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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.

“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.