Once controversial, financial assessments prove valuable, reverse experts say

Comparing the initial response to the policy with its results today, the industry has been acclimatized to its impacts while the health of the insurance fund has improved

Back in 2014, U.S. Department of Housing and Urban Development (HUD) issued a financial assessment for reverse mortgage borrowers that took effect in 2015. The response from the reverse mortgage industry was mixed at the time, but continual reviews of the policy have showed that it has made a material reduction in both tax and insurance (T&I) defaults and serious defaults.

This is according to a recent review of the policy published by New View Advisors. While the potential challenges it would bring to reverse mortgage origination were dreaded by members of the industry at the time the policy was unveiled, the policy – now in its ninth year – has largely been incorporated into the industry’s norms and accepted as a way to improve the position of the Home Equity Conversion Mortgage (HECM) program.

Initial reactions

In May 2015, just a couple of months after the policy went into effect, the mood at the National Reverse Mortgage Lenders Association (NRMLA) Western Regional Meeting in Huntington Beach, Calif. Was subdued when it came to the outlook of the FA’s potential impact on the reverse mortgage business.

Still, industry professionals at that time acknowledged that defaults had been a serious and persistent problem between 2009 and 2014, and were hopeful that the FA policy could help improve trust in both the reverse mortgage program, and the lenders offering the product.

“Financial assessment is a positive thing,” said Colleen Moore, who in 2015 served as the national director at San Diego-based Golden Equity Mortgage. “The reality is, if [the borrower] doesn’t pass financial assessment, you weren’t saving that borrower anyway. Embrace this process and the credibility financial assessment gives us.”

A need to address the default issue was also expressed at that meeting by Sherry Apanay, who served as chief sales officer for the company that would later rebrand itself into Finance of America Reverse (FAR).

“If we want to grow our market, we have to fix this problem,” Apanay said at the 2015 meeting. “Financial assessment is the solution to do that.”

The immediate effects on volume from the FA implementation painted a harrowing picture of the policy’s impact, according to data shared with RMD in late 2015 by Reverse Market Insight (RMI). But following a sharp drop, volume did begin trending positively soon afterward.

Default reductions take hold

A picture of the overall impacts of FA came into clearer focus by 2017. New View Advisors took a close look at the data early that year, and in an analysis including 85,000 HECM loans originated both before and after FA’s implementation found that reverse mortgages issued in the pre-FA period had a tax and insurance default rate of 1.17%. That number dropped to just 0.39% for HECMs post-FA.

New View has periodically checked in with the FA policy over the years, and has continuously reported that it has consistently continued to have its intended effect. It issued its most recent commentary on the matter this month, illustrating that FA continues to have a positive impact from the perspective of T&I and serious default reduction.

Its most recent analysis included a look at more than 300,000 HECM loans, comparing loans originated post-FA from July 2015 through March 2023 to loans originated pre-FA prior to March 2015.

“The data show a very strong reduction in T&I default in the post-FA period,” New View said in its latest commentary. “As of March 31, 2015, the pre-FA data set had a T&I default rate of 7.1%, and an overall serious default rate of 10.5%. As of March 31, 2023, the post-FA data set shows a T&I default rate of approximately 0.9%, and an overall serious default rate of 2.3%.”

“Serious defaults” are defined as T&I defaults that are then referred to foreclosures, active foreclosures and other “called due” status loans, New View explained. Additionally, the results remain consistent when comparable cohorts are compared by loan age, New View said.

The implementation of FA was also followed by other steps taken by FHA to improve the credit footing of the HECM program, including another disruptive change to principal limit factors (PLFs) implemented in October of 2017.

“[The PLF] reductions [have] reduced the amount lent even when the loan is fully drawn,” New View said. “Not surprisingly, the economic health of FHA’s HECM insurance fund has improved dramatically, from negative $8 billion in Fiscal Year 2016 to a positive $15 billion as the end of Fiscal Year 2022.”

This has led New View to continue to give FA “high marks for reducing defaults,” the commentary said.

“After nearly eight years of experience, it is clear the HECM program has graduated to a sounder credit footing,” New View explained.

Reflecting on the policy

When reached by RMD, New View Partner Michael McCully said that current challenges being faced by the industry do not diminish the positive impact that the FA policy has had on the industry.

“While the reverse mortgage industry is currently experiencing lower execution and reduced liquidity, it is encouraging to see program improvements made by FHA have such a positive and long-lasting effect for the MMI Fund,” McCully told RMD.

Fluctuations on the secondary market side of the business do not diminish the progress that FA has brought to the HECM program, he said.

“Capital markets may fluctuate in the short term, but the strength of the underlying HECM program remains the industry’s cornerstone,” McCully said.

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