A lot has changed for reverse mortgages since the Federal Housing Administration (FHA) implemented the Financial Assessment for the Home Equity Conversion Mortgage (HECM) program last year. As FHA continues to update its policies, new data sheds light on how this rule is affecting HECM volume trends.
At the crux of the Financial Assessment—effective April 27, 2015—is subjecting loan applicants to various testing criteria in efforts to determine if they have the willingness and capacity to qualify for a HECM.
The purpose of Financial Assessment, however, was not necessarily to provide applicants with a “thumbs up” or “thumbs down” qualification, but to ensure that reverse mortgage lenders can determine if the HECM represents a sustainable solution for the borrower in question, said Dan Hultquist, director of learning and development at ReverseVision.
“One way this is accomplished is using the results of the Financial Assessment to determine whether a set-aside is needed,” Hultquist said during an industry webinar on Monday.
Hosted by Hultquist, the ReverseVision webinar provided a review of the Financial Assessment, including a basic overview of the rule as well as a discussion on some of its more complex components, such as when to determine if a Life Expectancy Set-Aside (LESA) is needed, and the circumstances that might indicate whether the set-aside needs to be fully- or partially-funded.
The webinar also provided a review of updated Compensating Factors guidance and revealed HECM loan trends, as reported within ReverseVision’s RV Exchange (RVX) loan origination software.
Of all closed HECMs recorded in the RVX system from March 15, 2016 through September 15, 2016, the vast majority (86.8%) did not require a LESA, Hultquist noted.
Among the HECMs that did actually require a set-aside, 12.6% of the loans required fully-funded LESAs. As for HECMs that required a partially-funded LESA, Hultquist noted that this group represented such a small percentage that it didn’t show up graphically.
“In the last six months, we’ve only seen nine loans,” he said, referring to HECMs with partially-funded LESAs in RVX.
Property charge and credit history issues—considered “willingness” issues—could be attributed to the vast majority of HECMs requiring fully-funded LESAs.
On the “capacity” side, 71% of loans would be considered acceptable from a residual income standpoint without any compensating factors, while 26% would be acceptable with compensating factors and 3% considered unacceptable.
Considering this population of loans, it would appear at first glance that 26% of HECMs would not be deemed “acceptable” under the Financial Assessment guidelines. But, the majority of these loans closed without a LESA because one or more of the eight compensating factors were able to be used, Hultquist noted.
“Without knowing exactly what compensating factors were being used, it’s difficult to predict the impact of today’s changes,” he said.
Whether a prospective HECM borrower requires a fully- or partially-funded LESA is not clear cut in black and white.
While underwriters and compliance officers have the difficult task of determining whether a borrower’s residual income qualifies them for a HECM, the Financial Assessment demands an all out effort from everyone involved in the loan origination process.
View a recording of the ReverseVision webinar on YouTube.
Written by Jason Oliva
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