Lenders Brace for Impact of Reverse Mortgage Financial Assessment

The financial assessment is a little more than six weeks away. And as the reverse mortgage industry braces for the upcoming change, only time will tell how the new rule will impact volume.

But until then, the industry is split between lenders who anticipate minimal impact on loan volume and those who expect a reduction by at least 15% as they adapt to the change.

The confidence of lenders who largely expect the implementation of the financial assessment to be a “non-event” is bolstered by their experience on the forward side of mortgage lending and the simulations they’ve run to assess the potential impact following the March 2 implementation.

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“Our belief is we’re probably not going to see more than a 3-5% impact, which is minimal to us,” says Dan Harder, president of 1st Reverse Mortgage USA, a division of Cherry Creek Mortgage Company. “Because of our background in forward mortgage lending, from an underwriting and risk management standpoint, philosophically it’s kind of a non-event for us.”

The underwriting staff of 1st Reverse Mortgage USA/Cherry Creek comprises six full-time designated underwriters who have an average of 20 years of traditional lending underwriting. They are also all VA-approved. But even so, the challenge lies in getting personnel up to speed on implementing the necessary documentation required by the financial assessment.

“Our underwriters are already equipped to understand extenuating circumstances, compensating factors and credit risk,” Harder says. “For us, it’s more of how we implement [financial assessment], but for some it could be a heavily burdensome event.”

In a recent RMD readers poll, 54% said they expect to see a 15% or greater reduction in loan volume as a result of the financial assessment. Meanwhile, about 14% anticipate a reduction between 11-15%, while 16% expect a reduction of about 6-10%. Voters representing those who expect less than 5% reduction in volume represented 16% of total votes as the second week of January.

For top reverse mortgage lender AAG, the expected number falls between 8% and 10%, based on the company’s analysis.

“AAG has conducted a thorough analysis to determine the projected impact that the new financial assessment rules will have to our business, and simulations show a potential 8-10 percent reduction to current business volumes,” says Paul Fiore, AAG executive vice president of retail lending. “However, through expanded marketing efforts we believe we’ll not only compensate for the potential decrease in loan volumes, but ensure sustained business growth in 2015. We don’t think this is unique to AAG, but expect that the industry as a whole is working to increase marketing activities to stay ahead of the curve.”

Others are hesitant to put a number on any potential impact just yet.

“There will be an impact, but there are just too many variables to put a number on it,” says Gregg Smith, president and COO of One Reverse Mortgage.

While lenders could look back on past clients and their credit to see how that relates to the financial assessment’s willingness to pay portion, Smith says a lack of true data on borrowers’ capacity to pay presents a challenge in forecasting who would have difficulty in meeting this requirement.

“There’s going to be a short-term learning curve and a steep learning curve for the changes that are going to happen on March 2,” Smith says. “Initially, in the first 6-12 months, the industry will have some heartburn internally trying to work through and refine the process.”

Open Mortgage, which also plans to rely upon its forward lending experience in adapting to the financial assessment on the reverse side of its business, is already well underway on hosting a series of webinars to facilitate discussions on training. The company expects a 5%-10% volume impact as a result of the new rule.

“Open is going to be prepared since we’re a large forward lender and that’s going to help us from that standpoint,” says Joe Morris, senior vice president of Reverse Mortgage Lending for Open Mortgage. “Income and credit is going to be forward-like, so we’ve had a lot of help as far as training is concerned.”

Ultimately, lenders view the assessment as a short-term adjustment that has long-term benefits to the reverse mortgage product and to the industry as a whole.

“For AAG, financial assessment puts into practice something that for us has been used for many years as more of a sales effort—having a clear understanding of the borrower’s current financial situation before reverse mortgage and their ability to manage their loan in the future,” Fiore says. “In the long run we believe financial assessment only serves to make the product stronger.”

Written by Jason Oliva

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  • Are the results of the poll so different than the estimates of lenders such as AAG? It is hard to tell since the poll did not provide any breakdown of percentages above 15%. Normally it would be those most hurt by a new policy which one would expect to be most vocal so one can make a case for saying that the upper end of the poll is probably overly represented.

    Of all of the estimates made by lenders, AAG in light of the poll seems likely at 8%-10%. Of course if that is the case, then HUD has created a financial assessment which far exceeds a reasonable target of about 4%. However, then again if the actual drop is 4%, would that mean that HUD was targeting the right 4% or any part of it? While it seems HUD has used the right measuring tools, one must ask if what seems right, is right? That will no doubt take years to determine with any degree of accuracy.

    The hard thing will be to tell what any drop means. With expected spikes in case number assignments over the next 29 business days, as some rush to beat the March 1st financial assessment deadline, the picture of what this fiscal year would otherwise look like will be hard to determine. For example, if business had dropped anyway this fiscal year as expected based on our general trend in business since fiscal 2009, what will a drop of 15% in endorsements mean? Was it another 13% drop in business plus a 2% impact from financial assessment? Hard to tell what that means since the majority of the HECMs obtaining case numbers in March will not be endorsed until at least July, i.e., if there are no major delays in closing these HECMs.

    Here are some of the problems in measuring the effect of financial assessment. Will financial assessment cause some prospects to lose interest in reverse mortgages who would otherwise get counseling or fill out an application? Will a higher percentage seniors fall out after counseling or in the application process before a case number is assigned? Those two groups will be impossible to measure as an industry since HUD only starts tracking applications after they have received a case number.

    Here in California we expect some additional fallout due to the new 7 day cooling off period. So how does one differentiate the reason for fallout? Was it the cooling off period or financial assessment which caused the borrower to fall out or was it a more traditional cause? After all our recent historical fallout rate following case number assignment is well above 30%.

    Because of the size of our California business, any fuzziness in lower endorsement and closing numbers will be reflected to some degree in any national drop in industry endorsements and closings. Some of us expect Fiscal 2016 to be more reflective of the impact of financial assessment on production and endorsement numbers than either fiscal or calender 2015. Since one of the primary purposes of financial assessment is to mitigate property charge defaults in the first 60 months following initial funding, measuring the success of such mitigation will not be fully measurable until March 2020 although reasonable estimates could be made as early as fiscal 2019. Hopefully financial assessment will be a blip on the way to reaching a 300,000 endorsement peak in 2018 as hoped for by the CEO at Liberty.

    So for sometime the best we will able to do to determine the real impact of financial assessment will be to poll originators and solicit detailed information on fallout from lenders. A loss of 8% to 10% in business due just to financial assessment would be like a dark cloud over the industry.

  • Lets face it, the Financial Assessment ruling will not only impact the market initially but it will impact it for the rest of the HECM life time.

    Some people are NOT going to qualify that would have qualified prior to March 2nd of 2015. That will never change, will be a new fact of life. What percentage (%) initially will affect the industry, we are all going to be guessing at this point.

    However, the Financial Assessment ruling may just be the ruling that will give a long term life to the HECM! Certain things had to change, no give or take on that!

    We are all going to to be facing a learning curve along with our seniors, we have no choice.

    In the long run, everything will work out as long as each and everyone of us educate our self’s thoroughly over the next 6 weeks.

    It will be up to us to have the answers for our borrowers. It is also going to be up to the loan officers to know what new documents are going to be needed when the application is taken!

    The process will be as difficult or as smooth as we make it to be. The opportunities that will be available for the reverse mortgage industry in coming years are going to be tremendous.

    We have a lot to learn and absorb but we can all do it and we can help one another out while we are learning. I am optimistic about the future and so should all of you reading my comment. Make it a great weekend.

    John A. Smaldone

    • John,

      I could pretty much agree with everything you wrote except this: “However, the Financial Assessment ruling may just be the ruling that will give a long term life to the HECM!”

      How will “the Financial Assessment ruling” give the HECM “a long term life?” Will it help the MMI Fund in any substantial way? If so, please explain how. Or is there another way it will extend the life of the program you had in mind?

      Per the majority of RMD survey respondents, Financial Assessment as it stands on its own will reduce business by over 15%. If that is true then Financial Assessment is far too harsh and stringent. Lenders need financial assessment to reduce their exposure to what some call reputation risk and FHA is not opposed to Financial Assessment although it took FHA five years to issue the ruling and related guide.

      Financial assessment will not increase endorsements but as you say, it will cut out those who would have qualified in the past. What you did not say is that it will actually mitigate the amount of defaults that would otherwise take place; no one can say that just yet or what degree that will be true. How effective Financial Assessment will be at accomplishing its purpose will not be reasonably known for years unless the percentage affected is so high that not even lenders can bear it.

      Yes, we have all heard the line that we now have a new HECM that is better for borrowers. But is it really? It is definitely better for the MMI Fund, lenders, and FHA but not necessarily borrowers.

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