“It is impossible to know where one is going without first exploring where one has gone.”
It has been more than a year since the announcement that shook the industry, and reverse mortgage professionals everywhere eagerly await the opportunity to learn the details of the dramatic changes we are to endure for years to come. Never again will the program be as simple or as easy to explain as it has traditionally been. Nor will it ever be as easy to qualify for as it was in its heyday. This we know. From the elimination of the fixed-rate Standard option to the impending implementation of Financial Assessment, the HECM industry has been completely flipped on its ear by HUD in the past calendar year.
The program we all grew to love is forever morphing into something different, and all we can do is deduce where it will go from here.
But what do we really know about Financial Assessment? Nothing, until HUD announces the final guidelines. Until then, speculation runs rampant. Doomdayers fear these changes are too drastic and the qualification requirements will shrink the already limited market to the point that nobody can make a decent living anymore, whereas optimists look at the bright side and welcome any change that will strengthen the industry to keep it healthy and sustainable for the long haul, even if it means enduring some restrictions and rolling with the punches. And of course, there are many opinions that lie somewhere in between.
Two years ago, MetLife Home Loans pioneered the concept of financial assessment in the wake of the shocking exits of Bank of America and Wells Fargo from the reverse industry. In the very beginning of 2012, MetLife announced it would institute its own policy of disqualifying applicants based on criteria such as poor DTI (debt-to-income ratio), no income, low assets and bad credit. The program lasted about a month and a half due to a remarkable loss in market share caused by the significantly stricter underwriting guidelines. Today, there is a very small, select group of HECM professionals who experienced some form of financial assessment firsthand as a result of MetLife’s short-lived program. I am among them.
The most logical way to prognosticate what is ahead is to look at what has been done in the past. So let’s delve into Financial Assessment and all the other recent changes to the HECM program over the past year. In doing so, we will explore the cause or purpose of each caveat and attempt to gauge the long-term implication such a policy will have on the industry and our future clients.
Principal Limits Principal limits have been lowered completely, universally, across the board. Absolutely nobody qualifies for as much money today as they did six months ago. Clearly this is the FHA’s way of reducing risk and exposure to the number of outstanding loans that outlived their equity in recent years due to the drastic real estate market. Let’s not forget the rumors last year that the maximum limit of $625,500 would be reduced to $417,000, thus tightening the grip on many higher-value homes that might have excellent LTVs otherwise. The jury is still out on how much this will impact the industry in the coming year.
Credit Score This is usually the first detail that comes to mind when discussing Financial Assessment, since traditionally there has never been a credit requirement in HECM lending before, which has been one if its most prevalent selling points. “No monthly payments” is usually No. 1 and “no credit requirements” is usually No. 2. We cannot know the full extent of how strongly this will impact qualification because we can only guess how heavily weighted this particular factor in the equation is. For example, when MetLife instituted its own financial assessment in 2012, someone with poor credit could still qualify if their ratios were strong. By itself, the credit score might not be a huge disqualifier, but this can be compounded by high debt levels and/or low income. Here’s food for thought: If seniors take out a loan that has absolutely no obligatory payments for the rest of their lives, then why does it matter what their credit score is? Who cares? Apparently HUD does, so we’ll see how an assessment of a potential borrower’s credit score will impact qualification numbers.
DTI One could also ask why someone would have to document any income whatsoever for a loan that has no required payment. We never did before! But perhaps the real source of concern for HUD is not the ability to pay off the loan itself, but rather that the client show both the willingness and ability to maintain homeowner’s insurance and property taxes over the life of the loan, thereby minimizing the risk of foreclosure. This could be a logical argument for checking credit, assets and income under the new rules. It should also be mentioned that when MetLife instituted its version of financial assessment in 2012, the term “income” was used rather loosely. For example, someone with limited fixed income could still qualify if it was deemed that their LTV was superior—meaning the available funds did not have to come from documentable “income,” per se, if the newly available HECM funds were more than enough to cover living expenses for an indefinite time, based on age and life expectancy, of course.
Standard Versus Saver Gone! No more, forget about it. Remember the quadrant we all learned in HECM 101 way back when? Relics on a shelf, these terms no longer exist in the industry. They have been merged into one conglomeration of limited options. Likewise, the associated mortgage insurance premium (MIP) of 2 or .001 percent of the principal limit has been changed to 2.5 or 0.5 percent depending not on which program is chosen (since neither exist anymore), but rather on the mandatory obligation, an aptly titled, brand-new term that signifies the combination of any outstanding liens plus all closing costs for the loan.
The 60 Percent Rule Now, seniors are only allowed to borrow up to 60 percent of the principal limit during the first year, unless their aforementioned mandatory obligation is already over 60 percent, in which case they can draw the full amount of this obligation plus an additional 10 percent the first year. After one year, the restriction is lifted and they have access to their full principal limit. What purpose could this temporary restriction possibly serve? Perhaps it is an attempt to reduce the risk of elder abuse. Similar to the life insurance industry, which has a two-year cushion on suicides to curb insurance fraud, it is quite possible that HUD wanted a one-year cushion, not to punish or hamper seniors, but to dissuade others from manipulating seniors to take out such a loan in order to gain a quick buck.
In conclusion, HECM underwriting guidelines have tightened, and they will continue to tighten once Financial Assessment launches in April. What will the new program look like? Will a reverse mortgage begin to look more like a forward mortgage in terms of documentation and qualifications? Will HUD borrow the model from MetLife and adapt its own rules? How heavily weighted will each new factor be? (For example, is good credit with low income more desirable than poor credit with high income and a great LTV?) How much leeway will competitors have in deciding their own underwriting guidelines within the confines of Financial Assessment? Will these tighter guidelines make the loans more attractive to investors in the secondary market? How will that affect pricing among competitors? And here’s a scary question: Will these tighter rules make it more difficult to qualify those clients who need the program the most? If so, how does that affect the long-term sustainability and profitability of this program? The answers to these important questions remain to be seen.
This article is intended to be an impartial and academic observation of the changing reverse mortgage industry. The opinions stated in this article do not reflect those of any company the author has ever been associated with, past or present.