Reverse Mortgage Lenders Adapt to New Credit Rules

The reverse mortgage Financial Assessment has brought its share of new practices and procedures to originators who have long worked around the confines of a largely “no income, no credit,” product. 

Originators have reported an adjustment to the new requirements, which was to be expected. But on the topic of credit, lenders have had to make some major adjustments in order to accommodate originators who have little experience with credit checks and analysis. 

The rise of the “credit desk”

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Major wholesalers are working with their originator partners by providing the service of “credit desks,” or platforms where originators can gain an initial assessment as to issues around prospective borrowers’ credit. The originator can then proceed on an informed basis rather than having to request the borrower’s credit report or face associated fees. 

 

“The American Advisors Group (AAG) credit desk assists our wholesale partners in reviewing loan scenarios where the borrower has potential income or credit issues,” says Kim Smith, senior vice president, wholesale for AAG. “We work with our wholesale partners to understand the borrower’s scenario and discuss potential extenuating circumstances and compensating factors. Ultimately, we want to assist them as they process the file and, if necessary, advise them in situations where a Life Expectancy Set-Aside (LESA) or partial LESA may be required.”

In order to use AAG’s credit desk, a broker follows a pre-submission review process by submitting a request for either a “lite” or “full” review. A lite review requires minimal documentation and involves a basic financial assessment. It’s designed to give the broker feedback on the likelihood a prospective applicant will pass the full financial assessment requirements. 

A full review is more comprehensive and requires full documentation both for credit and income. 

Urban Financial of America (UFA) offers a similar service to its wholesale partners. At UFA, a “scenarios” desk serves as a pre-review of circumstances to see if the borrower is likely ineligible based on that initial information. 

“Brokers like to save the borrower time if they won’t qualify upfront,” says Sherry Apanay, chief sales officer for UFA. “We see a lot of unique property appraisals, Powers of Attorney and doctor’s letters, trusts, etc.—any scenario a little outside of the ordinary where the broker isn’t sure if something will result in an approval issue.” 

Working through credit inquiries

The credit desks to date have identified both specific application outliers as well as some common issues that have come up across the origination landscape. 

“Working with our wholesale partners, many of the scenarios that cross the AAG service desk are fairly unique in nature; we haven’t come across a set of questions or issues that point to a common thread,” Smith says. “We work closely with our clients to assist them in recognizing and  documenting compensating factors.”

Following the initial Financial Assessment rollout in April, originators reported many of these unique scenarios and suggested some tips for working through them: conducting a pre-interview, getting comfortable with the concept of a set-aside, asking all relevant questions and examining credit early, among other tips. The credit desks are an additional help for originators who find unusual situations throughout that initial process.

Preliminary findings from the credit desk  

The credit desk can be helpful, but lenders are finding there are still misunderstandings about how credit is considered as a part of the Financial Assessment. 

“There seems to be a general misunderstanding that the lender can decide to give a borrower with credit issues a partial LESA due to the circumstances. Originators don’t seem to understand that partial LESAs are for income shortfalls and full LESAs are for credit issues,” Apanay says. Further, she notes that compensating factors are for income shortfalls only—not for derogatory credit. In cases where there has been derogatory credit, the borrower must exhibit extenuating circumstances, she stresses. 

“We haven’t seen many extenuating circumstance questions yet, but what we have seen haven’t appeared to be able to qualify as such,” she says.

Extenuating circumstances have been approached by originators as somewhat of a gray area to help qualify borrowers whose credit history alone doesn’t allow them to do so. 

“One example was a couple with several medical events over the past few years, but they continued to take out numerous additional credit lines (i.e. incurring new debt) that would have contributed to their derogatory financial situation, thereby not qualifying them for an exception. Others have been reasons for the derogatory credit, but not actual extenuating circumstances i.e. the trade lines were cosigned for a child or parent who didn’t make the payments.”

 

AAG has also observed some misunderstandings among broker partners, but more so that they are quick to assume a loan won’t qualify when the credit desk finds it likely will. 

“My number one observation about FA implementation in the wholesale channel is that we often see partners quickly assuming that a senior client is not able to qualify for a reverse mortgage, post-FA,” Smith says. “Our team has noticed many partners immediately thinking a ding on credit is a dead deal. That simply is not the case. I think as an industry we have to work together to train ourselves and our partners to recognize and document extenuating circumstances and compensating factors. This part is where we see the biggest learning curve and opportunity for improving how we work through the post-FA files.”

This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.  

Written by Elizabeth Ecker

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  • Does anyone think a loan should possibly be denied for not passing the capacity component of FA? If Bor has income shortfall, shouldn’t full LESA be worse case scenario?

      • Loan characteristics: 960,000 value, 156,000 mandatory obligations, sparkling credit 800 fico, perfect property charge history, no collections or judgements, 155,000 2nd year LOC. NBS 56 yrs with 7000/yr p/t income, and175,000 documented assets for our Bor. We even have 80,000 available unused revolving credit for emergencies. This client was denied a HECM because HECM deemed to be not a sustainable solution. At first underwriter said no LESA would be required. Then revised and said full LESA would be required. Then denied loan because unsustainable. Our 62 yr of age client has zero income and wants HECM to bridge gap until full retirement so he will not have to take 25% hit for early SS. We cannot use NBS income because not enough to meet RI requirement. Client had solid plan to use assets, wife’s income, future SS, and 47,000 funds from closing to bridge gap. Client wants to live in home for 4 more years, then right size using H4P to finance a more modest home. Client denied a HECM by a reputable investor citing sustainability talks with NRMLA and HUD. Set aside (pun intended) the property guide for a moment, does anyone really think we’ll have a default risk here even if UPB increases by several hundred thousand dollars? We have 960,000 present value. The MMIF needs more loans like this one to make the fund stronger. This bad outcome is driven by fear of NOR from HUD. Customers will suffer not to mention at the last conference in NYC we were instructed that worst possible outcome of FA would be full LESA. This is no longer true. Apparently, even with Full LESA of 145,000, this loan is dead. Good grief!

      • Greg,

        This story is odd at best. It is easy to believe that an essentially $1 million home with a 62 year old borrower would have a Fully Funded LESA of $145,000 or more. It seems what killed the transaction was the financial plan.

        But if the problem was not the passing the willingness to pay portion of financial assessment, then the Fully Funded LESA would only apply it was at least more than one-third greater than the Partially Funded LESA.So was the Partially Funded LESA at least $108,750.01?

        You are right about the MMI Fund. There is little way that this home will end up at termination costing the MMI Fund anything. If anything the MMI Fund will keep all MIP paid in (both upfront and ongoing) since the likelihood of loss reimbursement on this HECM should be de minimis.

        Quite frankly, delaying Social Security benefits in this situation through debt proceeds seems terribly laden with risk and ill advised, especially if the reason that the applicant is not working is connected to health issues.

        On what grounds would HUD issue a NOR in this situation? That threat seems to be the risk that hampers the closing of this HECM. Is there any way to ask HUD for a pre-determination of NOR risk on this loan?

      • You should be able to use the LOC that is left over from the LESA for dissipating assets. Use the $155k LOC as an asset from HECM proceeds and the $170k assets you listed to calculate a monthly income from it. That should do the trick. You then should be able to use the NBS Income to reduce family size and use as a compensating factor.

      • Also to add what I already wrote, the sustainability issue is for an assessment after the LESA. I received a memo from “unnamed lender” stating the borrower would still have to pass FA without the taxes and insurance included. This would be for all other debt. So the question has to be, what other debt besides taxes and insurance does your borrower have that would make the loan unsustainable?

        Using 62 years of age with $155k LOC and $170k in income for dissipating assets amounts to roughly $1,289 per month. If you use the NBS income to reduce family size, your borrower should only have a maximum monthly debt obligation of $1,878 per month. If your borrower has monthly debt of over this amount, he will fail that test. However, if your borrower has $170k in assets, you can use those assets to payoff those debts prior to closing and exclude them from FA.

  • HUD needs to address the collection issue on credit reports. A minor collection of a few hundred dollars should not require a full LESA. Medical collections in particular should be addressed. I have seen a few borrowers fail FA for this. Coming from the forward world, I have closed many FHA loans where collections were on the credit and still able to close the loan. Maybe HUD should think about common sense lending and implement a specific aggregate collection amount that can be overlooked. Some borrowers don’t even know they have collections on their credit until they are told it is there.

    Another mystery is why you can’t payoff debt on the HUD to eliminate the debt payment in its entirety. A borrower that is receiving funds at closing should be able to payoff debts and exclude those payments from the residual income test just as an FHA cash out on a forward can eliminate that payment from their DTI ratio on DU or LP. Maybe the mandatory obligation needs to be reconsidered so a senior that wants to pay their debt in full can get the loan if there is a shortfall otherwise.

    • ravens9111,

      Your anecdotes are not conclusive but certainly demonstrate how applications with case numbers assigned which would slide through to closing before financial assessment are now being culled out before closing. What percentage of applications are you seeing being eliminated in this way?

      • It’s still too early to tell the percentage that fail FA from minor collections but so far I would say about 5%. These are the borderline borrowers that should still qualify and pass FA otherwise. Even if a borrower has a good credit score, it doesn’t matter (it should still be a factor since credit score is usually a good indicator for credit risk profile).

        From my experience so far, I have seen roughly 15% fallout from FA. I don’t do an application until I have authorization to pull credit so I can verify payment history on revolving and installment debts. Usually it is pretty clear if an applicant will pass or fail. When I see no derogatory late payments but collections on the credit, I send in for a pre FA review. Collections have failed every time and always asked for LOE with documented extenuating circumstance, even if the aggregate collection is very small ($500 or less). A valid extenuating circumstances, such as death, loss of income, medical issues, etc. do happen but haven’t had one for such cases. When a borrower does not know the collection was even on credit it’s an automatic fail or if the borrower disputes the collection it is an automatic fail.

        However, even with failing due to collection or derogatory late payments, I have seen roughly 40%-50% still qualify with a LESA. The problem is telling a borrower they need one for a matter of a few hundred dollars in collection even if they can document making taxes and insurance payments on time in the past.

      • ravens9111,

        Your anecdotes are helpful and insightful.

        So if you are retaining 50% of the 15% that fail financial assessment that sounds like your personal fallout rate is up 7.5%. If your prior fallout rate was 37.5% your new fallout rate is 45% for an increase of 20%.

        What are your LESA amounts looking like?

        Have a great weekend and good luck.

  • Greg,

    It is subjectivity that will create differences in loan approvals and in cases like this drive applicants to shop their circumstances to various lenders.

    HUD should provide initial review of sustainability to satisfy investor concern especially since FHA and Ginnie Mae are simply sections within HUD.

    • Subjectivity without concrete baseline policies just doesn’t work well. Right now underwriters are operating with fear of NOR. This means good loans will not get approved.

      • Greg,

        I have heard the opposite as well. Both of us bring a low level of evidence, anecdotal. Somehow there needs to be a reliable statistical survey or better yet study of the impact of using judgments in the underwriting process. Unfortunately, the stats would be based on a subjective evaluation of the impact of subjective determinations but that should not stop the study from being performed.

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