[Poll] How Much Will the Financial Assessment Impact Business?

The long-awaited reverse mortgage financial assessment’s implementation date is coming fast. As March 2 approaches, lenders and originators are preparing their teams for the new rule, which is sure to have a major impact on the reverse mortgage origination process.

Reverse mortgage volume ended 2014 on a high note, but 2015 looks to be a whole new ball game. How much impact to your business’s loan volume will the financial assessment have? Weigh in by answering below.

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Written by Jason Oliva

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  • It will be interesting to see industry #’s in 6 months based on the projected declines above by those in the industry. My question is how many folks are going to sit/discuss options with prospective borrowers and spend an hour or 2 educating them on reverse mortgages before asking for all their financials/income/credit ect. to see if they qualify? And how many prospective borrowers(who are very private in nature) are going to provide all this information to see if they qualify before learning the basics about the program??…Kind of a catch 22??? I don’t think Fred Thompson is the answer. Their are folks who don’t even want to give their date of birth until you start answering questions on how the program works. Could be a lot of time educating someone only to find out they don’t qualify once you start looking at income/credit. This already happens even with current qualifications, but will be more so soon. Currently it is fairly easy to ask someone their age, home value, and outstanding liens just to see if you may be able to help them. This will no longer be the case…

  • In all the discussions about FA, the fact that all HECMs used to have a mandatory service fee set aside and were only adjustable rate is not mentioned. If you read the actual report from the Urban Institute, you will learn that 2/3s of the shortfall in the MIP fund was caused by something other than the financial condition of the borrower or default status.

    Mandatory set aside in the past was calculated on property value, but the FA formula for the set aside moves that calculation to the borrower’s income/assets/credit. Why not use the formula based on the property value that we used to have? And require set aside for all loans?

    FA only addresses non payment of property charges, due to a lack of income/assets/credit. It does not address default for other reasons, or the MIP fund shortage for other reasons. Making a link between borrower income/assets/credit, the end of term of the loan, and/or default and MIP fund shortfall is a huge stretch in logic.

    FA changes the qualification for repayment of the loan from the property to the borrower. This is a major change of the terms of the HECM program. The more this fundamental concept is fiddled with, the more unintended consequences we will see.

    Here is the link to the Urban Institute’s report:

    http://www.urban.org/UploadedPDF/2000060-The-2014-Actuarial-Report-on-the-FHA-Mutual-Mortgage-Insurance-Fund.pdf

    • JusttheFactsMa’am,

      What mandatory set asides were once calculated based on property values? Since the only one you refer to is the servicing fee set aside (which was never mandatory unless there was a clause in the mortgage agreement for monthly service charges), let us discuss that.

      Determining the amount of the servicing fee set aside is a simple sinking fund problem. It is the present value of the monthly servicing fee over the number of months until the senior reaches age 100 (using the HECM age of the borrower) discounted by one-twelfth of the sum of the expected interest rate and the ongoing annual MIP rate (assuming that the first payment is at the beginning of the month). Thus in early 2009 if the borrower was 62 years old in HECM years, the monthly servicing fee was $30 and the expected interest rate was 5%, then the servicing fee set aside would have been $5,758.26. You can see the formula in Section 2 of Appendix 22 of the HUD HECM Handbook 4235.1.

      Financial assessment has little to do with the MMI Fund and absolutely nothing to do with any kind of shifting the responsibility for repayment of the loan from the property to the borrower. This again is all myth. There has never been any HECM related nonrecourse protection on property charge payments unless they were paid for by using HECM proceeds.

      Financial assessment is not being instituted to save the MMI Fund money. Financial assessment is being instituted to mitigate loss in the reputations of lenders, servicers, and FHA over foreclosures for uncured property charge defaults on HECMs with case numbers assigned after March 1, 2015. The purpose of eliminating Standards and instituting the 60% principal limit cap on first year disbursements were as attempts to lower projected future MMI Fund losses on HECMs with case numbers assigned after 9/29/2013.

      The summary report by the Urban Institute is a good reference; however, it never talks about the percentage of loss that comes from any source other than that which came just from the losses from last fiscal year. The ending balance of the HECM portion of the MMI Fund for fiscal year 2014 was a negative $1.2 billion but among the items offsetting the gross losses reflected in that ending balance is over $5.9 billion in net funds transferred out of the forward mortgage programs in the MMI Fund over the last 5 fiscal years and $1.7 billion transferred out of the US Treasury at the end of fiscal 2013. That means that before the offset for funds transferred into the HECM portion of the MMI Fund of $7.6 billion, the HECMs endorsed after fiscal 2008 have an expected $8.8 billion in discounted net losses. Most of that comes from the inability of the projected values of the collateral related to fixed rate HECMs which were endorsed before January 2014 to cover the projected balances due upon their termination. Excluded from that last sentence are Savers and all foreclosures for uncured property charge payment defaults.

      It is unclear from what sources you are getting your information but you clearly need better sources and even as to the one good source you cited, it is important you understand what it is you conclude from it.

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

      • I misspoke, the service fee set asisde was the age calculation, you’re correct. My opinion is that whether a set aside is done using that formula or one based on property value, it is a better method than using the income/assets/credit formula that is in FA. Opinion, not fact, no reference needed.

        In the example you give, the loan you cite would have had over $5000 set aside to pay any delinquent property charges. I realize in California and New York that would likely not pay a full year, but other states would clear the delinquency until the property moves to REO and is sold. So your example reiterates this formula could be a better method than income/assets/credit.

        The Urban Institute report is quoted because it is an interesting -and very debatable! explanation of the fund shortage, not a justification for FA, and exactly why FA and the MIP fund issue are two separate issues.

        If you have experience with originating forward mortgages, you will realize that once income/asset/credit documents are used in the qualification process, they can also be used in the recourse/liability process. It’s simply my opinion that it will have far reaching unintended consequences. If there’s another way to achieve the same result, like a service fee set aside, why not do it that way? Opinion, not fact, no reference needed.

  • I feel us RMSs are missing the question mathematically (percentages to some must be hard??!). I can’t imagine that any answer that says “less than 15%” could be in anyone’s mind! To reword the question; Would you say that you’ll loose less than 1 loan in 20, or 1 loan in 20, or 1 loan in 10 or… worse, 1 loan in 5?

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