Feeling the Squeeze After the Assessment

Shannon Hicks July 6, 2015 10

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Early numbers show the aftereffect of the new Financial Assessment


reverse mortgage newsWhile it is not Armageddon for our industry the impact of the newly enacted Financial Assessment for the Home Equity Conversion Mortgage cannot be denied. According to a poll conducted by Reverse Mortgage Daily 12% of lenders anticipated a loss in volume less than 10% while more than half expected an impact of 15% or more.

Much like the early exit polls in national elections we are beginning to get a clearer picture of the assessment’s impact on our industry. Early data shows…

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10 Comments »

  1. Erik July 6, 2015 at 6:56 am - Reply

    I have run into 2 scenarios with the FA that have caused my borrowers to become unqualified because of the LESA. In both instances they are required to have a fully funded LESA, but with their life expectancy still being rather long, they do not have enough funds to close the HECM now. They are and have been current on the property taxes and HOI, but because of FA, they are no longer able to qualify and that is sad, they sure could use the extra funds and they have no issues with the funds from the HECM being used to pay the taxes and insurance. They are one of the unfortunate ones and this is one reason why I believe the LESA or FA needs to have some room made for a situation like this. A surefire benefit, but the borrower is living on only SS income.

    • James E. Veale, CPA, MBT July 7, 2015 at 5:30 pm - Reply

      Erik,

      If implemented, your suggestion would make a mockery of the rules governing the credit Character and Capacity testing of an applicant. Although I would like to see more extenuating circumstances and compensating factors they would do little more than water down the results of the tests and would eventually lead to muddying the situation even more.

      So the only substantial thing left to change is the LESA computations themselves. It is reasonable for HUD to use both an increase factor for the Monthly Residual Income Shortfall (MRIS) and the one-twelfth of the Property Charges (OTPCs) as specifically defined; that the increase factors should be the same for both computations is interesting but inherently wrong from an economic point of view. HUD does not seem far afield by using the MRIS in the Partially Funded LESA (PFL) formula or the OTPCs in the Fully Funded LESA (FFL) computation.

      So where can a change come? It is in the present value factor (PVF) in each LESA computation since they are the same in both computations. While the factor is somewhat consistent with the computation of the servicing fee set aside, its significant difference is that the time used in the servicing fee set aside computation is 100 years minus the HECM age of the youngest borrower at closing. In the LESA it is the TALC life expectancy of the youngest borrower at closing which will generally be a much lower time frame than with the servicing fee set aside.

      Yet even using the TALC life expectancy seems far too draconian. If the average HECM lasts less than nine years, using a time frame of 21 years in the LESA computation seems far too long for a 62 year old since younger seniors have a higher propensity to move than older ones. So having a cap on the time frame of 11 years seems fair. Will 21 years be too short for some 62 year old borrowers? You bet but 11 years should be a reasonable time period; however, it will not cut down LESAs as much as you might expect.

      For example, let us look at the amount required for a FFL when the youngest borrower in HECM years is 62, the expected interest rate is 4.7%, and the OTPCs is $500. The current FFL is $86,642 but under the suggested change, the FFL would drop to $58,306. Under the suggested change the $58,306 LESA would apply to all borrowers with exactly the same circumstances who are 62 years old through 76 years old in HECM years. While there will be some HECMs that will extend beyond 21 years, how many will there be? After this is not an exercise to eliminate all property charge payment defaults but rather to mitigate such defaults.

      (The opinions expressed in this reply are not necessarily those of RMS or its affiliates.)

      • Erik July 10, 2015 at 7:32 am - Reply

        James,

        I appreciate your response. I however don’t recall actually making any suggestions to change the program where a “mockery” could be made?

        I was just expressing where I lost two deals because of the FFL and the borrower falling into the long drawn out FFL obligation.

        I do like your opinion of possibly lowering the years, as your example states that would save the borrower a lot more money than you give credit for. I think a $28,000 reduction in your scenario or any reduction in many cases may save the borrowers.

        I am learning more about FA every day and how the UW seem to really want the borrowers to get approved and I don’t have a problem with FA at this point, other than those who are still struggling and can’t qualify even though they have no issues with using a FFL, its just that some calculation says they will live a certain amount of time, but in reality we never know how long we have.

        Much appreciated, thank you for your input.

        • James E. Veale, CPA, MBT July 10, 2015 at 3:56 pm - Reply

          In your first comment you state: “They are one of the unfortunate ones and this is one reason why I believe the LESA or FA needs to have some room made for a situation like this.”

          “To have some room made for a situation like this” suggests that exceptions should be made when cases are like yours. Eventually as exceptions are added for this reason or that make a mockery of standards.

          My suggestion is not to add an exception but to change the rule on how LESAs are calculated. Blindly using TALC life expectancies seems far too draconian in practice.

  2. James Spray July 7, 2015 at 3:15 pm - Reply

    In my humble opinion, FA is most unfortunate for those who can no longer qualify for the HECM program due to debt not related to housing expenses. Am I missing something here? Has anyone else observed this “side effect” of reform?

    • The_Cynic July 7, 2015 at 11:47 pm - Reply

      James,

      But isn’t cash outflow on debts other than liens on the home and costs unrelated to home upkeep or property charges usually the reason so many HECM borrowers went into default on their property charge payments? The source of default was generally a question of insufficient cash flow and since cash is fungible, one cannot ignore any significant cash outflow simply because it might not be directly related to a lien or property charge on the home.

      To determine if there is capacity for a HECM, all sources of cash inflow and outflow must be considered a factor in determining whether an applicant has the capacity to meet required property charge payments. Without this information, how can it be determined if Monthly Residual Income is sufficient to avoid a Partially Funded LESA (or the Fully Funded LESA if the Partially Funded LESA is more than 75% of the Fully Funded LESA).

      We

  3. merlin nagel July 9, 2015 at 10:33 am - Reply

    WHAT IS LESA, OTPCS, FFL, TALC, & ETC????

    • James E. Veale, CPA, MBT July 10, 2015 at 5:28 pm - Reply

      Mr. Nagel,

      These are abbreviations for terms commonly used in the new HECM financial assessment.

      For example, one term in the computation of the FFL (Fully Funded Life Expectancy Set Aside) is OTPCs which stands for one-twelfth (of the sum) of the Property Charges as defined by HUD to be the most recent annual costs of property taxes, flood insurance, and homeowner’s insurance. LESA is simply the Life Expectancy Set Aside.

      An older abbreviation is TALC which stands for the Total Annual Loan Costs (expressed as a percentage rate) and has its own disclosure form in the HECM mortgage documents. It is similar to APR (the Annual Percentage Rate) but it is calculated for several time periods using several values of the home. Unlike APR, TALC generally has 12 different percentage rates.

      The Guide presenting the Financial Assessment as required by HUD can be found at:

      http://portal.hud.gov/hudportal/documents/huddoc?id=14-22ml-atch2.pdf

      I hope that helps.

      (The opinions expressed by me in this thread of comments and replies are not necessarily those of RMS or its affiliates.)

  4. Dave Grady July 10, 2015 at 9:48 am - Reply

    I know you folks are trying your best to make applesauce of bad apples and are totally focused on how to make that work.
    I politely suggest you might consider the bigger image. This is step two in HUD’s very clandestine effort to kill the reverse program.
    It began when the people who were to be the original beneficiaries of the program, elderly, low income seniors, were shoved aside. Now you almost don’t need the money just to qualify.
    The final step will be HUD making it so difficult for anyone to qualify, the program dies. Hide and watch.

    • The_Cynic July 10, 2015 at 7:46 pm - Reply

      Mr. Grady,

      You probably feel exactly the way you express yourself but it seems you lose sight of what the purpose of the program was and more importantly is. The purpose of the HECM program is found in its purpose clause which is the same as it was on the day the HECM program started back in fiscal 1990 and states as follows:

      “Insurance of home equity conversion mortgages for elderly homeowners

      (a) Purpose

      The purpose of this section is to authorize the Secretary to carry out a program of mortgage insurance designed—

      (1) to meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income, through the insurance of home equity conversion mortgages to permit the conversion of a portion of accumulated home equity into liquid assets; and

      (2) to encourage and increase the involvement of mortgagees and participants in the mortgage markets in the making and servicing of home equity conversion mortgages for elderly homeowners.”

      Notice that the law has a two part propose not just one. While it sounds quite hard, neither part is directed to or at the “low income seniors” you seem so overwrought about. It is directed to elderly homeowners, and the encouragement of mortgagees, and mortgage market participants to be a part of the HECM insurance program..

      A Democratic Congress forced the HECM program to stand on its own in 2008 when it forced a Republican President to sign its version of housing reform known as HERA into law. In that law is a provision which after going into effect on 10/1/2008, required HUD to no longer account for new endorsements in the General Insurance Fund where the HECM program could have losses but rather in the Mutual Mortgage Insurance Fund where the HECM program along with a number of forward mortgage insurance programs are forced to perform better than just be self-sustaining (there is a 2% reserve requirement).

      Many originators hold your opinion. Your opinion is not the exception but the majority opinion but the oversell of fixed rate Standards to low income seniors whether they immediately needed all of those proceeds or not, did more to damage the program than anything else. So came the elimination of fixed rate Standards followed shorty by the elimination of all Standards.

      Then those same low income seniors who tried so desperately to help ended up not having sufficient cash flow to pay their property charges and at the insistence of lenders ended up forcing financial assessment on everyone. Am I blaming those who went beyond reason to put so many seniors at risk of default by placing them in HECMs that could not possibly result in sufficient cash flow to stay out of default? No but do I blame those who fight for the failed origination policies of the past? You bet.

      The HECM program was not created for low income seniors. It was created for elderly homeowners and for the encouragement of mortgagees and other mortgage market participants to be part of the HECM program. So please stop trying to subvert what the HECM program actually is.

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