For Reverse Mortgage Lenders, Financial Assessment is a Whole New Ball Game

Nearly a year after the Department of Housing and Urban Development (HUD) delayed its implementation of the financial assessment for the Home Equity Conversion Mortgage (HECM) program, a final time frame and guidance for implementation finally came to fruition last week.

And for the most part reverse mortgage lenders welcome the rule, if not only to finally have an idea of what they’re up against, but confidence that this guideline will inherently strengthen reverse mortgages in the long-run.

“We welcome the financial assessment,” says Joe Demarkey, principal at Reverse Mortgage Funding. “It’s in the best interest of the industry, FHA and most importantly our senior consumers. We see it as a very necessary tool in helping to ensure that the industry is lending responsibly in the marketplace.”

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Accountability is perhaps the central theme behind HUD’s development of the financial assessment, not only for borrowers in their capacities to afford and maintain reverse mortgages, but also for the companies that provide them. This idea is rooted in the Federal Housing Administration’s (FHA) mission of preserving future losses to its Mutual Mortgage Insurance fund and increasing the fiscal sustainability of the HECM program.

“FHA and HUD made changes to the program that were necessary and the financial assessment continues to help,” Steve McClellan, CEO of Urban Financial of America told RMD. “Here’s why: it’s another true positive step we can point to where it really is going to hold the industry accountable to not putting someone in a reverse mortgage that probably shouldn’t have one and increases the risk of a foreclosure event.”

Despite the general acclaim for the financial assessment and all it stands to accomplish for reverse mortgages, no change arrives without creating some uncertainties. One unknown is how the new rule will impact loan volumes, which fell in 2014 below their 2012 low, and hovering at just above 50,000 loans.

Some lenders do have a ballpark for how much they see loan volume going down. For Open Mortgage, that decrease is in the range of 5% to 10% of loan production, says Joe Morris, senior vice president of Open Mortgage’s reverse division. Because of this, staff training remains a top priority for many moving forward.

“The biggest challenge is going to be getting the reverse industry up to speed on all the necessary documents and nuances of having a borrower approved,” Morris said. “It’s a whole different ball game now and a different mindset.”

Some lenders are even going the extra mile in efforts to forecast the potential impact the rule could have on loan volumes next year when the financial assessment takes effect on all HECM case numbers assigned on or after March 2, 2015.

AAG is currently analyzing its historical data to determine what the potential impact could be to its loan volumes in 2015 as it relates to the financial assessment guidelines, says Paul Fiore, executive vice president of retail lending.

The lender is also scrutinizing certain language within the rule that applies to borrowers’ eligibility to obtain and sustain their loans.

“Since the financial assessment allows for compensating factors and extenuating circumstances, we need to be diligent in establishing boundaries around how we define ‘capacity and willingness’ as ‘acceptable,’ especially in scenarios where borrowers fall short on residual income and/or show bumps in their credit histories,” Fiore said.

The reverse mortgage industry finally has an idea of what to expect now that the financial assessment is here. But while it is uncertain as to how the rule will play out, one thing is for certain: lenders will have their work cut out for them in the year ahead in adapting to the change.

“As an industry, we have a huge learning curve ahead of us,” Fiore says. “And at AAG, we’ll be working tirelessly to ensure we’re well prepared for March 2015.”

Written by Jason Oliva

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  • “AAG is currently analyzing its historical data to determine what the potential impact could be to its loan volumes in 2015 as it relates to the financial assessment guidelines” If you take all the loans from the previous year and analyze which ones would not have qualified if the financial assessment was in place you may get an idea but only time will tell. The only reason I could see for the time and money spent on this analysis is to determine whether you want to remain in the Reverse Mortgage space.
    Let’s see the volume in March 2016 when this has been in place a full year. It is no longer a loan for the person in need which I believe will impact volume more than 5 or 10% as stated by Joe Morris.

    • Good points. I’ll add that they have no way of measuring how many applicants would never have gone through with the new loan process. From my experience, we already tow the line between keeping a current client on board through the process and losing them to one of many potential frustrations.

      Are they counting the number of loans that would be a decline? What about the number of loans that would require a partial or full set-aside? I expect many will not move forward once they find out they are required to have a set-aside.

      My expectation is that we will lose 25%-30% of the current volume and it will need to be replaced with the mass affluent buying in to the “new reverse mortgage”. The jury is still out on that.

      • Matt,

        You also make good points. There is little doubt that all lenders have considered all of the points both you and treverse make and have concluded what impact it will have on their endorsement numbers as well as the endorsement numbers for the industry as a whole.

        Based on the unrealistic positive attitudes latched onto by so many in the industry (like life jackets to fishermen in a significant storm at sea), the 5% to 10% drop in endorsement volume is probably a common conclusion. So we see a range forming of between 5% and 30%; however, what does this mean as to origination revenues? One also has to believe that the borrowers who refuse to proceed with their HECMs because of set asides or just the intrusion of financial assessment will erode endorsement numbers still further. So while the endorsements for fiscal 2015 might have been 48,000 without financial assessment, the total for next year should be closer to 40,000 (only about 7 months of which includes financial assessment ) for a net loss of about 16.7% in endorsements.

        Unfortunately, as to lender origination revenue reductions, endorsement volume is not the only story. One also has to assume that there will be a significant drop in initial draws for those who have full or partial LESAs. While the result will not be nearly as significant as the lost endorsements, it will be felt!!!

        Let us say the volume drop is just 5%, but the origination revenue drop for lenders could be 7% to 9% due to smaller available principal limits after reduction for LESAs in light of their impact on the first year 60% disbursements limitation. If the endorsement reduction is 20%, of course the total origination revenue reduction average per endorsed HECM could be between 22% and 25%.

        I do not believe the serious of the problems is lower endorsement totals. I strongly believe it is in the loss in industry wide lender origination revenues.

        No doubt, my industry friends and I will be trying to laugh off at some restaurant during one evening of the 2018 NRMLA Convention the facade of a marketing media campaign the Extreme Summit has been and where HECM endorsements stand at that time but no doubt, all we will do is cry over such lofty dreams with no practical means for implementation even as industry leaders were pleading for proof that Saver v.2 and v.3 were somehow the NEW reverse mortgage using evidence that is in some cases decades old. We will be longing for the days of over 110,000 endorsements still not reaching 100,000 endorsements by even 2018.

    • Well Ray,

      It is tough being in a region where a principal city, SF, has its average home valued at over $1,000,000. If a senior with an average home sees an increase in the value of the home, has a current balance due of 40% to the value of the home, how in the world will higher values help? The homes of the mass affluent in San Jose are not much different.

      With jumbos only offering 30% proceeds to value, your market is very limited.

  • American Advisors Group has a long-term commitment to the
    reverse mortgage space. Our standard practice is to review our data—when significant industry changes like financial assessment are announced—to help determine the potential impact to our business. We are proud of our leadership position and are fully dedicated to helping America’s senior community age in place comfortably.

  • Why was MetLife a good indication? They saw the future and here we are. They self imposed as they saw problems arising. They followed through and no one followed with FA which hurt there originations. very forward thinking if you ask me.

    • They implemented the FA and their pipeline went to 0. Isn’t the FA going into effect in March? Good luck. I’m sure a few will get through after 3-4 months of processing.

      • There pipeline didn’t go to 0. It was lower b/c everyone didn’t implement FA and they were on an island. Processing will take longer as will U/W but 3-4 months is just silly ReverseGuy.

      • The reason why Metlife’s pipeline went to 0 when they implemented FA was because none of the other lenders required it. Its like comparing apples to oranges now that this time everyone will have to follow the same rules.

      • Exactly, everyone will have to abide by guidelines that very few who actually need a reverse mortgage will get through. There is no denying this is a need based product. The majority do not do a reverse mortgage until there is pain and a need. This perception has never changed the 15 years in the business. Luckily no longer in it. I like to see how things are progressing though.

  • Financial Assessment (FA) will eventually stabilize the industry and sustain its longevity. Many hurdles and changes to over come but in the long run, it will better our seniors, the industry and everyone who remains in it!

    John Smaldone

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