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.
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