Financial Assessment Continues to Reduce Reverse Mortgage Defaults

The portfolio of reverse mortgage loans originated after the introduction of Financial Assessment requirements continues to show lower defaults, according to the latest analysis from New View Advisors.

The New York City-based advisory firm released an updated version of its FA analysis this week, probing more than 125,000 Home Equity Conversion Mortgages originated during two distinct periods: July 2015 through September 2017, just after Financial Assessment was instituted in April 2015, and January 2013 to March 2015.

The team at New View then investigated how many defaults showed in up in each batch, distinguishing between tax-and-insurance defaults and so-called “serious defaults” — the rate of T&I defaults plus foreclosures and other loans with a “called due” status.

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The results showed a clear dip in defaults: Before FA, borrowers defaulted at a rate of 2.3%, with a serious default rate of 3.1%. During the period immediately following the institution of the new rules, defaults and serious defaults dropped to 0.6% and 1.2%, respectively.

The post-FA group of loans also had an average of 12% higher balances, with overall higher subsequent draws as well.

“Given this result, we once again give the Financial Assessment concept high marks for reducing defaults,” New View wrote in its recap of the statistics. “However, this is another mid-term grade that needs to be tested as the post-FA portfolio ages.”

The Federal Housing Administration developed the FA standards to help bring stability to the program: By ensuring that borrowers had the means and ability to pay taxes and insurance expenses during the course of the loan, officials reasoned that they could curb T&I defaults. So far, the numbers bear that out, though the a bill introduced by U.S. Rep. Maxine Waters would go even further by codifying non-borrowing spouse rules and instituting loss mitigation practices.

The FHA and the Department of Housing and Urban Development also pointed to the instability of the HECM in the Mutual Mortgage Insurance Fund as a reason for instituting the new principal limit factors and insurance premiums that went into effect on October 2.

New View’s most recent report represents the fourth such look at the effects of FA rules on defaults, with the analysts finding a positive effect each time.

Read New View’s full analysis at its website.

Written by Alex Spanko

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  • This is some of the worst comparative information I have read.

    If we focus just on HECMs origination between January and March 2013, the vast majority were fixed rate Standards. So If we look at three months of HECMs originated in any three month period after April 2015 and before October 2017, what differences are there between those HECMs and fixed rate Standards? They are at least five major changes besides financial assessment.

    If we were able to look at the effect of all six changes except financial assessment (thus five changes in total) would there be any change in the default rate due to failure to pay taxes and insurance? Absolutely. If that assumption is true, then how much of the reduction of property charge defaults were reduced by the other five major changes versus that of financial assessment? How can that even be determined? Easily if there is more meaningful limitations placed on the sample selected.

    The only true measure of finding out if just financial assessment alone has an impact on the default rate in question is to measure the default rate on HECMs with case numbers assigned after August 3rd, 2014 but before April 27th, 2015 to all HECMs with case numbers assigned after April 26th, 2015 but before October 2, 2017. We know one thing about the HECMs with case numbers assigned in these two periods, their only significant difference is financial assessment. We also need a period of years to pass for the HECMs selected from the latter period in order to find out what the default rate actually is for HECMs with case numbers assigned after April 26th 2017 since there is almost no default rate in the first year due to the requirement that taxes and insurance be prepaid through the first twelve months following closing. One senior HUD employee expressed a need for at least five years to pass after October 1, 2017 so that there is time for the two populations to mature.

    The authors of the report are some of the brightest analysts the industry has known. So why would they intentionally create a misleading report? It is doubtful if the analysts would create such a report without an engagement instructing them what to report on. If that assumption is true, these analysts have done their job well. One has to ask, outside of perhaps HUD who has the most to gain from the propaganda (comparison reports) in the linked blog above?

    The answer should be very obvious since they fought so hard for HUD to create financial assessment and are rightfully concerned that the newly nominated FHA Commissioner might terminate financial assessment as the unnecessary barrier it appears to be.

    • They obviously know about and weighted the past changes appropriately, and this is their results.

      Exaggerating the effects of past, selected changes isn’t a good, convincing argument against their findings. All considered, I’d believe the report as the most useful reference for serious analysis.

      • Mr. McSherry,

        Please point out what is so obvious? I am not the one who selected the months I discussed above.

        Did you even bother reading the linked blog “(Part IV)”? Did you see the following above? “…January 2013 to March 2015.”

        Did you read the prior blog “(Part III)” at the New View Advisors website? There the period selected was: “…April 2013 through March 2015.”

        In Part IV, the authors add the three months I cite above (January 2013 through March 2013) and by that got even better results. What my comment did is explain why. If they authors did modify their sample, why did they not tell us about it and what did they do to modify it?

        Perhaps you exaggerate; generally those who exaggerate accuse others of the same. Most CPAs I know who have been partners in significantly large CPA firms with audit responsibilities try not to.

        Mr. McSherry what is your background? Anyone can verify if I am a CPA. Can anyone verify what you are or have been?

        The authors never tell us that they adjusted anything because they did not. What they write is true but their sample is skewed. This is not unusual in research even if it is distorts conclusions.

        Your assumptions are just that and have no basis in fact. You seem rather vested in HECMs for someone who has never been in the industry. Is that because you are afraid you made a bad decision by getting your HECM? It seems so. It is too late for second guessing or trying to justify your decision; looking at the costs of origination as sunk, it is rare for a HECM to be an extremely poor decision unless negative arbitrage is in play.

      • My RM is in more than fine shape. And you have zero to to back-up your snarky outburst. Your post should be deleted as a personal attack.

        You have a Masters in lack of character (MLC). Anyone can look that up, right here on this forum.

    • James,

      Perhaps I can make this real simple.

      Say a chocolate tasting expert is hired to hold a contest at Ghiaradelli Square in San Francisco to taste eight bowls of ice cream (representing the two samples in each of the parts of the New View Commentary on how the results from financial assessment have gotten better and better). He starts with four sets of two bowls each progressively getting larger as the tests progress.

      In the first test, each bowl has one spoon of plain Vanilla ice cream. The first bowl has two small teaspoons of Smucker’s butterscotch syrup added and the second bowl two spoons of the same size but filled with Ghiaradelli’s dark chocolate syrup.

  • I would hope that the default level would reduce, at least on loans that were made after April of 2015. It was bound to and should continue to do so.

    I would like to see a graph year to year from April of 2015, it would be interesting to see the results. Better yet, I would like to see a graph, each year going forward from the April, 2015 date and then a comparison year going back each year prior to April, 2015!

    That would be an interesting graph to see the default rate difference, this would give us a true an accurate measure of the effective results of FA.

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

    • John,

      Currently I am unable to locate that graph. Others may be able to do that.

      In order to convey the information by cohort of year of endorsement, there will need to be different lines (or other object) for the fiscal year of origination with the number of defaults in each fiscal year. I would be somewhat intricate and perhaps difficult to follow with a table showing the underlying numbers.

      Without some kind of grouping we would see total defaults by year but would have little idea what the characteristics of the HECMs that defaulted in a particular year. The best groupings would be if we could get them grouped by fiscal year that the related case number was assigned.

    • John,

      This reply is dedicated to a different point in your comment. It does not relate to graphs.

      There is no question that financial assessment has cut down to some degree, HECMs that would otherwise default due to property charge payment defaults. The question is whether the reports from New View Advisors about how it is getting better and better are distorted. I fully believe they are.

      The other question is whether the cost for such reduction is worth the benefit. I do not believe it is.

      Here is the cost I am referring to. First, there are the additional administrative hard dollar costs to the lender and even the originator. Second, is the time costs for lenders, originators, seniors, and counselors. Third, is the soft dollar costs of new business lost due to the CURRENT financial assessment.

      John, I am FOR some form of financial assessment but one that is better targeted, less intrusive, less costly, and a better predictor of those who would default that slip through the current financial assessment. Dr. Moulton from OSU and others have suggested such change. There should be consideration by HUD for these suggestions.

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