Financial Assessment Continues to Reduce Reverse Mortgage Defaults

The introduction of Financial Assessment regulations in 2015 brought new challenges to the reverse mortgage industry, instituting an extra set of steps for potential borrowers and putting a dent in origination numbers. But based on pre- and post-FA data, the now two-year-old regulation appears to be achieving the Federal Housing Administration’s goals of reducing defaults.

Tax-and-insurance defaults — caused by a borrower’s inability to meet mandatory loan obligations — have dropped from 2.1% before the regulation to just 0.6% afterwards, according to a new analysis from the New York City-based New View Advisors. The rate of “serious defaults,” which New View defines as tax-and-insurance defaults plus foreclosures and other loans classified as “called due,” saw a similar drop from 2.8% to 1.0%.

“Given this result, the Financial Assessment concept gets high marks for reducing defaults,” New View wrote in its findings.

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Since FA, the size of the average loan and later draws have been higher, with average loan balances running 11% ahead of their pre-regulation figures.

“This is not surprising, since homeowners of more expensive homes generally have better credit and ability to pay,” New View noted. “Also, FHA now limits the amount that can be lent in the first 12 months.”

New View’s most recent numbers track with an earlier analysis conducted in February, which revealed a default drop from 1.17% to 0.39%, and a “serious default” decline from 1.8% to 1.03%. 

These results also align with FA’s original purpose: reducing risk to the variety of stakeholders in he Home Equity Conversion Mortgage industry.

“Tax and insurance and other defaults can lead to foreclosure and result in significant losses to FHA, HMBS issuers, and other HECM investors,” New View points out. “Defaults rose steadily during the financial crisis and have remained a thorn in the side of the program.”

Under Financial Assessment, lenders must determine a borrower’s ability to meet ongoing tax and insurance obligations, relying on credit and housing history to detect any potential financial issues. Should the borrower have a less-than-stellar past, he or she may be required to set up a life expectancy set-aside (LESA) to cover the costs over time.

To reach its conclusions, New View compared loans originated between July 2015 and June 2017, after the implementation of Financial Assessment, with a sample from the pre-FA days of April 2013 to March 2015. In all, the firm used more than 115,000 loans in its analysis.

Read the full report at New View Advisors.

Written by Alex Spanko

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  • FA was a blessing in many ways to our industry. I realized it cause a lot of adjustment to every ones way of doing business but when it was all said and done, FA has created an image of the HECM to be more creditable than ever since its implementation!

    Yes, a good portion of our borrowers of the past can’t be helped anymore. However, maybe many of those borrowers should not have been put into a reverse mortgage in the first place.

    As I have said in the past, we put a temporary Band Aid over the wound of many of our seniors, only to create the inevitable for them, foreclosure!

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

    • John, I think the recovery in the housing market has had more of a positive impact on lower HECM default rate than FA. LESA has knocked out of the box many potential clients that could have benefited from HECM that would not have resulted in default. As a result, I have been marketing to influencers of the mass affluent, an uphill battle for sure. Greg G.

      • Greg,

        Financial Assessment has not reduced the default rate on HECMs to any substantial degree at all. Remember there is more than one type of default. All kinds of defaults can result in foreclosure.

        Financial Assessment was designed to reduce property charge payment defaults and that is all. It has and no likely will not reduce the default rates on failure to payoff HECMs when the balance due exceeds the value of the home at termination.

        The current version of financial assessment is overly harsh. It seems it could be toned down with no appreciable increase in the default rate for property charge payments but such a change could result in a considerable increase in new business.

        While the desperate senior homeowners will not find the help they need from HECMs the way many did over a decade ago, the product is still well suited for many who are the not quite affluent seniors as Barry Sacks refers to them.

        If FHA makes financial assessment less stringent over the next five years, we should find a surge of new customers among those who could not previously qualify or did not want a LESA.

        Unfortunately the article above does the industry no favors long-term. We need a financial assessment that does its job and NO MORE!

    • John,

      This latest study bears the marks of an even more biased sample used in the control group and the group to which it is compared. When comparing a group laden with Standards and other HECMs with case numbers assigned before August 4, 2014 to those with case numbers assigned after April 26th, 2015 has reasons other than just financial assessment as to why the property charge payment default rate is better when borrowers are subjected to financial assessment.

      There is a simple study that could be performed and that is to look at the property charge payment default rate of HECMs with case numbers assigned after August 3, 2014 but before April 27th, 2015 and compare those rates to the property charge payment default rates for those HECMs that are at least a year old but have case number assignment dates after April 26th, 2015.

      The current revision to the original study posted in February 2017 is the worst of the three versions of the study but none of the three are as unbiased as the simple one recommended above. The reason for getting a clearer picture is that the only difference between the HECMs with case numbers assigned before April 27th, 2015 but after August 3, 2015 and HECMs with case numbers assigned after April 26th, 2015 is the addition of financial assessment to the latter group of HECMs.

  • All this series of articles proves is by selectively choosing data one can prove almost anything. The only valid test of financial assessment is to compare the current version of HECM to that same version without financial assessment. In the comparative data, there are not only HECMs the way they existed on April 26th, 2015 but also ones from the Standard and Saver era as well. Thus the comparison might as well be nectarines to peaches plus Wonder bread; the comparative data is rigged to make nectarines look better fruit than it is.

    The other reason why this is such a poor comparison is insufficient time has passed to determine how financial assessment impacts defaults from the payment of property taxes and homeowner’s insurance over time. It is not only a CPA who is questioning the results, some in HUD management are reporting the same problems with the conclusions contained in this series of articles.

    The only question is why would New View Advisors create blogs based on what appears to be biased comparative data? Was that the result of an engagement paid for by members of the industry or some related party?

  • I agree that the Financial Assessment is easily a net plus, overall, especially considering the surge in positive reports and recommendations in support of HECMs the FA has generated in the media.

    I just did a refinance that brought my home value to nearly the top of the “value-cap,” and my interests now lie in seeing an increase in that cap to, say, $800,000. No doubt, if the Financial Assessment stats were anything but significantly positive toward preserving the HECM insurance fund, a future-raise in the value cap would be out of the question.

    However, one can’t help remembering the “everything isn’t the cold cruel world” image the HECM had when seniors “heard” that difficult retirement-financing aspects as credit checks and income levels were “no problem.”

    The financial Assessment effect seems to be a balance between the lending-trend in general of lending only to those who really don’t need it, and eliminating the “grossly irresponsible” from the program.

    Left out may be Ronald Reagan’s vision of the seniors who, if they could just get rid of that monthly mortgage payment, they could buy a new oil burner and pay for a new plumbing system, and would no longer be heading for bankruptcy through never-ending, hundreds yearly, plumbing bills (for example).

    • Mr. McSherry,

      We strongly disagree. While financial assessment may have helped perceptions, the endorsement numbers in the last two years have yet to show it.

      What you do not address is if a less draconian version of the same financial assessment would prove to be as effective at limiting those with a propensity to default on property charge payments while at the same time allowing more seniors to participate in the program. Such a compromise should be considered by HUD in the next five years.

      The lending limit cap was increased to $625,500 over eight years ago. Do not make the same mistake of borrowers in the pre-recession years and spend down your proceeds expecting an increase to a $800,000 lending limit cap in the next few years. The increase to $636,150 is only a 1.7% increase in the lending limit cap. $800,000 is a 25.75% increase over $636,150. So if it took us eight years to get a 1.7% increase in the lending limit, how many years will it take for the lending limit cap to reach $800,000? Do not expect it very soon.

      I am a skeptical cynic, not a pessimist in the least sense of that word or some kind of ridiculous optimist.

      • You seem to be creating a disagreement,

        I didn’t address endorsement numbers situation at all, you did. The “change in perception” would be what I did address, and that is: there has been a more positive coverage in the media and academic reports; that’s a documented fact.

        Also, I didn’t say that I was hoping for an $800,000 value cap because I wanted to feel free to spend down my current line of credit; again, you did.

        In fact, I’ve spent barely any of my pre refinanced funds, plan to use a similar restraint on the refinanced funds, and only use what’s gained in growth: therefore, the higher the value cap, the higher “growth excess” amount that’s available.

        And finally, it seems that a decision to raise the value cap would be based on the current, fiscal health of the program, not how long a period of time lapsed since that last raise in the value value cap. The financial condition of the program can improve through cost-cutting, regardless of the number of increased endorsements. In fact, a higher value cap may attract more endorsements.

      • Hey Ed,

        I am saying that perception may have improved but what good is it if our volume stays the same or its current pattern gets lower? I would like to see your “documented facts.” That is a big claim you did not need to make.

        I did not accuse you of spending too freely. I accused others of spending too freely in prior years and warned you with their example.

        Nothing is “gained in growth.” The growth is simply an invitation from the lender to borrower more money than you were eligible to borrow before the growth was offered.

        HUD does try to raise the lending limit using COLA principles. It cannot always do that. Using the example of the last increase is to use the example of a COLA increase.

        Please explain to me where you see cost cutting. Congress provides in its annual appropriations the money needed to operate and administer the HECM program. It is a budget matter, not a program matter. MIP can only be spent on insurance losses and reimbursements to lenders. The program is in the hole by $7.7 billion as of 9/30/2016 per HUD’s financial statements. While cost cutting may help in administering the homes assigned to HUD, the ways to get rid of that size loss are extremely limited.

      • Huh? The “documented facts” are the fact that positive articles and reports of the HECM program have appeared in the media since the FA was implemented.

        And again, I didn’t address the cause and effect of the FA with regard to endorsement volume. I merely pointed out that the FA has generated positive “press coverage.”
        …………………
        If I have more and more money in the line-of-credit each month, as a practical matter, to me, I’ve “gained in growth.” I’m not arguing glossary-terms definitions, you are.
        …………………..
        “Cost cutting” occurs when the number of defaults on loans go down due to the FA restrictions on eligibility. The fewer the defaults, the healthier the program. That was the goal of the FA, and it appears to be working. I’m not arguing whether it “will be enough,” you are. I further stated a concern for the fact that there are would-be successful loans/endorsements from people who are deprived of the opportunity to prove themselves.

        I’m not arguing whether the impact-level on endorsement-volume numbers is worth it, you are, You’re making-up a position/argument for me, one that I haven’t made.

      • Ed,

        There is no reason under the sun for me to argue against you. You have your opinion and I have mine.

        I am happy you enjoy your HECM as you should. It is a great product and my view of various aspects should not influence your outlook.

        You believe that financial assessment has done a lot for HECMs and except for some perceptions, I have seen nothing to justify that position. You disagree with my measurement standards which you have every right to do.

        Good luck to you and enjoy your retirement. I am glad that a HECM is helping you do that.

  • The FHA seems to think that lending is a zero loss game. It’s not. You grow a portfolio based on writing better loans in volume and minimizing losses. They only want to minimize losses. This program will not be much for long term survival if it stays as only a ‘government backed’ program. Either private lenders get in, or this program is in trouble.

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