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.
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