“This financial assessment process is conducive to making the Home Equity Conversion Mortgage (HECM) an even safer loan product.”
If a potential borrower can swallow such an absurdity he need not be concerned about who this financial assessment ( FA ) is making the product safer for! The FHA wants 1.25% insurance and will only allow 60% loan to value and now wants additional insurance to secure the loan. What are sheep for if not to be sheared?
I understand the skepticism and sentiment and I would wager that with the sarcasm you exhibit, I will never change your mind about the way you feel about the changes to this program the costs or the need for the reverse mortgage financial assessment that was enacted but I’m going to tell you my perspective from that of an originator.
Obviously, Financial Assessment has made my life much more difficult both from the standpoint of my daily work in closing reverse mortgage loans and from the standpoint of having to explain to some borrowers that I cannot do their loans under the new parameters, most of whom I once had no problems closing their loans.
So, why do reverse mortgages need financial assessment?
The reverse mortgage loan program was never intended to be a government grant program or a subsidy of any kind. It is a loan program insured by FHA that is supposed to be revenue neutral to HUD, not making any money but also not costing the taxpayers either.
The mortgage insurance that you reference is paid by borrowers for FHA insured loans on both a forward and a reverse basis in order to ensure that there is sufficient money available to pay the claims for loss and guarantee that lenders do not incur losses for making the loans, that investors do not incur losses for buying the bonds secured by the loans and ensuring borrower’s funds will always be available.
Now you may think that only a portion of that “helps” the borrower, but in fact it all does. Without the guarantees available to all parties, reverse mortgage lenders would not make the loans and investors would not buy the bonds and the loans would not be available to the borrowers.
After all, who is going to make loans available to borrowers on which they don’t receive any repayment for many years and then could lose money if there are no guarantees? Without the insurance, the loan would not be available.
But let’s also talk about the loan for the borrower themselves. Prior to financial assessment guidelines, borrowers had only to be over the age of 62 and have an adequate amount of equity in a property that met HUD’s minimum standards.
There were no income or credit qualifications to speak of. What we saw many times were people grasping for the reverse mortgage “life jacket” as a last resort in all too many instances where even the receipt of the loan did not put them into a good enough position to resolve their issues.
The program without financial assessment
Without financial assessment, many borrowers obtained reverse mortgages and it delayed the inevitable, but then they ultimately got to the point where they still could not afford to pay their taxes, their insurance, their other financial obligations and live each month.
True, the loan delayed the time when they still had to sell the home due to the fact that they still could not afford to live there, but now the equity was less than it was with the deferred interest and costs of the loan and many times borrowers were left in a worse position than if they had just been hit with the reality that the property was beyond their means to keep in the first place.
The equity they would have had was often seriously eroded to a point where now a sale left them with nothing to set up in another location.
HUD Creates Income & Credit Requirements
HUD suffered huge losses when borrowers stopped paying their taxes and insurance and lenders had to advance funds to make these payments, adding these costs to the HUD claims. The program was never intended to require billions of dollars of federal funds just to stay afloat and there was a lot of concern of the longevity of the Home Equity Conversion Mortgage (HECM or “Heck-um”) as legislators pressed hard for an answer.
For a while, the very future of the HECM program was in doubt. Financial Assessment guidelines, underwriting borrowers to be sure that even with the reverse mortgage they can afford to continue to live in the home and pay their obligations, seemed the only answer.
The guidelines under financial assessment do not require borrowers to qualify the same way they have to under a normal mortgage loan. Instead of a 3 – 1 ratio guideline of income to debts to determine qualification, HUD uses the residual income method to determine qualification and they are looking for overall creditworthiness. The residual income required depends on your family size and in what region of the country you live.
Larger families and people living in more expensive areas of the country have a higher residual number they have to meet than those living alone in the less expensive areas.
But for a single homeowner in the most expensive region, the residual income is just $589 per month. That means that after the lender subtracts any debts you have (actual credit cards, loan payments, taxes, insurance HOA dues if any, etc) from your income, you have to have at least $589 left for the month to pay for all of your food, your medicine, incidental expenses, gas or other travel, etc.
If after you pay for all these expenses you have less than this amount but have at least 80% of the required amount, HUD still allows you to obtain a set aside where reverse mortgage proceeds are set aside to pay your taxes and insurance and you can still qualify.
We sometimes get borrowers who are negative. In other words, after all their debts are subtracted from their income, they have more money going out than they bring in. Some of these borrowers have been living on liquid assets. Some on credit. The financial assessment forces lenders to look at the circumstances and try to determine if this loan will simply delay the inevitable loss of the property or if it will actually help the borrower. But the reverse mortgage was never intended to be the end all be all loan for every borrower and every circumstance.
How It’s Become Safer
Financial Assessment makes the loan product safer for the borrowers who do actually benefit from it. Financial Assessment makes the program safer for the lenders who offer the loan and for the investors (people just like you and me) who buy the GNMA bonds.
If left unchecked and the losses continued, the HECM loan would not last and the borrowers who would benefit from it would no longer have access to it. As I started, the program is intended to be revenue neutral.
If the program begins to show income as a result of the changes, then HUD now has the authority to make changes to enhance benefits, or credit standards but without any changes at all, you would have been writing about the sheep who were sheared as a result of the loss of the program and as much as I bemoaned the changes when they were first announced, I am much happier that the changes were made and the program still exists today for those who can use it.