Three Years In, Underwriters Say LESA Has Improved Reverse Mortgages

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.

Marketing LESAs

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.”

Reducing defaults

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

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  • This article clearly shows how misunderstood LESAs are to this very day.

    For example, Ms. Johnson claims: “…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.”

    Even a voluntary fully funded HECM does not necessarily eliminate property charge payments of taxes and insurance. The latest regs require at 24 CFR 206.25(c)(i)(F) that the mortgagee shall: “(F) Provide written notification to the borrower and FHA within 30 days of the mortgagee receiving notification that a property charge payment is outstanding when there are no funds or insufficient funds remaining in the LESA, and recommend that the borrower speak with a HUD-Approved Housing Counselor.”

    So can even fully funded LESAs “eliminate” property charge payments of taxes and insurance? Absolutely not no matter if the LESA is voluntary or involuntary. This is but another example of how lenders have failed in HECM marketing to properly disclose a borrower’s liability to pay taxes and insurance. The latest regulations make the situation clear but some lenders seem dead set on denying full disclosure on borrowers’ liabilities for taxes and insurance payments even when it comes to a LESA.

    Now returning to the quotation, we find out that without a LESA the lenders Ms. Johnson cites, state that without a LESA “‘the burden of having to pay their taxes and insurance each month.'” What nonsense again. With a HECM there is NO requirement that taxes and insurance be paid monthly. They must be paid when due which is normally once or twice a year. It sounds like the lenders are saying that taxes and insurance are due monthly with anything other than a HECM which again is nonsense. So all that is left are monthly (forward) mortgage payments where impound payments of taxes and insurance are being made. Thus the statement is fully confused and confusing. It is anything but disclosure. It is without question intentionally derelict marketing by those lenders.

    • What a ridiculous statement “…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.”

      So if taxes and HOI are $10,000 a year let the bank pay them so in 10 years I can have $100,000 compounding interest so I won’t have the burden of writing out a check.

      Do the people who write this stuff ever think it through and look at the consequences of what they are saying? No wonder Reverse mortgages still have a negative reputation with many.

    • James anyone that knows me, knows that I am very compliant as it relates to the HUD/HECM guidelines. To use the terminology “denying full disclosure” and “derelict marketing” is completely unfounded. HUD made these changes to assure the sustainability of the product so that we would all have a product to offer to our aging market. The suggestion that the lenders use this as a selling tool actually endorses the LESA and opens the conversation to further discussions regarding the requirements of the LESA. The reference to the monthly tax and insurance payment is also directly related to a borrower(s) monthly capacity to meet their obligations, as required by the Financial Assessment guidelines.

  • It is important to realize that the opinions expressed are speculative as Ms. Luth brings out when she 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….’”

    Yet would the problem be as prevalent today if there were no LESAs? There is only one period when these defaults became a problem and that was in the economic crisis which started in 2007 and then continued into the era of fixed rate Standards. So the question is not how are LESAs improving the problems when the problems were at their worst but how would they have improved the years when these defaults problems were far less noticeable? This is where objectivity comes into play but unfortunately rarely does.

    • treverse,

      Unfortunately there is a horrible myth still believed and circulated by members of this industry. It is both unnecessarily ignorant and points to a total disregard of facts.

      What you are saying is that the reasoning for the October 2, 2017 changes were to countermand losses in the MMI Fund caused by losses incurred directly from the default of the payment of property charges. The only thing we disagree on is the cause.

      The cause from my perspective is one thing and only one thing, losses incurred at normal termination, the greatest of which is the death of the last surviving borrower who uses the home as that person’s principal residence up until death. I am assuming that you would like to be correct on this issue so I will guide to an independent third party and HUD for the facts.

      Please turn to Table 5 on Page 169 of the HUD’s Annual Report to Congress on the Financial Status of the MMI Fund for Fiscal Year 2017. It clearly shows that the expected losses in the MMI Fund from the HECMs endorsed during fiscal years 2014 and 2015 are larger than those for the HECMs endorsed during fiscal years 2016 and 2017. (Pinnacle by the way is last year’s independent actuary for FHA in analyzing the HECM portfolio in the MMI Fund). The following paragraph explains the ignorance.

      With few exceptions all HECMs endorsed in fiscal years 2016 and 2017 were subject to financial assessment yet the losses for fiscal years 2014 and 2015 are much, much lower despite all but a very few of the borrowers of those endorsed HECMs having been required to undergo financial assessment. In fact the losses per FHA are $1.5 billion higher for fiscal 2014 and 2015. Yet endorsement counts for both sets of fiscal years were similar and even their pattern in secular stagnation were remarkably similar.

      It is a very, very false belief that somehow financial assessment prevents losses in the MMI Fund. So far that has proven to be false. Some might even claim that financial assessment is CAUSING losses in the MMI Fund. I am not there quite yet simply because there is insufficient hard data to prove that.

  • In reading the other comments, I felt that each of you brought out excellent points points on the LESA.

    FA as a whole was what the industry needed, LESA on the other hand could have been handled differently in my opinion. I always felt and escrow type of arrangement would have worked better. I am talking about the servicing companies actually issuing coupon books for seniors to make monthly payments into their escrow account to pay for taxes and insurance when they came due annually.

    In fact, I proposed a plan, which called for an initial set aside of one years worth of taxes and insurance as a reserve, instead of the LESA as we know it today. I felt this was not as harsh as LESA, it lessened the burden on our seniors of having so much having to be set aside, plus, monthly payments are what seniors are accustomed to budget! Obviously, I did not get any where with my proposal!

    The other thing as “treverse” pointed out was the Nail in the Coffin. Which was the impulsive act on the part of HUD to implement the October 2nd, 2017 ruling. Mainly the part pertaining to the PLF adjustment!

    Then my friend George Owens brings up a great point! “Would the problem be as prevalent today if there were no LESA’s”?

    George points out that there is only one period when these defaults became a problem and that
    was in the economic crisis which started in 2007 and then continued into the era of fixed rate Standards. George hit it right on the head!

    To sum it up, if we could change two things, “restructure LESA and repeal the PLF ruling of October 2nd, 2017”, life would be a lot easier today for all of us and our seniors!

    I have to be optimistic and say, “Common Sense” will eventually prevail!!!!

    John A. Smaldone

    • John,

      I cannot agree that the industry needed FA or at least the FA we got. Its result makes it far too restrictive for many seniors to survive who are as unlikely to default on property charges as those who mildly pass FA today. If FA has reduced previously qualified borrowers by 20%, then it is my belief that 70% of that 20% (or 14%) should have qualified if Dr. Moulton from OSU is right in her recent study on defaults for taxes and insurance.

      The industry needs FA, just not the one we have right now.

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