AARP: New Changes Make Reverse Mortgages Tougher

While the Department of Housing and Urban Development (HUD) has tightened lending criteria for reverse mortgages, the new standards are designed to reduce defaults — which at one time represented about 10% of outstanding reverse mortgage loans, the AARP writes in a recent article

The changes, which stem from the Financial Assessment that took effect April 27, “require that lenders determine whether would-be borrowers have enough income to keep up with property taxes and homeowner’s insurance so they don’t default on the loan and, possibly, lose their home,” AARP writes.

Maintaining ongoing property charges, such as taxes and insurance, has been a problem for some borrowers in the past. 

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According to Lori Trawinski, director of banking and finance at the AARP Public Policy Institute, about one in 10 outstanding loans were in technical default in 2012 because borrowers couldn’t keep up with those bills.

“The new lending standards are designed to reduce defaults,” the article notes. “Lenders will be required to look at credit reports, assets, income and the borrower’s history of paying taxes and homeowner’s insurance.”

While the changes will make it more difficult for people who are struggling with income flow to meet the criteria, Trawinski says, a borrower could still qualify by having the lender set aside some of the loan’s proceeds to cover property charges down the road. 

Prospective borrowers in high-tax states, however, will need to determine whether a set-aside will still make a reverse mortgage worthwhile. 

“We think reverse mortgages can be a useful tool for some people,” Trawinski says. “That’s where it becomes difficult. Everybody is in a different financial circumstance.”

To read the AARP article, click here

Written by Emily Study

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  • One thing AARP gets right is the purpose of financial assessment and what it actually attempts to measure. It does not force seniors to look at their finances more diligently, help us to determine suitability, or protect those are not likely to benefit from HECMs as at least one reverse mortgage originator is declaring in another publication.

    As the AARP author declares financial assessment is “designed to reduce defaults” on property charge payments but only for those HECMs with case number assignments after 4/26/2015. It is just that simple. There were no tests performed to determine if the design will do that even though the assessment procedures seem well suited to do just for HECMs with case numbers assigned before 9/30/2013; the problem is financial assessment does not apply to those HECMs.

    A lot has been said and concluded about potential defaults on HECMs but all of those had to do with a base we were far more familiar with, HECMs with case numbers assigned before 9/30/2013 when principal limit factors (PLFs) were much higher on Standards and there was no first year limitation on disbursements (FYLOD).

    While there is little question that financial assessment will result in lower defaults, the question is will the lower number be substantial and will the price of lower endorsements be worth it? Lower PLFs and the new FYLOD may have made the need for financial assessment mute! The time needed for sufficient data on defaults from the post 9/29/2013 case number assigned HECMs to sufficiently materialize, be gathered, and be analyzed is some years away.

    For now what is needed is for lenders to better train their originators about the purpose and use of financial assessment. Right now it seems those at AARP understand financial assessment better than many HECM originators.

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