Reverse mortgage defaults have dropped precipitously since the implementation of Financial Assessment rules in 2015, according to an analysis from New View Advisors LLC published Friday.
The New York City-based financial services firm compared data on tax and insurance defaults for home equity conversion mortgages issued between July 2015 and December 2016 — a period that began two months after the formal implementation of FA on April 27, 2015 — and defaults on HECMs originated between October 2013 and March 2015.
New View found that reverse mortgages issued in the pre-FA period had a tax and insurance default rate of 1.17 percent, a number that dropped to just 0.39 percent for HECMs post-FA. The firm also analyzed the incidence of so-called “serious defaults,” which New View defined as tax and insurance defaults plus foreclosures and other loans with a “called due” status, and found a similar decline: Severe defaults accounted for 1.80 percent of all HECMs in the pre-FA period, and 1.03 percent after.
“Based on this result, we should give the Financial Assessment concept high marks for reducing defaults,” New View wrote in its post. “However, this is a mid-term grade that needs to be tested further as the post-FA portfolio ages.”
New View also noted that the average loan amount, as well as the size of subsequent draws, has risen after in the post-FA period, as the pool of HECM borrowers includes a greater proportion of homeowners with better credit and higher-valued homes.
Michael McCully, a partner at New View, said the results shouldn’t surprise anyone in the industry. “Financial Assessment is supposed to weed out those less likely to stay current on tax and insurance payments,” he said. “It makes sense that the nature of the borrower would start to shift.”
Written by Alex Spanko