Financial assessment of reverse mortgage borrowers is a reality. The industry knows that a consideration of a borrower’s ability to maintain their responsibilities, pay their annual homeowner’s insurance and property taxes, and general maintenance on their home, is coming. Technical default of reverse mortgages due to unpaid taxes and insurance and
Looking for ways to demonstrate that this product is rife with potential abuse puts seniors at undue risk of losing their home, expounding the issue of these defaults fits the bill for the right type of sensationalism.
As HUD has been compiling data to determine the full scope of the defaults, industry experts have estimated that approximately 5 to 8 percent of HECM loans have some form of tax or insurance deficiency, whether it is a one-time limited event or an ongoing failure to maintain responsibilities.
That wave of threatened foreclosures has yet to come, but the media attention focused on the problem has heightened the need for the industry to implement some type of resolution that appropriately mitigates the problem, without either scaring off seniors who need or want to explore the benefits of this product, or devastatingly restricting production. Although it has taken longer than expected for HUD to respond with some form of guidance, they have made it clear that they have been working on new requirements for some time. As of the time of printing, they continue to state that issuing guidance is eminent. They have also advised lenders that there is no reason to wait for that guidance. There are no restrictions against lenders implementing their own form of financial assessment for reverse mortgage borrowers in order to mitigate their own perceived risk of default.
Obviously, a key selling point to potential reverse mortgage borrowers is the ability to remain in their home for as long as they choose without a mortgage payment or threat to their ownership. Of course, they are required to maintain their taxes and insurance. Some lenders and servicers point to origination as a primary source of the problem. They raise concerns that originators have not done enough at the front end to make sure that borrowers fully understand their responsibilities in the transaction. Lenders and servicers also acknowledge that not enough has been done to mitigate the problem as it developed.
As the issue gained more attention in late 2010, the need for some type of industry response grew. HUD released Mortgagee Letter 2011-01 in January 2011 that established guidelines for how lenders and servicers addressed the problem of tax and insurance defaults. The guidance made it very clear that utilizing foreclosure, which requires HUD approval, should be a last resort, and servicers should try to utilize loss mitigation efforts, including offering counseling and repayment plans, to help borrowers get back on track with their responsibilities. NRMLA responded by forming a partnership with the National Council on Aging in April 2011 to launch a program designed to help borrowers in default find ways to resolve their deficiencies.
In July, NRMLA issued a letter to HUD with its recommendations for the implementation of a financial assessment tool for HECM borrowers. NRMLA agreed with the need to evaluate the ability of HECM borrowers to maintain their responsibilities with an assessment to be performed at approval and verified at closing. The organization suggested that a simple debt-to-income ratio test be applied to all borrowers. After completing the reverse mortgage, those borrowers who would have a ratio of 50 percent or less would receive a pass and require no further evaluation. Borrowers whose ratio exceeded 50 percent would then require additional assessment to determine if a program option can be implemented to still allow them to proceed with the reverse mortgage, while still mitigating the risk of future default.
NRMLA suggested that the additional assessment of those borrowers should include an examination of their history of delinquencies related to property charges. If borrowers did not show a history of delinquencies, then a lender should merely require that the borrower accept a term or modified term monthly payment sufficient enough to bring their debt-to-income ratio within the 50 percent standard.
Those who did have a history of property charge delinquencies should be required to have a set-aside sufficient to pay the charges for the estimated life expectancy of the youngest borrower as detailed in the TALC.
Subsequently, NRMLA has held additional meetings regarding its recommendations to discuss potential revisions to the information submitted to HUD. Unable to reach a consensus of its board, NRMLA convened a special committee in September to further evaluate the financial assessment model and the role the organization should play in HUD’s development process. The outcome of those meetings was kept confidential, but in the lack of a public update, the suggestion is that NRMLA has chosen to wait for HUD to release its guidance and then respond accordingly.
In a HECM program update issued by Acting FHA Commissioner Carol Galante on October 5, FHA stated that given the current economic climate and minimal changes to the HECM program since its inception, the agency has been revisiting its regulations to propose and ultimately adopt changes that are necessary to make the HECM program even more successful.” Financial assessment being a cornerstone of that evaluation, the notice officially stated that HUD does not prohibit lenders from including additional capacity and credit assessment in the origination and approval of HECM loans, essentially challenging lenders to establish their own protocols in the absence of HUD guidance.
Reverse Mortgage Solutions (RMS), which has a HECM servicing portfolio of 51,000 loans, has been working on a viable financial assessment model for some time. The company has tried to apply a commonsense approach in analyzing the wealth of data available in their portfolio to evaluate the causes of the tax and insurance default problem. Their goal has been to design an assessment tool that filters those with the highest risk of default without impacting the large majority of borrower who do maintain their responsibilities.
According to Mike Kent, Senior Vice President with RMS, the default issue can be addressed by taking a commonsense approach and taking the time to analyze the data available from the history of HECM loans. He spoke with The Reverse Review about how RMS is striving to design a reasonable tool that doesn’t unnecessarily overreach the problem and can be a model for the industry.
Mike: I think the development of a financial assessment tool is probably one of the most significant challenges currently faced by the industry. How will that work, what will that feel like, what will that require of us in altering or adapting our current processes to fit a financial assessment model? At RMS we are focusing on what the push for that model has been, and the goal to help prevent the tax and insurance defaults down the road. In developing our model, we examined our 51,000 loans servicing portfolio and looked at that small percentage of loans that have gone into tax and insurance default to determine ways we can identify those loans upfront in the process and create a system where they can be done while still mitigating the risk of that future tax and insurance default. We think it is a good, solid, sensible way to do it, rather than trying to apply a broad brush to every borrower. Our goal has been to find some of the common characteristics of those loans that we can identify early on in the process and create a financial assessment tool that identifies those at risk, and then find a different structure for those loans. That’s going to be a big challenge because that whole process, that whole concept of financial assessment, is still a little bit fluid. We all know it’s coming, but we don’t quite know what it is going to look like. The sooner some of the large servicers like ourselves can get that tool into the marketplace, the sooner we all know what we have to work with.
Brett: It has to be a challenge from your perspective, with HUD suggesting that lenders and servicers need to develop that process, but their guidance is coming at some point down the road and we don’t know what that is going to look like.
Mike: I think the simple fact that HUD has acknowledged that as lender/servicers, (especially direct Ginnie Mae issuers such as RMS) we have the latitude to design that system, which gives us a lot of room to come up with a tool that will not necessarily disqualify any seniors who really do want and need this product, but will give the ability to design a sensible way to identify those common characteristics early on in the process and mitigate those risks.
Brett: Do you believe that mitigation will help limit the attention that has been given to that relatively small yet concerning problem?
Mike: That’s correct. We forget that the vast majority, somewhere between 92 and 95 percent of our seniors, conduct themselves in a manner that is consistent with the terms of their loan documents and it really is a very small segment of seniors who have ended up in a tax and insurance default, and many times that isn’t of their own doing. When you are a senior there are certain life changes that can occur – we call them one-off events – that can cause them to be unable to pay their taxes or insurance in a given year. We need to be able to identify that as well and not penalize them for those events. That’s really the goal of the financial assessment tool we are developing. We are focusing in on that very small segment of the market that needs to have some kind of different structure in their transaction to really help mitigate the possibility of tax and insurance default down the road. Nobody wants their loans to go into default and nobody wants to have to apply any type of challenging mitigation tools to alleviate the problem. So we think if we identify it upfront and structure the transaction in a way that works for the senior and for the lender/servicer, then hopefully we’ll see a dramatic reduction. We think through some very modest changes we can probably reduce the problem by 75 percent.
At press time, the release of financial assessment tool guidelines and requirements, either by HUD or lenders such as RMS, has yet to be seen. The issue was once again brought to the media forefront by a story about a 101-year-old woman in Detroit who was removed from her home due to a foreclosure. Even though the woman’s son openly acknowledged that he was aware of the responsibilities and admitted he failed to help make sure his mother’s taxes and insurance were maintained, HUD responded by forgiving the past due amounts and returned the woman to her home. Although this is a touching story of redemption for the 101-year-old woman, it sets a dangerous precedent for HUD and HECM lenders and servicers. The perception created in the public view is that somehow HUD or the lender erred in their management of the loan, when it was actually the borrower’s failure to meet their responsibilities or respond to mitigation attempts that led to the end result.
The latest issue places more pressure on the industry to not only visibly and publicly reduce the current number of loans in technical default by some form of mitigation, but also establish a protocol for identifying potential risk at the origination and approval stages of the process. At some point, the industry also has to realize that it must develop a stomach for moving to foreclosure on those borrowers who refuse to meet their obligations and/or participate in mitigation efforts.
The primary concern of many industry participants is that the regulators and lenders will seek to create positive public perception by overreaching the problem and applying a catchall financial assessment tool to mitigate the small number of loans that reach the state of default. Should the financial assessment model move toward a broad credit and income underwrite of all HECM applicants, it could lead to an immediate contraction in the number of seniors who are willing to move forward with the program. There is no doubt that the industry needs a tool to help mitigate the risk of tax and insurance default, along with a more coordinated program to identify and resolve delinquent payments as they occur. Even in this tenuous political and economic environment, the hope is that cooler heads prevail and the result is a common sense approach that applies alternatives for the small percentage at greatest risk of default, while maintain the current process for the vast majority who understand their responsibilities and fully intend to comply.