgagee letter rather than “blunt force” changes that would be an alternative under the authority the Federal Housing Administration currently has.
In developing the recommendations, NRMLA considered the goal of making the product more sustainable and better equipped to serve its intended purpose for borrowers to fund longevity rather than the most recent primary use of drawing all proceeds at once.
“Our recommendations on the financial assessment and how that should look is principally in order to reduce the tax and insurance delinquency rate,” said Colin Cushman, President and CEO of Generation Mortgage. “We hope FHA takes it on as at least something to think through.”
The NRMLA committee found the complexity of certain financial scenarios surrounding borrower defaults required a comprehensive solution involving financial assessment as well as principal limit utilization to test whether the applicant will be able to meet their obligations over the life of the loan.
Capacity and willingness to pay ongoing property charges are considered in the proposal, which involves a test for each. The capacity test looks at income and capacity to pay property taxes and insurance charges while the willingness test looks at whether historically borrowers have demonstrated they are willing to keep those payments current.
Capacity considers residual cash flow using the VA lending framework, modified for reverse, and verifies income, expenses and assets. The willingness test includes a review of an applicant’s credit history as well as whether the applicant has been current on property tax and has an active homeowners insurance policy.
Under the proposal, additional requirements would apply to higher risk applicants who do not pass both tests, in order to offset that risk. Those might include reduction of principal limit factors, raising the mortgage insurance premium or requiring a tax and insurance set aside and servicer-paid taxes and insurance.
The assessment is largely a case-by-case approach rather than a single solution to rule out borrowers, the panelists said.
“We asked, is there any silver bullet here that would allow us to put some borrowers in a higher risk bucket upfront?” Cushman said. “Based on attributes at origination we tried to sort out the best silver bullet we could.”
HUD has long been working on a financial assessment with NRMLA having made a separate proposal in 2012 to help inform the process.
Written by Elizabeth Ecker