Houston Chronicle Breaks Down the Reverse Mortgage Financial Assessment

The recent change that now requires a financial assessment before being approved for a reverse mortgage is a reason why the product is being viewed in a better light than in previous years. For potential borrowers, however, there are some things they should be aware of before they dive right into these loans, according to a recent article by the Houston Chronicle.

The goal of enforcing the financial assessment for potential borrowers is to reduce defaults on reverse mortgages by making sure borrowers can pay property taxes or home insurance, the article says. By performing financial assessments, the default rate on reverse mortgages could decrease by up to 50%, according to a 2016 study from the Center for Retirement Research at Boston College cited in the article.

Borrowers should know what they’re getting into with the financial assessment and also should be aware that even if they don’t have an ideal outcome from the assessment, there is the set-aside option to help cover estimated tax and insurance payments over the expected life of the youngest borrower.

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“Each financial assessment includes an analysis of the borrower’s credit history, with special attention given to any foreclosures, defaults, late mortgage payments and late payments for property charges,” the article says. “Research has shown prospective borrowers’ credit scores are ‘huge predictors’ of their likelihood to default on reverse mortgages.”

The article points out that the new regulations aren’t much different from the underwriting requirements in place for traditional mortgages, so the new regulations have been a long time coming. Though, the implementation of the financial assessment and set-asides does lengthen the time between when the borrower applies for the reverse mortgage and when he or she completes the loan.

“But conducting a financial analysis of prospective borrowers and requiring set-asides for those at higher risk of default are steps many have said were needed,” Stephanie Moulton, associate professor at the John Glenn College of Public Affairs at Ohio State University, said in the article.

Read the full Houston Chronicle article.

Written by Alana Stramowski

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  • I beg to differ, there are many differences with the FA ruling underwriting requirements compared to traditional lending underwriting requirements.

    I don’t halve the time to go step by step the differences but there are a lot!

    Yes, since the FA ruling has gone into effect our product has been viewed in a better light than in previous years.

    For potential borrowers, yes there are some things they should be aware of before applying for a reverse mortgage but all of this should be explained by the loan originator and the HUD appointed counseling agencies!

    To many people in the past probably should not have been put into a reverse mortgage, all many were doing was putting off the inevitable, “Foreclosure”!

    John A. Smaldone
    http://www.hanover-financial.com

    • John,

      We need to realize that if our product is being viewed better now than in the past where are all of the applications and endorsement hiding out? People are doing what they do best, repeat things they know little about.

      You are right HECM financial assessment is much different than forward mortgage qualification. Many times seniors are qualified to get a HECM but the financial assessment is needed to determine if they will need a LESA. Forward mortgages have no LESA evaluation. These two very different “animals” with very different purposes.

      Forward mortgage qualification is mainly used to see if the applicant has the capacity, capital, and credit history needed to reasonably determine if they can keep make required payments of interest and principal plus requited impound payments for taxes and insurance. It leans heavily on cash flow from income and other acceptable sources. Our financial assessment is used to determine if the applicant can pay taxes and insurance as required.

      So for financial assessment purposes, FICO, a cornerstone in forward mortgage credit history evaluation, is not meaningful in HECM financial assessment. Like you state, the differences are too numerous to cover in a comment of this size.

      Where we differ is that until otherwise proven, it seems as if what financial assessment will achieve is to keep less than 2% of new borrowers from entering default for failure to pay property charges while reducing our endorsements by 15% this fiscal year. By most standards the alleged benefit of financial assessment should be labelled “draconian.”

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