One year ago, we wrote a cover story outlining the details of impending Financial Assessment—speculating how the market would react and offering tips on how to best navigate this new landscape.
Like many articles at that time, projections and strategies were based upon pages and pages of dense guidelines that, once enacted, would take this industry through uncharted waters. At the end of the day, it was all speculation. Some was positive and forward-thinking, while other conjecture was wrought with skepticism and fear.
Now, nearly a year after FA, we’re revisiting the topic through the lens of the underwriter, exploring the degree to which this monumental program change has truly impacted the industry. It seems that the work of the underwriter has been most drastically altered by the adoption of FA. We’ve spoken with dozens of these dedicated professionals about how their teams have adjusted processes to thoroughly document a borrower’s ability and willingness according to the new rules. We’ve learned that the adjustment has not been completely smooth, despite months of preparation. It turns out that even the best-laid plans bend and turn when put into action. As one underwriter said, FA has taken us for quite a ride.
But in many ways, the industry has successfully adapted to the change. And as originators continue to advance their skills and education, easing the burdens of the underwriter, one can assume that things will improve as times marches on. Perhaps now is a good time to reflect on the challenges we’ve faced in the wake of FA these past several months as we prepare to put our best foot forward in 2016.
A Meeting of the Minds
In early December, Finance of America Reverse (formerly Urban Financial of America) held a two-day underwriting seminar in Tulsa, Oklahoma, as part of its commitment to the ongoing training and education of its B2B partners. Led by Britany Luth, FAR’s vice president of best practices and a longtime underwriting contributor for TRR, the seminar provided a place for more than 30 underwriters and loan support professionals to discuss issues affecting their work. As you might expect, the challenges posed by the implementation of FA dominated the conversation.
“Since its launch, we have learned a lot that we simply hadn’t thought of when preparing for Financial Assessment,” Luth says. “Early on, the industry worked through questions and confusion on various interpretations of the new guidelines. As we continue to run across new scenarios and receive clarifications from HUD, we use it as an opportunity to share what we have learned. The goal of this training was to reset. We identified key areas of confusion and targeted those as areas for training. The response was overwhelming and exceeded our expectations, proving there is still a desire to learn more within the industry.”
During the training session, we spoke with dozens of underwriters who offered their views on how FA has impacted their work. Based on these opinions, we’ve outlined some key themes that were repeated by many of these professionals. Their collective commentary offers valuable insight into how the role of a HECM underwriter has changed in today’s lending environment, and how the loan process has been impacted as a result.
Ask the Underwriter
Reverse professionals in charge of operations, policy and workflow spent a great deal of time preparing for FA. New procedures designed by such experts were enacted at lender companies across the country, and in most cases they were thoughtful and efficient improvements.
But once FA came into play, it became evident that no workflow revision could change the fact that the underwriter had the greatest burden to bear. With an experienced eye needed to analyze nearly every case file, underwriters say they are facing increasing demands. It is they who now provide the framework for a loan originator’s success. While special email addresses, hotlines and scenario support desks for originators were established at many companies, at the end of the day, LOs just wanted to hear from their underwriters. It was the underwriter they sought out to discuss the need for a full or partial LESA, or to ask if enough evidence had been provided to prove a borrower’s eligibility.
This development made one thing clear: The role of the underwriter appears to have been elevated significantly with the onset of FA. LOs were more confident when an underwriter was involved upfront in the origination process, and bringing one into the loop early as a final step in the pre-qualification process proved to measurably reduce processing turn times.
A Letter of Explanation to Accompany Your Letter of Explanation
It was expected that many originators would have difficulty applying FA’s guidelines to determine a borrower’s ability and willingness. LOs would need to address three key factors on all case files in order for the loan to proceed: credit history, prior property charge payments and residual income. But despite advanced training and discussion, it became clear that many originators were having trouble, with underwriters reporting that originator confusion was lengthening turn times. For many, more training and education were needed.
Perhaps the greatest challenge arose from the need for originators to supply a letter of explanation with proper evidentiary support in case files with extenuating circumstances. Underwriters have reported that, while great care and detail was often provided in the LOX for their review, many files failed to include verifiable documentation. So, for example, if a case involved a borrower whose income was depleted because of a serious medical issue, the case file might include great detail about the borrower’s plight, but fail to include a letter from their doctor and a hospital invoice in support of this claim. Underwriters might be sympathetic, but without such support they are unable to approve the file under FA guidelines.
The need for additional support for these letters of explanation were delaying turn times with a request for resubmission, and in some cases, a resubmission of the resubmission was needed to get it right. For many underwriters, the paperwork began to pile up, clogging the pipeline as they worked to push cases through to approval. Under FA guidelines, underwriters can no longer read between the lines. Instead, they must slog through a tower of paperwork to make sure an explanation is provided down to the letter.
Making a List, Checking It Twice
While the need for increased documentation has been an adjustment, originators are catching on, with some underwriters reporting that the problem has begun to right itself as LOs learn the ropes.
It seems that continued training and education is the answer to the problem, with origination 101 now encompassing a more thorough interview process with a potential borrower than before.
The process must be aided by a comprehensive checklist, one that outlines exactly how a borrower interview should proceed, particularly in troubled cases that require extra support. A number of lender companies have ushered in a return of the paper checklist to assist their LOs, helping them navigate the guidelines, a move that is certainly helpful to those with little to no forward experience.
Many of these checklists perform as a combination job aide and roadmap to information and document collection. In most cases, the forms have morphed from a page to a packet and include an example of a pre-qualification discussion between originator and borrower. Because FA is so detailed, the checklist may also prompt the user to consider exceptions, alternative documentation, extenuating circumstances and compensating factors. It might provide prompts for more common situations to further the borrower interview. For many lenders, these checklists have been essential to helping originators get through the process.
A Sense of Optimism
When news of FA was first announced, many in the space had their concerns. One was about how potential borrowers might respond. But with nearly a year behind us, it’s safe to say that for most, the elevated pre-qualification process has not made a marked difference in consumer interest. In fact, the changes HUD has made in the past two years seem to have inspired greater support from the media, which have many predicting greater consumer acceptance down the road.
Discussions at NRMLA and elsewhere appear to reflect a sense of optimism. The emphasis has been on the need to embrace change and to foster clarity between HUD and the industry as we work together to get a handle on FA and see the market succeed. Both sides have recognized the importance of an ongoing dialogue as we work through the changes, and many have applauded HUD for its responsiveness to industry queries throughout this process.
While FA has undoubtedly increased the demands of their job, many of the underwriters we spoke with echoed this sense of optimism. Several professed their belief that additional requirements for borrower eligibility strengthen the HECM program and ensure its continued availability to aging Americans. Many stressed that the key is continued, industry-wide support for ongoing education so that the application of FA eventually varies little from lender to lender.
As we move into the New Year, one prevailing question lingers: Will next year see program growth and volume? Over the past three years we have seen tremendous change to the HECM as HUD enacted measures to ensure its longevity. Now, there appears to be a sense of hope that we might enjoy a period of stability where industry participants can focus on mastering the changes and connecting with a larger audience.