New Data Shows Financial Assessment Reduces Reverse Mortgage Defaults

Reverse mortgage defaults have dropped precipitously since the implementation of Financial Assessment rules in 2015, according to an analysis from New View Advisors LLC published Friday.

The New York City-based financial services firm compared data on tax and insurance defaults for home equity conversion mortgages issued between July 2015 and December 2016 — a period that began two months after the formal implementation of FA on April 27, 2015 — and defaults on HECMs originated between October 2013 and March 2015.

New View found that reverse mortgages issued in the pre-FA period had a tax and insurance default rate of 1.17 percent, a number that dropped to just 0.39 percent for HECMs post-FA. The firm also analyzed the incidence of so-called “serious defaults,” which New View defined as tax and insurance defaults plus foreclosures and other loans with a “called due” status, and found a similar decline: Severe defaults accounted for 1.80 percent of all HECMs in the pre-FA period, and 1.03 percent after.

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“Based on this result, we should give the Financial Assessment concept high marks for reducing defaults,” New View wrote in its post. “However, this is a mid-term grade that needs to be tested further as the post-FA portfolio ages.”

New View also noted that the average loan amount, as well as the size of subsequent draws, has risen after in the post-FA period, as the pool of HECM borrowers includes a greater proportion of homeowners with better credit and higher-valued homes.

Michael McCully, a partner at New View, said the results shouldn’t surprise anyone in the industry. “Financial Assessment is supposed to weed out those less likely to stay current on tax and insurance payments,” he said. “It makes sense that the nature of the borrower would start to shift.”

Written by Alex Spanko

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  • The base study was the eighteen months of HECMs loans “originated” between October 2013 and March 2015. Are those the HECMs actually originated in that period or endorsed in that period?

    New View tries to make a big point about the dollars borrowed over the number of endorsements. That has substance if the higher endorsements would not bring in more dollars borrowed. It is clear that the dollars borrowed in fiscal 2009 exceeded those borrowed last year especially since tails borrowing was not provided in fiscal year 2009. In fiscal year 2009, home values were suppressed by the mortgage bust of 2008 so the principal limit total for all new HECMs that year was impacted by a once in a lifetime event. Last year home values had a healthy increase. So borrowed dollar information is hardly informative unless the difference was substantial which it is not.

    What the New View article proves is that the changes on March 31, 2013 and October 4, 2013 were sufficient to bring down total defaults due to taxes and insurance. Those changes by themselves brought the defaults back near to the 1% level and made them livable.

    Does New View really believe that a 15% drop in business due to financial assessment is worth a drop of less than one percent in the default rate? That makes little sense. One questions if somehow New View was trying to influence HUD.

    More than ever before financial assessment has been shown to be draconian and the New View article proves that based on the drop seen in defaults on the HECMs originated after the removal of all Standards compared to the default percentage on HECMs originated in the five years before that.

    Now more than ever before there should be a cry for HUD providing a financial assessment that is less stringent than the current one and one that will allow for more endorsements.

    • Thank you for your comments. My understanding of HECMs was that it gave seniors (myself) with limited income (myself) an opportunity to reach equity in a house (myself) in order to extract funds needed to allow the homeowner to “age in place” (myself) and to be able to afford necessary improvements (ie, code violations and poor prior workmanship – this house was an unexpected “inheritance” that was unexpectedly dropped in my lap on the very day the market crashed and for which I was totally unprepared) in order to a) make the house more habital (including adjustments for making it more accessible) and b)allowing me to keep a greater part of my income (limited) in order to pay for my more routine expenditures. I did not expect the nightmare that my application has become, a process which has taken a full year (at my age, a year of life becomes much more important) and has made it very difficult for me to meet necessary expenses (medical, housing, emergencies, etc.). As far as I can tell the HECM arket has morphed into an opportunity for wealthier homeowners to get rid of their expensive properties and to buy fancy “downsized” homes in luxury gated communities such as the Villages — in other words, to assist more financially fortunate persons yet another way to reap monetary rewards while leaving middle-class seniors behind and struggling. Any fool could look at my financial information and would be able to see that my motive for applying for an HECM would result in my having a more substantial amount of immediate income – I have always paid my own property taxes and homeowners insurance anyway – and to allow me to live more comfortably while increasing my ability to update and to maintain this house (for example, my well fiasco ended up costing $16,000 – they had to drill down 950 feet, among other things; I need a new septic system – at least $10,000; the basement “fix” cost $8,000 – the list goes on). I have worked diligently my whole life, primarily with people with disabilities (not a high-paying job, but important); I am well-educated (but not interested in financial maneuvering); I have had a substantial share of adverse events that have been costly — I haven’t amassed wealth so I am not in a position to create more wealth on the backs of blue-collar and middle income Americans as are the current crop of HECM beneficiaries. I am very angry about this. Additionally, I need to access the equity in this house.

      • daisymaygnome,

        The aging in place concept has nothing to do with HECMs; however, that does not mean that seniors cannot use them for that purpose. HUD attempted to use the program to help less fortunate seniors by keeping the proceeds as large as possible and qualifications very low.

        Qualifications still are low just not as low as they were three years ago. Proceeds are lower because the a required self-sustaining program has not been so since at least fiscal 2009.

        Why did qualifications change? Lenders had far too many defaults on their hands verging on foreclosures due to nonpayment of taxes and insurance. No one wants the reputation of kicking out grandpa and grandma. Many of us went home at night shaking our heads knowing the seniors we had just help avoid pending foreclosures on forward mortgages would soon be in trouble on their reverse mortgages due to their lack of assets other than the home and low income.

        What is interesting is that the law which all of Congress created, had an important purpose clause which states in part: “The purpose of this section is to authorize the Secretary to carry out a program of mortgage insurance designed—
        (1) to meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income, through the insurance of home equity conversion mortgages to permit the conversion of a portion of accumulated home equity into liquid assets.”

        You can read the entire purpose clause (the rest deals with lenders) at 12 USC 1715z-20(a). You will find that law at https://www.law.cornell.edu/uscode/text/12/1715z-20

        HECMs are income neutral except they must be self-sustaining and must not be detrimental to seniors by the way they are constructed.

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