The New Financial Assessment for Reverse Mortgage Borrowers

15 Nov

Reverse mortgage lenders are beginning to require senior borrowers to qualify for loans by proving that they have enough money to continue paying property taxes, home insurance premiums, and other home upkeep expenses. MetLife is the first reverse-mortgage lender to implement a financial assessment requirement, effective November 14, 2011. Other lenders say they are developing similar requirements, and the FHA supports the companies’ efforts.

While the HECM program requires consumer counseling to make sure seniors understand the loan, there are no income or wealth requirements that seniors must fulfill to qualify. All they need is substantial equity in their home. Lenders use the value of the home as collateral and pay out differing portions of the owner’s equity in the home, depending on the borrower’s age and other variables.

In addition to receiving cash, the borrower is freed from ever needing to make another mortgage payment and may remain in the home as long as he or she can.  Even if all their equity has been used up over time, borrowers may stay in the home and not be required to make future loan payments. Because HECMs are “non-recourse” loans, borrowers or their families can walk away from homes with a negative loan balance and face no financial repayment obligations.

Without any financial means requirements for the loans, many older borrowers have found themselves unable to afford to continue paying property taxes and home insurance premiums. Failure to make these payments is grounds for foreclosure, and as many as 25,000 HECM borrowers have been estimated to be in technical default on their loans. Private lenders and the FHA have been working for roughly two years to develop a plan to respond to this problem, but an agency spokesman says “we’re not there yet,” and admits that it has proven to be a very difficult issue to resolve.

By requiring financial assessments of new borrowers, lenders are trying to eliminate such problems with future borrowers. The first company to implement the standard is MetLife, which began using the new rules on November 14.

The MetLife assessment process will evaluate a borrower’s income from Social Security and other sources, how much money they are likely to earn on their retirement assets, and the equity funds they can draw down from the HECM loan they’re applying to obtain. Spending needs will also be reviewed, including remaining housing expenses. This cash flow analysis will then be able to provide MetLife with a good idea of the borrower’s suitability for a HECM loan.  The income analysis will be expanded to include projected earnings on an applicant’s financial assets and the HECM funds themselves that would be provided if the loan is approved.

LOs have been provided with training Webinars and calculators to use to determine a borrower’s suitability for a HECM loan under the MetLife qualification guidelines, and can probably expect to see similar training offered by other lenders in the near future.

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