HUD Releases Reverse Mortgage Financial Assessment to Take Effect March 2015

The Department of Housing and Urban Development has issued a financial assessment for reverse mortgage borrowers that will take effect for all case numbers issued on or after March 2, 2015.

The financial assessment is detailed by HUD through Mortgagee Letter 2014-22 published Monday. For borrowers who do not demonstrate their willingness to meet their loan obligations, life expectancy set-asides—full or partial—will be required.

“The mortgagee must evaluate the mortgagor’s willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements,” HUD writes in defining the purpose of the financial assessment. “In conducting this financial assessment, mortgagees must take into consideration that some mortgagors seek a HECM due to financial difficulties, which may be reflected in the mortgagor’s credit report and/or property charge payment history. The mortgagee must also consider to what extent the proceeds of the HECM could provide a solution to any such financial difficulties.”

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The mortgagee letter also specifies documents that must be collected and submitted for all borrowers. The documentation has been updated to include “Financial Assessment Documentation” that includes, but is not limited to, credit history documentation, income verification, asset verification, property charge verification, residual income analysis, documentation of extenuating circumstances or compensating factors, and calculations for life expectancy set-asides and residual income shortfall set-asides.

According to HUD, the lender must evaluate the borrower’s “willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements.

“Where the mortgagor has not demonstrated the willingness to meet his or her financial obligations as stated above and no extenuating circumstances can be documented, the mortgagee must require a fully funded Life Expectancy Set-Aside.”

The assessment refers to previous mortgagee letters that drafted the financial assessment but takes the place of those mortgagee letters with some changes.

NRMLA issued a statement in support of the financial assessment following its release.

“At NRMLA, we are always concerned about protecting those aging Americans who cannot afford to meet the responsibilities of reverse mortgage loans,” said NRMLA President and CEO Peter Bell. “Financial Assessment will help determine if the product is right for the potential borrower. By implementing this process, HUD is responsibly making the HECM a safer product.”

Written by Elizabeth Ecker

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  • Whoopee FA is upon us! Finally, life gets simpler! Now we can just work with affluent
    middle class borrowers with perfect credit and no real need for a hecm except to
    “enhance their upscale retirement lifestyles……wait till Congress wakes up to
    this bizarre departure from the purpose, spirit and intent of this government
    insured housing program for “low to moderate income people”. It will be
    interesting, especially during the impending recession and a Rekublaikhan
    controlled House and Senate and a new repub president in less than two years. I
    am overcome with the vapors!

  • After so much delay this is more anticlimactic and less effective than it would have been if it had been instituted before September 30, 2013. Had it taken effect months before that date, perhaps some of the pressure to make the radical changes to the program on September 30,2013 might have been significantly lessened.

    Of all the changes, this is the most needed to avoid defaults; however, it seems draconian in its extremes. Although the information gathering, document verification, and other procedures are necessary, the length of time used in determining the set asides is extreme, especially in light of the life of the average HECM.

    There is no empirical evidence that the measures being taken will in any way significantly reduce defaults. Such conclusions was inferred from limited HECM information related to approved counselees of just one counseling agency and from forward mortgage conclusions which are not necessarily based on the same general principles; to say that the sampled population was biased and limited is a vast understatement. Also it was taken from fiscal years where the situation was significantly different than the first fiscal year it will go into effect. Yet it has limited application but should not have been so readily accepted by the industry or HUD as supporting anything other than general principles.

    With the radical changes of September 30, 2013 still in place, HUD needs to revisit the impact of financial assessment on August 15, 2015 and then again on March 15, 2016 to determine if financial assessment should be tweaked in one direction or another.

    (The opinions expressed in this comment are not necessarily those of RMS or its affiliates.)

  • My biggest issue with FA is borrower fatigue. I think it’s the variable that is least considered by policy makers that never meet with our customer base. It’s impact on volume could be significant.

  • I know I need more time to digest and read everything I can about the ruling. First opinions based on the article by Elizabeth is that by perpetrating the Financial Assessment ruling on the industry and our seniors in the manor spelled out it will have many characteristics of a traditional forward mortgage.

    I said some of the characteristics, I am not saying our HECM is turning into a forward loan, there are still many differences. We all new this was coming and as my freind Jim Veale has pointed out, the FA ruling will help to curtail defaults.

    I am concerned, the mortgagee’s for all purposes will be the determining underwriting factor. This means we may see varied philosophies between lenders underwriting policies, this I don’t like.

    I see that many seniors who are on tight budgets and need a reverse mortgage to get them back on thier feet again may not be able to qualify. That may be taking away the original intent of the HECM for our seniors?

    The required set asides in many cases may disqualify a loan completely? I have not seen as of yet how HUD will treat a set aside for T&I, we know it could render a loan to be ineligible but could there be more repercussions?

    I can’t say at this point in time that I am happy about the FA ruling, I felt there were other ways to skin that Cat, which I made that known some time ago.

    We will have to live with the FA ruling and hopefully I am making a mountain out of a Mole Hill?

    John A. Smaldone

    • John,

      What I am concerned about is that the current changes are eliminating most of those who might default and adding financial assessment may only eliminate a significant number of those who would qualify.

      • Cynic,
        You are 100% right in what you say. Why is HUD in such a hurry? I also thought the changes made in mortgagee letter 2014-21 superseded the changes of 9/30/2013. Am I right on what I thought I read?

        Anyway, your reply was very good and I appreciated it. If you can let me know if I am right or wrong on my assumption, I would appreciate.

        Thanks again,

        John

      • John,

        There are a few mortgagee letters that impact and thus alter Mortgagee Letter (“ML”) 2013-27. I refer to ML 2013-27 as the changes which took place on September 30, 2013 in my first reply to you (as just revised). As of November 13, 2014 none of the known changes which have gone (or will go) into effect after the implementation of ML 2013-27 are expected to have much change to the negative impact of ML 2013-27. Yes, ML 2014-12 did increase principal limit factors somewhat but insufficiently so as to have any materially positive affect on the negative impact of ML 2013-27 on endorsement numbers.

  • more reason for this industry to continue its downward spiral….let’s hope the ‘affluent borrower’ does a little better job ‘saving’ this industry than the purchase product did when introduced years ago. Seems like the affluent borrower is the new ‘pitch’ that will turn this industry around. I guess folks need something to stay positive because there really isn’t much anymore. There will definitely be less defaults with fewer utilizing the program.

    • reverseguy123,

      I am not aware of any pitch to affluent borrowers. The industry is looking to the mass affluent who as Barry Sacks notes are those American seniors who are not quite affluent. No doubt you forgot to add the word mass before affluent. I cannot imagine either the affluent or mass affluent more than marginally participating in the industry.

      You are so right. The industry is not the voice of realism. The optimism of the industry is akin to LBJ trying to practice “How to Win Friends and Influence People” with Zhou Enlai during the Tet Offensive and expecting Chinese foreign policy to turn to him and the US; LBJ was smart for not even considering such nonsense. However, in our industry we have seen industry leaders leading cheers for 100,000 endorsements at the NRMLA Convention in November 2010 for fiscal year 2011 when there was no evidence to indicate that was a realistic outcome. We all saw how well that worked out.

  • The guide requires proof of previous withdrawals from retirement accounts or social security, which means a 62 year old will be ineligible unless they have a job or other source of previously established income. Making early withdrawals from social security or retirement income can have lifetime income impacts.
    The original purpose of HECM was to help people who are not working, i.e., retired, with NO INCOME, obtain a loan using the value of the property as proof of repayment. By making a set aside, and income verification, the calculation of the value of the property is adjusted. The adjustment that was made in September now needs to be adjusted upward.
    Nobody has yet provided verifiable statistics that defaults are caused by a lack of income. Or proof that income verification will lower defaults. I am lauging out loud at the extensive description of income documentation in the guide. In over 400 closed transactions, I’ve only had two clients who were still working!
    So my question is, if you have no income, and no savings, and don’t get social security or want to delay it (or it goes belly up) and you own your home…maybe someone could come up with a way you could access your home equity to make tax and insurance payments? Maybe something called a home equity conversion mortgage? Huh? Maybe something like that.

  • Lots of valid comments already stated. I’ll add that the cost to process and advertise for a funded HECM will go up dramatically, not only due to the extra work for LO’s and processors, but also because fallout will increase significantly. Risk of uninsurable HECMs goes WAY up so underwriting will be very conservative since there is no scratch-and-dent market. Welcome to the new normal: it will soon be tougher to fund a HECM than a forward mortgage, which is good news for those that master their craft and are able to stick it out.

  • After reviewing the 87 page assessment guideline publication by HUD one of the glaring issues I see the is the emphasis on employment income. I have been originating HECM loans for 10 years and would estimate that 80 percent of my clients are retired.
    It really looks like someone at HUD simply cut and pasted the same
    guidelines for income and credit requirements out of their conventional lending handbook. It is concerning that perhaps some regulators are not totally familiar with the demographic that this program is designed for.

    I appreciate the concern on property tax default however the recent
    changes and lending restrictions have not been given enough
    time to measure their affects on this issue. I am apprehensive about the additional strain this will put on a borrower during the
    application process. It is also troublesome, as Mr. Smaldone
    pointed out that underwriting process of the financial assessment
    is left up to the underwriters discretion and leaves the door open
    for inconsistency from lender to lender.

    The financial assessment appears to be departure from
    the original spirit and design of the program, to help older Americans
    remain in their homes.

  • Just completed the assessment on my client, who is not yet 62 to see how it would turn out for her. She has no job, no social security, and a moderate amount of savings. She has no mortgage on a $462,000 value home. She has been turned down by 2 banks for a HELOC. According to the FA, she would have to get an exception for a reverse mortgage, maybe get it, maybe not?
    HOWEVER, both banks offered her an asset depletion loan…so very easy to get a loan to deplete her existing cash. I’m just saying….

  • The new rules going into effect 2March2015 are meant to provide Reverses to those who can afford to pay their property taxes and keep up their homes. The Reverse Mortgage may have been started to “help” low and moderate income homeowners so that if they defaulted the Taxpayer would make up the shortfall.
    I am pleased HUD woke up and wants this program to reduce future foreclosures(To Be Determined). Also HUD wants to help those who have no intention of sticking their inability to pay to the taxpaying public. So far the taxpayers got stuck for $1billion due to poor upfront due diligence on Reverses. I say bravo-less bad Reverses and more solid ones.
    Steve Cariati
    Awaiting my New York approval.

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