The upcoming financial assessment will make reverse mortgage borrowers have to prove they’re not “deadbeats,” writes The Mortgage Professor in a recent article, noting that the new rules are also tougher in some ways on those seeking a reverse mortgage than a standard mortgage.
While the income and credit requirement on reverse mortgage applicants — to be imposed March 2 — should reduce the default rate on new loans, the downside is that future borrowers “will have to pay the higher costs of originating and servicing HECMs, and wait longer for deals to be completed,” says The Mortgage Professor, a.k.a. Jack Guttentag.
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, HUD released its final time frame and guidance for implementation late last year.
In some ways, the new underwriting requirements that lenders will apply to all applicants are tougher than those used with standard mortgages, Guttentag says.
“This is strange, considering that applicants for reverse mortgages pay only taxes and insurance whereas applicants for standard mortgages also pay principal and interest, which is usually much larger,” he says. “On the other hand, the applicant for a standard mortgage who fails to meet the underwriting criteria is rejected whereas the applicant for a reverse mortgage who fails the test has another option, called a Fully-Funded Life Expectancy Set-Aside.”
The Set-Aside is an amount drawn under the HECM that is reserved for payment of property taxes and insurance by the lender, and is viewed as sufficient to assure the required payments can be met through the entire lifespan of the borrower.
“I calculated the required Set-Aside for a borrower of 75 with life expectancy of 144 months, taxes and insurance charges of $5,000 a year, and interest rate plus mortgage insurance premium of 5%,” he says. “It was $54,000, not a trivial sum. If this borrower had equity in his home of only $100,000, the Set-Aside would use virtually all of it, and no additional funds could be drawn. If his equity was less, the required Set-Aside would not be possible and he would be rejected.”
Another option is the Partially-Funded Life Expectancy Set-Aside, which is available to applicants who meet the credit requirements and are therefore viewed as willing to meet their obligations, but don’t have enough income.
The new rules have two “remediable weaknesses:” new underwriting requirements must be applied to every applicant, and lenders must make the required payments under the fully-funded Set-Aside, he says.
Regarding the first, he says, “[…] applicants with plenty of equity in their homes might find that the fully-funded Set-Aside imposes no burden on them at all, in which case the underwriting costs could be avoided. There is no reason why lenders and borrowers should not have that option.”
In addition, borrowers should have the option of making the required payments with their own funds, with the inducement that an equivalent amount will be transferred from the Set-Aside account to the borrower’s credit line, he says.
“The purpose is to encourage borrowers to become responsible,” he says. “This would involve no risk to FHA, since the lender will make the payments if the borrower doesn’t.”
Read the article here.
Written by Cassandra Dowell