Moving Forward: The Reverse Mortgage Post-Financial Assessment

Now that the long-awaited Financial Assessment (FA) is finally here, reverse mortgages will draw even more comparisons to traditional mortgage lending practices as the industry moves “forward” post-April 27.

With credit underwriting and residual income analysis now required by the Financial Assessment, reverse mortgages are undeniably becoming more forward-like in their nature. For many, the new rules will require origination, sales, underwriting and processing teams to do things they have never before been required to do in the history of the Home Equity Conversion Mortgage (HECM) program.

“The reverse mortgage industry is now being forced to underwrite their loans similar to how the forward mortgage industry has always underwritten loans,” says Alice Sorenson, executive vice president at LRES, an appraisal and REO asset management company.

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Character Test

The Financial Assessment requires originators to analyze a borrower’s ability and willingness to meet financial obligations associated with a reverse mortgage, including property taxes, hazard insurance and maintenance upkeep.

To that end, lenders will need to collect more documentation that substantiates borrowers’ income. To determine whether a borrower qualifies for a reverse mortgage, lenders will be required to assess proof of income from pay stubs, bank statements, investment accounts, as well as any other assets a borrower might have.

“In doing so, they [lenders] have to do an analysis of residual income,” says Sorenson, whose company has clients in both the forward and reverse mortgage sectors. “It’s finding out the real residual income of a borrower and analyzing how healthy and stable is that income? Is it continuing or is it going to expire?”

Essentially, in doing the analysis, a lender is assessing if the borrower has the character to live by the rules and obligations of the contract they’re going into, Sorenson says.

“We’ve been looking at the character of a forward borrower for years. Now that is entering into the picture in the analysis of a reverse mortgage borrower,” she says.

One of the biggest changes coming to the reverse mortgage via the Financial Assessment is the manner in which lenders qualify a borrower’s income in the event they fall short of meeting the loan’s mandatory obligations, such as property taxes and insurance payments.

LESA vs. Escrow

Whereas escrow accounts in forward mortgage lending have allowed borrowers to establish an account to pay for future taxes and insurance obligations, the Life Expectancy Set-Aside (LESA) under the Financial Assessment serves a similar purpose.

Lenders can set up a LESA if a borrower’s residual income falls short of being able to meet their taxes and insurance payments, or can establish one at the request of a borrower who does have sufficient residual income to meet these obligations.

While the LESA aims to safeguard borrowers from defaulting on these necessary payments, the measure has its pros and cons.

“That’s positive in one regard but also negative because the borrower is going to get less funding that they might have been hoping to get from a reverse mortgage,” says Sorenson. “It’s the price new borrowers are going to have to pay because of what older borrowers in the past have failed to do.”

Some argue that had the LESA been a requirement in the past, it may have been able to prevent defaults experienced by past borrowers who became delinquent on their taxes and insurance payments.

And despite forecasts that the Financial Assessment will reduce volume anywhere between 6% and 20%, lenders do see an opportunity for the rule to grow the market on a long-term basis.

“Although the concept of a LESA can be somewhat daunting to us as salespeople, it is important to understand the value of a LESA for a borrower,” said Paul Fiore, executive vice president of retail lending at American Advisors Group (AAG), during an RMD webinar mid-April. “It really is a balance between selling the reverse mortgage and identifying potential credit challenges you might come across.”

Pre-emptive Assessments

In anticipation of the official Financial Assessment, some reverse lenders have been doing their own versions of the requirements as part of their qualification process for borrowers.

For the past six years, AAG has used a version of the Financial Assessment in its sales process to help borrowers see how a reverse mortgage can potentially impact their future, Fiore said.

But even so, the company has had to make some tweaks to comply with what is required under the Financial Assessment for the purposes of qualifying a borrower.

In the past, AAG formerly did only the residual income part of the assessment, and for the month-and-a-half leading up to the rule, the company has been testing the Financial Assessment as the way it is now required under the Department of Housing and Urban Development (HUD).

About 90-92% of potential borrowers AAG speaks to passed the residual income test during the preliminary rollout without any compensating factors whatsoever, Fiore said during the webinar.

“It’s extremely important to help borrowers achieve the benefits of a reverse mortgage, but if you get caught up talking about guidelines and prequalifying the borrower, then you miss many important parts of what’s being told to you from the client that would help you understand whether a reverse mortgage makes sense for them,” he said.

Reputation Management

Similar to AAG, Urban Financial of America’s retail division also used a version of the Financial Assessment worksheet before the rule took effect to show how a reverse mortgage can impact a borrower’s particular situation.

“The Financial Assessment forces questions that some haven’t been willing to ask in the past. This is a good thing,” said Sherry Apanay, Urban’s chief sales officer, during the RMD webinar. “A detailed review of a borrower’s financial status will solidify the need, but also show how it [a reverse mortgage] can be an important financial decision.”

The stricter qualification guidelines prompted by the Financial Assessment will also help enhance the reputation of reverse mortgages, especially in the eyes of other financial institutions and professionals.

“In reality, what we’ve seen over the past several years is that non-qualifying mortgages are synonymous with subprime, which is not a positive perception,” Apanay said. “The Financial Assessment will not only bring additional credibility, but a safer product to our borrowers as well.”

On the business-to-business front, this change in perception may also help lenders open the doors to possible relationships with other financial entities such as credit unions, financial advisors, and community and national banks, Apanay said.

The reverse mortgage industry has undergone yet another sea change now that the Financial Assessment has taken root. But despite the widespread changes, lenders overall agree that the benefits will translate into a stronger reverse mortgage product better equipped to serve seniors in the long run.

“At the loan level, the Financial Assessment is going to make healthier loans and that, in turn, is going to translate into a healthier economy,” Sorenson says. “It’s just a matter of time before the reverse mortgage continues to come into its prime and flourish, and become the financial tool that it has the ability to be.”

Written by Jason Oliva

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  • I always wonder, who are we all trying to impress? Why do we all pretend we love this FA issue? We go on and on about this as if it is great, no worries. Except that our clients, many of them, just won’t be able to make this work and have been taken out of the market. People will lose their homes over this. (OK, here comes the ‘never should have owned one’ argument).

    Then there is the part about “character assessment”. Now, there is a vague concept just waiting for someone to litigate for disparate treatment. What is character anyway, and how do you make it equal between young borrowers, middle age borrowers, and the elderly?

    This used to be a simple program. And as such, it had broad applicability. Unfortunately, we saw a major sea change in the housing market and instead of accepting that for what it was and making simple adjustments to create more “cushion” for the fund, we re-invented a good thing.

    The simplest answer is usually the correct one. The housing crisis caused the problem. So why on earth have we gone to such an extreme to punish the elderly? Oh yes, government
    .
    I for one am pushing for age to become a protected class so this type of treatment can be reduced.

    That’s all I have.

  • Jason Oliva did a great job writing this article. In fact, this could make a great mini overview to hand out to loan officers.

    I also just read my friend Nelson Locke’s comment. Some of his points are well taken, especially about the economic crash in 2008. He is right, a great deal of the problems have spurred out of the the crash but not all..

    We must come to terms with the past, the reverse mortgage was and still is a great tool for our seniors. However, many seniors in the past were bailed out of debt and their existing mortgages. We must ask ourselves, did we help all of them or were some just bailed out temporarily, only to find themselves back into maybe a worse debt situation than they were before they got into a reverse mortgage?

    What I am saying is that if back not to many years ago we were NOT looking at our senior borrowers past history of paying their debt obligations. I we look back and knew what we know now, we might of said, hey, these people are only going to be back in trouble again within a few years! We might have looked at it as we are not doing these seniors any favors, providing the LO had passion for our seniors and were thinking of their best interest?

    Yes, there will be difficulties getting accustom with these major changes. By the way, these changes are probably the most impacting changes to our industry since its inception.

    Those individuals that have only been in the reverse mortgage space their entire careers will have a greater degree of difficulty adjusting. However, if we all embrace the changes for what they are, we will find we will be able to be more successful than ever before!

    We may find out that the FA ruling will give the reverse mortgage a completely different image than it has had. The image I am referring to is in a very positive way. We will have the opportunity to use the reverse mortgage as a true financial planning tool. The financial industry will be looking at us differently. We will see companies changing their advertising strategies and focus on the new reverse mortgage image of a NOT only for need program.

    I see the challenges but I see the opportunities ahead for us all. Sure, many seniors may not qualify today that would have before. However, I am sure if we looked at their situation carefully they may be the one’s that had to be foreclosed on because of not being able to pay their property charges!

    John A. Smaldone

  • Jason writes under the heading “Character Test” the following: “The Financial Assessment requires originators to analyze a borrower’s ability and willingness to meet financial obligations associated with a reverse mortgage, including property taxes, hazard insurance and maintenance upkeep.” While willingness is a character test, the ability to pay is a capacity test. The two attempt to measure and determine two different things.

    Jason credits Alice Sorenson as saying:“At the loan level, the Financial Assessment is going to make healthier loans and that, in turn, is going to translate into a healthier economy….” Such conclusions are very common at NRMLA conventions. The economy is not going to get measurably better due to healthier HECMs. As usual it is hard not to get overly excited at these conventions and go off the deep end.

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