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.”
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