FHA Financial Assessment Appears to Be Working, Data Suggests

The requirement of a financial assessment (FA) of a reverse mortgage borrower’s ability to pay, now in its fifth year, is working by cutting tax and insurance defaults considerably. This is according to data analysis conducted and released Thursday by New View Advisors.

“FHA’s new policy of requiring the financial assessment of the borrower’s ability to pay has cut tax and insurance default by over three quarters and serious defaults by over two-thirds,” writes New View in its latest commentary. “These results continue to validate the encouraging data we shared in past analyses.”

The financial assessment regulations were handed down by the Federal Housing Administration  in an effort to reduce persistent defaults, particularly in the cases of taxes and insurance, which had plagued the HECM program before the rule’s introduction. FA requirements for Home Equity Conversion Mortgage (HECM) loans became effective in late April of 2015, requiring lenders to make an FA of the borrower’s ability to meet the required obligations under the terms of a HECM loan.

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“Tax and Insurance (T&I) and other defaults can lead to foreclosure and result in significant losses to FHA, HMBS issuers and other HECM investors,” New View writes. “Defaults rose steadily during the financial crisis and have remained a thorn in the side of the program.”

Now with over four years having elapsed since the introduction of the FA requirement, New View took it upon themselves to attempt to measure the effectiveness of the policy in having its intended outcome on the rates of default, comparing figures from after the FA rule with figures from the period before its implementation.

“With this in mind, New View Advisors looked at a data set of just over 200,000 HECM loans, comparing loans originated in the immediate 45 month post-FA period from July 2015 through March 2019 to loans originated in the 45 month pre-FA period from July 2011 through March 2015,” New View writes. “The data show a very strong reduction in Tax and Insurance Defaults in the post-FA period. After 45 months, the pre-FA data set shows a T&I default rate of 3.6 percent, and an overall serious default rate of 5.2 percent.”

Drawing a contrast, the post-FA data set shows a tax and insurance default rate of approximately 0.7 percent, and an overall “serious” default rate of 1.5 percent. In this analysis, New View defines a “serious” default as tax and insurance defaults plus foreclosures and other “called due” status loans.

“Over the past few years, FHA has taken a number of steps to reduce defaults in its HECM program,” New View writes. “These include Mortgagee Letter 2013-27, which limits in certain cases the amount that can be lent in the first 12 months. Also, a series of Principal Limit Factor (“PLF”) reductions has reduced the amount lent even when the loan is fully drawn. These changes have also helped, although the majority of serious early defaults are Tax and Insurance defaults.”

Because of the results New View has observed, they have given the concept of the FA requirement “high marks” due to its apparent success in reducing defaults. In terms of a letter grade, they have given the FA a “solid ‘A.’”

Read the full commentary at New View Advisors.

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  • Financial Assessment (FA) when first introduced back in 2015 was a scary ruling for many to have to face and understand, especially those who only had reverse mortgage experience.

    This article points out very well what FA has accomplished in the reduction of foreclosures. What I think it has done the most is eliminate those seniors that would take out a HECM as a means of being a Band Aid for the inevitable, foreclosure. Not only foreclosure, but eliminating the senior having to face even more debt and trouble by putting off the inevitable.

    Yes, it makes the reverse mortgage world a much harder industry to work in then it used to, but we are doing more good today for our seniors because of FA!

    Stay up on FA, take courses, continually remind yourself of all the qualifying rules that go along with FA. You will not only be doing a great service to your senior clients, but you will make your life much easier to cope with.

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

  • There is no question that financial assessment has done a lot to curtail property charge defaults. There are two questions, however. The first is the loss in volume worth the incremental reduction in property charge defaults? The second is what is the amount of the increment reduction in property charge defaults from the property charge default rate for just the HECMs with case numbers assigned after September 29, 2013 but before April 27, 2015? There were approximately 175,000 case numbers assigned in that period of which about 109,000 became HECMs.

    While New View does a great job in looking at the property charge default rate post the date of its mandate, it fails to look at the most important comparative period to discover the incremental improvement in the property charge default rate.

    Following the September 30, 2013 implementation of Mortgagee Letter 2013-27, HUD mentioned that it was pleased with the impact it had on property charge defaults. Both the MIP incentive to lower the available disbursements in the first year following closing and the somewhat punitive MIP for not accomplishing that were helpful. Those changes plus the mandatory obligation rules helped create an atmosphere where consumers were less likely to take unnecessary draws leaving a very significant portion of the line of credit available to help with future payments of property charges. There was a significant change to PLFs under that ruling as well.

    Looking at the property charge default rate on HECMs with case numbers assigned after September 29, 2013 to April 26, 2015 would help determine the base default rate that the changes of Mortgagee 2015-06 and related Mortgagee Letters (what is commonly called financial assessment) have specifically improved upon.

    Mortgagee Letter 2013-27 was the principal cause for the reduction in property charge defaults following the end of what is commonly called the fixed rate Standard era but before the advent of the effective date for financial assessment.

    There has yet to be a document that provides sufficient justification for the addition of financial assessment. Was the less than one percent improvement in the property charge default rate worth the form of financial assessment that lenders through HUD insisted upon?

    No one saw the horrific effect that this one change has inflicted upon the MMIF. It is time to see financial assessment for what it is. This is not to say that some form of financial assessment should not be in play that brings lenders into the origination approval process but this form of financial assessment and its LESA need to be dumped and a more consumer friendly with less negative impact on the MMIF take its place.

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