It’s been nearly three years since the Department of Housing and Urban Development introduced Life Expectancy Set-Asides (LESAs), which require borrowers with less-than-stellar credit histories to set aside a portion of their reverse mortgage proceeds to pay taxes and insurance.
It took time for underwriters to get a handle on LESA guidelines as they sought clarification from HUD and tweaked their processes, but now many say things are running smoothly. And while some were skeptical about the set-aside requirement upon its introduction, many now say LESA has improved the product.
“LESA was truly a gift,” Deborah Moran, underwriting manager at Reverse Mortgage Funding, told RMD. “We’re giving the borrower relief by paying their taxes and insurance — less for a senior borrower to worry about. It’s good for consumers, it promotes responsible lending, and it enables originators to take more loans than they otherwise would have under Financial Assessment if there weren’t a LESA option. ”
Elly Johnson, COO at United Northern Mortgage Bankers, says LESA helps underwriters feel more confident in their decision-making.
“For the underwriters making the final decision on a HECM, when a LESA is involved, it gives them a level of comfort knowing that they have satisfied all the components for a sustainable solution,” she says.
Johnson says that while the transition was difficult, most lenders have come to embrace LESA. She says some are even promoting it, marketing LESAs as a bonus feature that borrowers can choose in order to eliminate the burden of having to pay their taxes and insurance each month.
“They’re describing it as an option for the borrower and including it as part of the conversation, rather than a requirement of the loan in some instances. That’s an interesting little twist,” Johnson says. “I think in the beginning a lot of people saw LESA as a bad thing, but they’ve figured out a way to turn that around and sell it as an option. I think that’s a positive from a marketing perspective.”
HUD introduced LESA to reduce the likelihood that borrowers would default on their loans because of a failure to pay taxes and insurance, a problem that has long plagued the industry. Britany Luth, VP of best practices at Finance of America Reverse, says so far, it appears to be working.
“I would say roughly 10% to 15% of our borrowers fall into the LESA category,” Luth says. “We’re seeing substantial drops in defaults on the back end; however, those portfolios are still so new it’s hard to say that we’re really comparing apples to apples. Only time will tell how that will match up to historical books of business, but so far we’ve seen good improvements.”
A lack of partials
While LESA does appear to be advancing the goal of reducing tax-and-insurance defaults, some say the guidelines could use fine-tuning. For one, very few borrowers are utilizing a partial LESA, with the vast majority falling into the fully funded category.
To qualify for a partial LESA, a borrower demonstrates a willingness to meet financial obligations but does not meet residual income requirements. But if the partially funded set-aside is projected to be greater than 75% of total property charge costs based on life expectancy, they are forced to take a fully funded LESA instead.
Sharon Langley, operations manager at Open Mortgage, says the guidelines have essentially negated partial set-asides.
“Very rarely will you see a LESA done with partial. In fact, I’ve not seen but one in the whole three years that these have been done,” Langley says. “The full is sometimes is so high that it prevents the borrower from qualifying, and I think HUD could probably look at that piece, because it’s not being utilized at all.”
Luth agrees: “We rarely have borrowers who fall into the partial LESA category. I think industry-wide it’s a very small percentage. There might be an opportunity there to look at changing some of those guidelines to help borrowers who have income shortfalls with no credit delinquencies or derogatory credit.”
A need for flexibility
Others suggest that borrowers who elect a LESA might benefit from more flexible guidelines. For example, Moran says the ability to make changes after closing might be useful.
“I wish there was a way that borrowers could fund a LESA themselves if there wasn’t enough equity in the home, and that changes to the LESA could be made post-closing,” she says. “For those borrowers who had the option to voluntarily set one up but didn’t — I wonder if they rethink it post-closing and wish they could have set one up.”
Johnson says it might be beneficial to grant borrowers who elect a LESA the ability to control the timeframe.
“We’ve had borrowers who have expressed interest in a LESA, but wanted the ability to structure it to their timeline, versus the current methodology, which is based on the borrower’s life expectancy,” she says. “Some might want a LESA, but for five years or seven years. I think that would be something that would help the product tremendously.”
But even without flexibility, Johnson says LESA has shed light on an important aspect of reverse mortgage underwriting.
“Sustainability was that third component that people didn’t really pay attention to — they were all about willingness and capacity,” she says. “But now, three years in, they are finally understanding that there are not just two components, but three: willingness, capacity, and is it a sustainable solution for the borrower? I think now everyone gets the big picture.”
Written by Jessica Guerin