Potential changes to the approval process for direct endorsement lenders may raise the barriers to entry for the reverse mortgage business.
By requiring test cases for closed loans rather than loans that are in process pre-closing, some may be prohibited from applying for DE approval based on the higher risks associated.
“It will restrict the number of lenders seeking DE approval,” says Dennis Loxton, regional vice president of reverse mortgage lending for 1st Financial Reverse Mortgages. “If you are a lender, you may not seek DE approval if you’re only planning on doing 10 of these loans a month.”
The proposed HUD changes, published for comment in the Federal Register in late March, would include “moving the timeframe that FHA conducts its pre-endorsement review of loans originated by Direct Endorsement lenders from a time that is prior to the lender closing each loan and before FHA’s endorsement of the mortgage for insurance to a period after the loan has been closed.”
HUD’s request for comments seeks to find whether the change in the time frame would reduce the processing time before loans may be closed and facilitate loan closing.
Because of potential errors that can arise during the test cases, which are often found during the process either by the lender or the shadow investor, the risk becomes heightened if the test cases are submitted for closed loans, Loxton says, due to the responsibility of the lender to keep and service that loan and the lack of a market to purchase it.
For lenders of a certain type and size, the implications are not as wide reaching, Loxton says, but for those mid-sized non-bank lenders, the change could be prohibitive.
“If you’re a mid-sized mortgage banker, to have one of those loans stuck that you can’t sell is potentially a big deal,” Loxton says. “If this happens with a forward loan, you usually can still sell it. But in the HECM world, it’s a specialty product.”
Lenders considering applying for DE approval may be best served to apply before the potential changes go into effect.
“This serves to narrow the playing field and set barriers to entry higher than they have been,” Loxton says. “If you were thinking about doing this six months from now, this is the time to do it.”
Written by Elizabeth Ecker
