We have been hearing about changes coming to the reverse mortgage industry for 2013 and industry experts say ” This time it’s for real” I actually wrote about the financial assessment changes back in January 2012 titled “Changes on the Horizon for Seniors Seeking a Reverse Mortgage”
Before exiting the reverse mortgage industry Met-Life actually implemented a financial assessment which reduced the borrowers who qualified and slowed the loan process – they eventually stopped the assessment and as we know eventually exited the industry altogether. Hopefully HUD and FHA can come up with a plan that does not stall reverse mortgages and at the same time stabilizes the plan so that it will benefit seniors enough to still have an interest in the reverse mortgage loan option.
So what is the financial assessment exactly and why now? Primary purpose according to HUD and the review by the Consumer Protection Bureau (CFPB) is to prevent reverse mortgage loan defaults many of which were a result of borrowers failing to maintain the property condition, property taxes and home owners insurance. According to CFPB’s report an estimated 54,000 HUD insured reverse mortgage borrowers — or 9.4 percent- are in default for this reason. We have seen a drop in the FHA loan volume in recent years but according to the HUD actuarial review of the HECM Mutual Mortgage Insurance (MMI) fund to have an economic value of negative- $2,799 million at the end 0f 2012 mostly as a result of the following:
High number of reverse mortgage loans completed during the years of 2003-2008
Higher numbers of borrowers taking out reverse mortgages at younger ages 62-68
Borrowers are living longer and keeping the loans longer and resulting in loan balance exceeding home value.
More Homes being conveyed to FHA rather than sold – mostly due to economic conditions
Economic value stands basically for “cash available to the fund” The goal is to recover this fund through new endorsements, economic improvement’s, higher house appreciations and higher mortgage insurance premiums to bring it back to positive. The current approaches being reviewed for the 2013 changes include:
Limiting the amount borrowers can draw at closing- this could reduce or eliminate the Standard HECM – According to HUD 70% of borrowers take the lump sum standard HECM
Create a Financial Assessment that helps qualify borrowers and are income worthy to cover taxes and insurance- up until it changes loan approval has primarily been determined by the borrowers’ age and equity, and not having Federal Tax liens with little or no impact from credit or income
Establishing a Set aside or escrow for taxes and insurance to ensure they are paid in a timely manner- currently this is the biggest issue at hand for default
Disallow Non Borrowing Spouses on new loans going forward- Up until Jan 2013 a borrower could/can still precede with a reverse mortgage loan even if the other (spouse) borrower was too young to qualify While this may all seem like impending doom for reverse mortgage borrowers and the consultants that serve them, the real goal of HUD is to obtain the authority from Congress to better manage the reverse mortgage programs and prevent defaults and ensure the HECM programs long term viability for senior borrowers.
There will likely always be defaults it is imperative that we as reverse mortgage consultant and HECM counselors act as Fiduciaries and clearly educate and design a program around the client’s needs and explain the potential risk of taking out a lump sum reverse mortgage at an early age if they do not have other credit lines to or debts to extinguish. A reverse mortgage can be part of a smart financial planning strategy to make living at home and aging in place as they desire but only if used in a financially suitable and responsible way that the borrower won’t spend through the funds too quickly.