Is Reverse Mortgage Underwriting Getting Tougher?

While the reverse mortgage industry has long awaited formal guidance from the Department of Housing and Urban Development as to greater underwriting requirements when it comes to Home Equity Conversion Mortgage borrowers, lenders have only scratched the surface when it comes to implementing sweeping underwriting changes to address the issue of tax and insurance defaults. 

More and more, though, we are hearing from originators that say underwriting has changed, albeit gradually, in the direction of more requirements, more documentation and necessary records overall. 

One example provided by a longtime broker is months of phone bills, mortgage statements, rental agreements and tax records on any homes that are not the borrower’s primary residence. Additionally, he says, underwriters are looking into any additional addresses that may appear on a credit report—even if the address belongs to an attorney, an explanation is required. Homeowners’ insurance, too, is being examined more thoroughly than before. 

“It’s not all bad,” he told RMD, “but you can tell that with a smaller and smaller lender pool to deal with that they are making sure things are to the letter.” 

Other originators have reported more required documentation for items that would have previously moved along without as much scrutiny. Citing a case of a tax foreclosure that took place three years earlier and had since been reversed, one originator said his client’s application was denied. It wasn’t a financial problem, he says, and the borrowers had paid taxes on time every year since the foreclosure. 

“There has been some impact on [the larger] lenders,” he says, noting that smaller lenders may be able to devote more time to the approach. “This is the direction HUD has indicated it wants to go.” 

It may also be a sign of the times, following the worst economic downturn since the Great Depression resulting in large part from a boom in sub-prime lending. 

More stringent underwriting requirements have also been noted as one possible reason for the increase in reverse mortgage fall through, measured as the rate at which potential borrowers go through counseling but ultimately do not close the loan. By some recent estimates, that rate is close to 50%. 

While the implementation of a financial assessment mandated by HUD has been discussed, lenders have yet to publicly make a change in that direction. MetLife tested new underwriting guidelines as a form of financial assessment before exiting the business, while other lenders have stated their intention to do so without implementing the change. 

Several lenders had not responded to requests for comment as of press time. 

Written by Elizabeth Ecker

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