‘High Marks’ for FHA Financial Assessment Due to Reduced Tax & Insurance Defaults

The requirement of a financial assessment (FA) of a reverse mortgage borrower’s ability to pay, now in its sixth year, is working by cutting tax and insurance (T&I) defaults by over 75%, and serious defaults by over two-thirds. This is according to data analysis conducted and released this week by New View Advisors.

“These results continue to validate the encouraging data we shared in previous years,” writes New View in its latest commentary accompanying the data.

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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“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 remained a thorn in the side of the program.”

Now with over five 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.

“[W]e looked at a data set of more than 200,000 HECM loans, comparing loans originated in the immediate 57 month post-FA period from July 2015 through March 2020 to loans originated in the 57 month pre-FA period from July 2010 through March 2015,” New View writes. “As Financial Assessment took effect in April 2015, the second quarter of 2015 included a mix of FA and pre-FA loans.”

According to the data collated by New View, they reflect “a very strong reduction” in T&I defaults in the measured post-FA period.

“As of March 31, 2015, the pre-FA data set had a T&I default rate of 4.7%, and an overall serious default rate of 6.8%. As of March 31, 2020, the comparable post-FA data set shows a T&I default rate of approximately 1.1%, and an overall serious default rate of 2.2%,” New View writes. “For the purpose of this analysis, we define serious defaults as T&I defaults plus foreclosures plus other ‘Called Due’ status loans.”

Because of this latest data, the HECM program’s standing has most definitely benefitted from the implementation of FA, New View writes.

“Given these results, we continue to give Financial Assessment high marks for reducing defaults,” the commentary reads. “After nearly 5 years of experience, it is clear the HECM program has graduated to a sounder credit footing. The coming months will show how well this reformed HECM program weathers a likely serious economic downturn.”

Read the full commentary at New View Advisors.

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    • David,

      Unfortunately the lowering of the principal limit factors on 10/4/2017 had absolutely nothing to do with property charge defaults. Most everyone (including the actuaries) believes that financial assessment has all but eliminated the need for changes to HECMs due to this cause.

      Although the overall loss in the MMIF was substantially lower last fiscal year over the prior year, there was still a loss for new business completed in fiscal 2019. Until the new book of business in subsequent fiscal years becomes slightly negative or slightly positive, expect EVEN lower principal limit factors sometime in the future. We may be out of an extreme forest fire as of the last official measurement date (9/30/2019), but the direction of the wind and the humidity (now the covid-19 virus and its effect on the economy) could bring on even lower principal limit factors.

  • Let us be clear, New View has done a great job of showing that the defaults from HECMs not subject to financial assessment were much higher than after. Most of us have known this since the implementation of financial assessment. That is OLD news.

    Yet what New View has refused to do is:

    1) demonstrate how draconian financial assessment is to borrowers with LESAs,

    2) show how draconian financial assessment is to increasing HECM endorsements, and finally but MOST importantly

    3) show alternatives that are less draconian and do not increase defaults substantially.

    It is the last point that is most crucial. New View has NOT shown the default rate of the endorsed HECMs that received case number assignments from September 30, 2013 through April 27, 2015 nor has it shown the default rate for endorsed HECMs with case number assigned on August 4, 2014 through the end of business on April 26, 2015.

    The longer of these two time periods are what FHA has referred to as the best changes it has made to HECMs. On September 30, 2013, HUD ended the period of HECM Standards and HECM Savers. HUD also created the 60% of the principal limit draw rule for the first 12 months after closing. As part of that it created the mandatory obligation structure. It also rewarded those who met the 60% rule by only charging 0.5% for the initial MIP but 2.5% for those borrowers who did not.

    HUD like many others of us felt that financial assessment would only be marginally necessary after these changes as a safeguard to allow lenders to prevent seniors who showed a high propensity to default on property charges from being approved to get a HECM with that lender. Yet time and time again, New View has failed to present the default rate for endorsed HECMs with case numbers assigned in either period.

    While most of us expect the default rate to be marginally higher on endorsed HECMs with case numbers assigned from September 30, 2013 through the end of business on April 26, 2015, we do not believe that the difference would be anything other than inconsequential. If that is the case, we do not see why financial assessment is thus eliminated except to allow lenders the right to prevent applicants who have a high propensity to default on property charges from being approved for a HECM with that lender. By the proposed elimination of financial assessment, we believe that the more draconian aspects to borrowers who had to get LESAs and a substantial portion of those who have been disqualified or discouraged from getting a HECM would become borrowers.

  • David,

    Glad to see you are still in the limelight, hope all is well my freind.

    David, I have to agree with Jim, he mad e very good case backed up with excellent facts. Financial Assessment has made a tremendous difference overall, I applauded the the new ruling when it was implemented, even though it effected business drastically in the beginning.

    I rest my case, Jim Veale outlined it the best!

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

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