Reverse Mortgage Originators Grapple with Extenuating Circumstances

The Financial Assessment (FA) has, without a doubt, complicated the responsibilities of reverse mortgage originators since it took effect late April. As originators now work with prospective borrowers on a much more financially intimate level, some are facing obstacles when approaching one of FA’s key components: extenuating circumstances.

In its guidelines on determining extenuating circumstances, the Department of Housing and Urban Development notes that reverse mortgage lenders must make a “connection between the specific occurrence(s) and the measurable impact on the occurrence(s) on the mortgagor’s finances.”

“This can be a little subjective sometimes,” said Dan Hultquist, a certified reverse mortgage professional (CRMP) with Open Mortgage. “However, if the beginning of derogatory credit coincides with the timing of an event, like the death of a spouse, loss of a job, or medical emergency, then the connection can surely be made.”

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Open Mortgage’s Hultquist noted that he has only had a few borrowers that could document extenuating circumstances to avoid a life expectancy set-aside (LESA). In two cases, he said the borrowers had sufficient equity to sustain a fully-funded LESA.

“In those cases, I often ask the homeowner ‘if the lender were to pay your critical property charges, would that give you peace of mind?’” Hultquist said. “In both cases, the borrowers agreed that it would. If the HECM product is truly about offering peace of mind, the LESA can actually help.”

But other events may not be so clear-cut when determining extenuating circumstances, and the vague guidance from HUD provides considerable challenges.

“It’s not really clear what qualifies as an extenuating circumstance and what doesn’t,” said Neil Sweren, vice president of the reverse mortgage division at Southern Trust Mortgage. “For us, the biggest challenge is the lack of clear guidance. Everybody wants to try and make a deal work if at all possible, but we’re sort of feeling around in the dark a little bit with what will work and what won’t work.”

Sweren noted a recent scenario involving a borrower who had an “employment-related situation.”

“It was obvious that [the situation] couldn’t repeat itself, but we were given a bit of hard time as to whether that would qualify as an extenuating circumstance,” he said. “That has not yet been resolved.”

In some situations, doing thorough due diligence when verifying assets and income documentation to prove that an extenuating circumstance did have a significant impact on a prospective borrower’s finances may not be enough, even if a LESA was established to fund property taxes and homeowner’s insurance.

Larry Hanover, a CRMP at Universal Lending Corporation, did a reverse mortgage for one Illinois woman in her 70s following the death of her husband. Before the husband died, he left his surviving spouse two “well-funded” annuities and they had paid off their house, he said.

But those annuities were not able to fund the type of care the husband needed to remain in the home, so his wife started using credit cards, and over the last 2-3 years, she ended up running a high balance. Then her husband died.

Though Universal Lending Corp. was able to close the loan, which funded at the end of July, Hanover noted that the widowed borrower actually ended up not qualifying for the funds in the reverse mortgage, despite Hanover having set up a $58,000 LESA in an escrow account to pay for taxes and insurance on the property, and having assisted the woman in writing a letter of explanation in efforts of proving her extenuating circumstances.

“We closed that loan, but we’re having issues in the secondary market now in trying to sell that loan,” said Hanover, who reasoned that this is likely due because the Federal Housing Administration does not allow in the current guidelines for credit card debt to be paid off at closing.

“The woman got her money—on her side of it she’s ok,” said Hanover. “But until something gets fixed, no other person from our company is going to get a loan like that.”

Written by Jason Oliva

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  • It seems some companies have a strong underwriting department that proactively before closings seeks the opinion of secondary market investors on questionable closings while others are much more passive and simply wait for the investor to question them after closing.

    “…despite Hanover having set up a $58,000 LESA in an escrow account to pay for taxes and insurance on the property….” Are escrow accounts actually being funded? The whole idea of a LESA is to hold onto proceeds so that the borrower does not incur interest or MIP charges on the amount set aside.

    It is not the equity in the home that must be large enough to take on a LESA but rather the Principal Limit net of mandatory obligations. It is good to see some using the correct name for a LESA where the borrower fails the willingness part of financial assessment, i.e., fully funded LESA.

    • Senior 63 yrs-old people have $2000 sssn and $1500 pension, no debt … still cannot qualify for reverse mortgage because of at least 50% equity requirement on home value of $480,000 at California 92840. HUD should help such seniors to reduce the requirement down to 25%.

  • There is a need for greater clarity with respect to extenuating circumstances. There is too much subjectivity and those responsible for underwriting decisions are fearful of the heavy hand of post-closing NOR. The result is that good loans are not being made and a subset of people will not get a well deserved HECM thereby decreasing their long term sustainability under current circumstances. Call it collateral damage, but real people are negatively being impacted by the lack of clarity in this area. For example, people with excellent credit history for mortgage, installment and revolving along with excellent property charge history, are being required to have full LESA if there is an outstanding medical collection for which they are unaware. Even if customer is willing to satisfy such debts, the underwriting response is full LESA because not being aware of a medical collection is not deemed to be a valid extenuating circumstance. Greg Gianoplus – Gateway Bank Mortgage – NC

    • The collection issue is ridiculous. I agree 100% this needs to be addressed. Even if it is not medical, there needs to be an aggregate amount FHA will ignore as long as all other requirements are met. An aggregate of $2,000 or less should be implemented and be paid at closing from HECM proceeds or borrowers own funds.

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