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‘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.

“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.