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The Industry Braces for the Financial Assessment
When it comes to how reverse mortgage loans are originated a line has been drawn in the sand: March 2nd, 2015. In two short weeks the long-awaited or dreaded Financial Assessment goes into effect forever changing the way HECM loans are qualified. This is a game-changer.
The road leading to the Financial Assessment has been a bumpy one. With HUD signaling an upcoming assessment MetLife took the first leap launching their own Financial Assessment company-wide in November 2011. The resulting confusion and broker redirection of loans to other lenders without such guidelines led MetLife to reverse course and suspend the assessment in short order. After this false start and lack of industry-wide financial assessment guidelines we all waited patiently for the official word.
There were several hints that the assessment was coming soon but the policy was inevitably delayed for several years…until now. Misgivings aside the financial assessment will extract its cost from lenders in both time and money. With clear guidelines now published by HUD comes the task of…
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The following is the only public reason given by Wells Fargo itself for leaving the industry:
“For Wells Fargo, however, the inability to assess borrowers’ financial health was the biggest factor for exiting the business. Anyone over the age of 62 with enough home equity can take out a reverse mortgage, regardless of their other income. The amount of money received is determined by the borrower’s age, the amount of equity in the home and prevailing interest rates.
‘We are not allowed, as an originator, to decline anyone,’ added Mr. Codel of Wells Fargo. We ‘worked closely with HUD to find an alternative solution and we were unable to find one with them, which led to this outcome.’
The quotations are taken from a June 17, 2011 article in the New York Times written by Tara Siegel Bernard and titled “2 Big Banks Exit Reverse Mortgage Business.” You will find it at: http://www.nytimes.com/2011/06/18/your-money/mortgages/18reverse.html?_r=0
(The opinions expressed in this comment are not necessarily those of RMS or its affiliates.)
For years there was little need for financial assessment (“FA”). FNMA bought almost all industry generated HECMs and accepted all responsibility for them following purchase.
Then came HERA and changed everything. Suddenly FNMA had to size down its mortgage portfolio and HECMs became a double curse to FNMA since HECM balances due did not diminish over time like fully amortizing forward mortgages but actually grew by design.
HECM lenders were forced to find a way to sell HECMs through the securitization process. Using the principle of least resistance, HECM lenders sought out HUD’s arm for securitization, GNMA. At first things seemed great since the premium for HMBSs was a welcome increase in origination income. Then more and more lenders realized the details of the GNMA agreement had lingering guarantees following issuance which meant more risk. One of those guarantees in conjunction with the assignment requirements of FHA was that the lender was ultimately responsible for the payment of all borrower defaults for the payment of property charges which were not cured by the borrowers. Now lenders realized they needed FA to qualify borrowers to minimize this risk.
So starting in fiscal 2009, HUD began being notified by lenders that a HUD mandated HECM FA was needed. HUD told HECM lenders that they already had the right to do FA on their own. MetLife was the only lender to try to implement their own brand of FA and we all know what happened from there. It is speculated that MetLife left the industry over this issue as well as Wells Fargo earlier. Some believe that even Bank of America left in February 2011 in significant part due to the lack of HUD mandated FA.
Besides the financial cost of foreclosure because of the default guarantee, lenders became very concerned about the public image damage such foreclosures could create not only in their HECM businesses but their other and far greater business activities. It is this reputation risk which is cited as the reason why the large banks left the industry.
Many in the industry are confused as to why FA is needed. In quoting Franklin Codel, an EVP and current head of Wells Fargo’s mortgage production, James points out the major cause of why that bank left our industry.
Yet many are STILL confused about the impact of lender financial assessment. At about the same time we first heard that a significant number of HECMs were in default for not paying property charges, the Obama Administration began analyzing the HECM program and reporting the losses which they expected for the fiscal year 2010 book of business would result in. They estimated it at about $800 million.
Although lender financial assessment might result in lower losses to the MMI Fund on future books of business, the real purpose of HUD mandated lender financial assessment is to satisfy lender demands for it. Its institution will not only lower the risk of default on property charge payment to the lenders but should also lower the reputation risk to lenders from related foreclosures.
What should mitigate HECM losses to the MMI Fund are the lower Principal Limits which went into effect on September 30, 2013 (as modified on 8/4/2014) and to some lesser degree the first year disbursements limitation.