True Stories: Hybrid, eNote and RON Implementation

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Mortgage

FHA’s reverse mortgage changes have slashed the default rate

Policy of assessing borrower's credit risk appears to be doing the trick

It’s been four years since the Federal Housing Administration instituted a policy requiring all prospective reverse mortgage borrowers to undergo a financial assessment to determine their suitability for the loan, and so far, it appears to be working.

Known as Financial Assessment, the practice of reviewing a borrower’s credit history and risk to assess their ability and willingness to maintain the obligations of the loan – mainly, keep up with tax and insurance payments – was put into effect in 2014.

While this sounds routine for those working in the forward mortgage world, the reverse mortgage origination process did not previously include a review of a borrower’s credit history. They simply had to have enough equity, attend counseling, agree to the terms, and that was that.

But as a number of borrowers were ending up in default because they were not keeping up their end of the deal, the FHA sought to remedy the situation by requiring lenders to assess a borrower’s credit history before moving forward. If it came up less than satisfactory, funds were set aside to ensure the regular payment of taxes and insurance.

According to the latest analysis from New View Advisors, Financial Assessment has had the intended effect, slashing tax and insurance default by more than three-quarters and serious defaults by more than two-thirds.

“Tax and Insurance (T&I) and other defaults can lead to foreclosure and result in significant losses to FHA, HMBS issuers and other HECM investors,” New View explained in recent commentary. “Defaults rose steadily during the financial crisis and have remained a thorn in the side of the program.”

New View said it analyzed more than 200,000 pre- and post-FA HECMs to determine the policy’s effectiveness.

“The data show a very strong reduction in tax and insurance defaults in the post-FA period,” New View concludes, noting that the rate of T&I default fell from 3.6% to 0.7%.

“Given these results, we once again give the Financial Assessment concept high marks for reducing defaults,” New View said. “We grade Financial Assessment’s performance as a solid ‘A’.”

 

 

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