New Reverse Mortgage Qualifications Do Not Allow For “Deadbeats” – The Mortgage Professor Comments

28 Jan

One of the attractive features of the HECM reverse mortgage has been that there
are no income or credit requirements. All homeowners 62 and older who live in
their homes without a mortgage have been eligible, and those with mortgages
may also be eligible if the balance is not too large.

But all that will change effective March 2, 2015 when a series of drastic new FHA rules come into play.
The precipitating factor underlying the new rules is the marked rise that has
occurred in recent years in property tax defaults by HECM borrowers. While
such borrowers are violating their obligations under the reverse mortgage
contract, and are thereby subject to foreclosure and eviction, FHA has been
understandably reluctant to allow elderly homeowners to be thrown into the
street. Because of the potential political and public relations fallout,
those critical provisions of the HECM contract are essentially unenforceable.
Instead, FHA has elected to impose income and credit requirements on future
applicants. The purpose is to assure that henceforth borrowers will have both the
capacity and the willingness to pay their property taxes and homeowners
insurance. While this won’t affect existing loans that are now in default, it
should sharply reduce the default rate on new loans. The downside is that future
borrowers will have to pay the higher costs of originating and servicing HECMs,
and wait longer for deals to be completed.
The new underwriting requirements that lenders will apply to all applicants are
very detailed, and in some respects tougher than those used with standard
mortgages. I went through the new rules with an underwriter, who pointed out a
series of provisions that went beyond anything in the rules pertaining to standard
mortgages. This is strange, considering that applicants for reverse mortgages pay
only taxes and insurance whereas applicants for standard mortgages also pay
principal and interest, which is usually much larger.
On the other hand, the applicant for a standard mortgage who fails to meet the
underwriting criteria is rejected whereas the applicant for a reverse mortgage
who fails the test has another option, called a FullyFunded Life Expectancy SetAside.
The SetAside is an amount drawn under the HECM that is reserved for
payment of property taxes and insurance by the lender. The amount, calculated
using a formula provided by FHA, is viewed as sufficient to assure the required
payments can be met though the entire life span of the borrower.
I calculated the required SetAside for a borrower of 75 with life expectancy of
144 months, taxes and insurance charges of $5000 a year, and interest rate plus
mortgage insurance premium of 5%. It was $54,000, not a trivial sum. If this
borrower had equity in his home of only $100,000, the SetAside
would use virtually all of it, and no additional funds could be drawn. If his equity was less,
the required SetAside would not be possible and he would be rejected.
There is another possible option, however, termed a PartiallyFunded Life
Expectancy SetAside. This is available to applicants who meet the credit
requirements and are therefore viewed as willing to meet their obligations, but
don’t have enough income. This SetAside, which can be much smaller, is used
to draw funds from the HECM twice a year, which are sent to the borrower who
makes the payments.
In addition to their complexity, the new rules have two remediable weaknesses.
One is that the new underwriting requirements must be applied to every
applicant. But applicants with plenty of equity in their homes might find that the
fullyfunded SetAside imposes no burden on them at all, in which case the
underwriting costs could be avoided. There is no reason why lenders and
borrowers should not have that option.
The second weakness is mandating that the lender make the required payments
under the fullyfunded SetAside.  Why not give borrowers the option of making
the required payments with their own funds, with the inducement that an
equivalent amount will be transferred from the SetAside account to the
borrower’s credit line? The purpose is to encourage borrowers to become
responsible. This would involve no risk to FHA, since the lender will make the
payments if the borrower doesn’t.
Copyright © 2015 The Mortgage Professor

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