Analyzing Credit: Perspectives from Reverse Mortgage Originators

The Financial Assessment (FA) has forced reverse mortgage lenders to adapt to new credit rules during the underwriting process. And for some originators, these new guidelines for determining a potential borrower’s “willingness and capacity” to afford a reverse mortgage have not been total deal breakers, despite previous expectations.

Clearly, one of the biggest differences in originating under the FA is that originators now have to fully vet potential borrowers and their financials prior to their application, says Brian Cook, mortgage advisor and reverse mortgage specialist at Primary Residential Mortgage.

“Previously it was simply comparing the loan-to-value. However, with the FA, an originator has to be more conscious of their client’s financial standing and history,” Cook says.

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Even though spotty credit is not necessarily the end-all-be-all when it comes to reverse mortgage eligibility now under the FA, it is one piece of the puzzle that provides a glimpse into a prospective borrower’s financial picture.

“With the FA, you are mostly going to look at debts and their ratio-to-income, however, one still needs to be conscience of other factors, including collections and previous mortgages on credit,” Cook says.

Analyzing credit is pretty straightforward, says Kari Van Kleef, operations manager at Fairway Independent Mortgage Corporation.

“On the reverse mortgage side it’s more lenient as far as you’re not so concerned with credit score,” Kleef says. “For the collections and judgements, you need to find out what they are, but clients don’t need to necessarily pay them off at that point.”

Kleef, who runs all of operations and processing for Fairway, notes that during her credit analysis she will look to see if a client’s has recorded any 30-day late payments in the last 12 months with their mortgage. She also does the same for the client’s installment and revolving credit.

Getting the documentation from potential borrowers to prove certain extenuating circumstances have contributed to any credit blemishes creates some opposition, though nothing too out of the ordinary for clients.

“Most people are accustomed to providing this documentation when doing general financing,” says Kleef. “It’s when you have to get more personal and have clients explain and prove it [their circumstances], you get a little pushback.”

When conducting a credit analysis, Fairway doesn’t see many cases where the FA guidelines prevent clients from qualifying for reverse mortgages, particularly if they have “lates” on their revolving credit card debt.

“There seems to be plenty of compensating factors or extenuating circumstances to get around those lates,” Kleef says, noting that the most important areas of consideration when doing a credit analysis surrounds property charges and mortgage installment debt.

“We’re spending a lot of our time helping people that have very limited income. That’s bigger than anything on a credit report,” Kleef says. “It’s meeting some of the residual income factors that have been more difficult than meeting some of the other factors.”

Written by Jason Oliva

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  • “’With the FA, you are mostly going to look at debts and their ratio-to-income, however, one still needs to be conscience of other factors, including collections and previous mortgages on credit,’ Cook says.” Ratios? What in the world is Brian talking about, FHA forward mortgages? The other originators in the article seem to know what HECM financial assessment actually is.

    The HUD created terminology in the financial assessment is abominable. Terms like “Monthly Residual Income” (MRI) show how little those who created financial assessment actually know about finances. The amount that is described as MRI is nothing more than HECM projected monthly cash flow (PMCF).

    The easiest way to understand why it is PMCF and not MRI is by looking at the dissipating asset computation. If the borrower has $50,000 in cash reserves and the TALC life expectancy is 12 years, this adds $347.22 per month to what HUD labels MRI. yet how is cash from savings, income or residual income? The dissipating asset computation does estimate one possible modification to the PMCF of the HECM applicant.

    HUD uses lending limit rather than home value limitation, maximum claim amount rather than maximum home value and MRIS rather than PMCF. HECM speak is almost a different language. There is nothing wrong with principal limit when speaking of the principal limit at origination but there should be some adjective added to the name when we are speaking about the current principal limit of an active HECM such as current month’s principal limit.

    We already have enough confusion when it comes to HECMs but HUD in its wisdom, just keeps adding to it by the terminology it employs. If the CFPB is complaining about confusion over reverse mortgages, then HUD should be taking the opportunity to scale back on its unusual terminology and give us terms that are much more readily understood.

  • “There seems to be plenty of compensating factors or extenuating circumstances to get around those lates…”

    Please correct me if I’m wrong, but I’m pretty sure compensating factors can only be used for capacity and extenuating circumstances for willingness.

    I don’t believe it is true that you can use compensating factors to get around any late payments or other derogatory credit such as collections, judgments, lates on taxes, hazard, HOA fees, etc. Sure, you can use extenuating circumstances with documentation that correlate when these events happened. However, I also find it hard to believe this happens more than not.

    • ravens9111,

      Hard to argue against your points. Although sometimes in interviews salespeople have a tendency to get carried away in their claims. You have definitely found one such case.

  • “Well, we will see what we will see.”

    There has been way too much positive posturing to believe all of the positives we have heard about financial assessment. It is getting like all of the negative talk we heard in the past about it; there has been far too much of both positive and negative talk.

    With endorsements at over 5,000 for both June and July, rumors went out that somehow in someway the increase had to do with financial assessment. The fact is the increase in endorsements came about because seniors were trying to avoid the financial assessment mandate on April 27. 2015.

    August 2015 endorsements should also be way up due to the large number of case numbers assigned during April (13,500). The last time case number assignments have been this high was September 2013 when they were just over 16,000. Since then until April the average number of case numbers assigned per month was 6,900 almost half of what they were April. Considering that it takes about four months for a HECM to go from case number assignment to endorsement August should be a good month for endorsements.

    • I don’t believe the average time from case number to closing is 4 months, especially pre FA. I would think 45 days is much more typical. However, there was a noticeable slowdown with turntimes on underwriting so an extra 30 days is reasonable. I think the majority of pre FA loans have already closed. The ones remaining most likely have issues and will not close. If I had to put a number on it I would say 80%-90% of pre FA loans that are going to close are closed out. The other “trailers” will be finished by the end of August or September.

      • ravens9111,

        HUD does not track closings since that information is not reported to HUD; however, HUD tracks endorsements.

        The date of closing and endorsement are entirely different. Endorsement normally comes about 75 days following closing.

        So we generally agree as to your statements regarding closings.

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