A Case for the Financial Assessment?

Shannon Hicks June 9, 2014 12

Reverse Mortgage Education

Would the FA prevent negative stories like this?

Reverse Mortgage NewsThe long anticipated and overdue Financial Assessment for federally insured reverse mortgages has drawn mostly criticism and some praise from industry professionals. The chief concern amongst many is the new financial guidelines will further shrink the pool of eligible borrowers at a time when reverse mortgage production is low. However there is another facet of the financial assessment that can be easily overlooked; reducing headline risk. Case in point a recent article in the Tampa Bay Times by staff writer Susan Taylor Smith entitled “Complexities of a reverse mortgage snag homeowners”. The article tells the account of Kenny & Fran Goodnow who now facing foreclosure due to pay homeowners insurance. In fact they failed to pay any homeowner’s insurance premiums for the years 2009 though 2011 forcing the lender to call the loan due and payable for the amount of $217,000. The story shows a struggling senior couple with little financial knowledge who claim to have been duped by a salesman. Let’s look at the facts. First the Goodnow’s were already struggling to…

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Contact the Tampa Bay Times Columnist Susan Taylor Martin
Email: susan@tampabay.com
Phone: (727) 893-8642

 

 

 

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12 Comments »

  1. tom June 9, 2014 at 4:12 am - Reply

    Great video ..but we also need to include Financial Assessment for the spouse who is left holding the bag when the other spouse passes away;
    Can the wife maintain the home when she loses the second social security check after husband dies.

    • James E. Veale, CPA, MBT June 9, 2014 at 1:28 pm - Reply

      tom,

      That kind of testing is something their financial planner/advisor should be doing with them, not a lender. The goal of HECM financial assessment is not to ferret out every possible default situation; it is to mitigate the number of defaults that take place in the first few years following initial funding. To do the kind of analysis you are recommending is not economically sound for a lender and FHA cannot afford to pay for it.

      HECM financial assessment is simply taking current facts and determining if the couple are likely to go into default in the first few years of the mortgage. It is not testing a bunch of different scenarios. It is not counseling borrowers about possible pitfalls during the life of a HECM. That is what counseling is supposedly doing.

      Defaults and, yes, even foreclosures on HECMs due to unresolved defaults on property charge payments, maintenance, and payment on the balance due are a fact of life. But none of those caused financial assessment EXCEPT FOR the high number of unresolved property charge payment defaults occurring in the first few years following initial funding that made this period of time of some expected increases in defaults so unusual and so difficult to handle.

      I hope that helps.

      • tom June 10, 2014 at 3:51 am - Reply

        Death can happen in 24 hours at this age and income is the driving force in financial assessment but I love Jimmy Veale the salesman here!
        Financial planner/advisor for the $150k home owner.
        enough said…
        Default in the first few years of the mortgage?
        Whatever that means then why let them take everything after the 1st 12 months.
        Why not make the Reverse Mortgage totally teflon and make it 3 years to get balance of money.

        • James E. Veale, CPA, MBT June 11, 2014 at 9:00 am - Reply

          tom,

          I support HUD saving the program despite the changes.

          If you start delving into the specific changes and their timing, that is a different story. HUD could have saved all of us a lot of grief by not lowering the principal limit factor (or PLF) expected interest rate floor to 5.06% from 5.56% back at the beginning of fiscal 2010 while at the same time it also increased the PLF at the floor. Why did HUD do this in the face of the OMB attacking the HUD budget projection for fiscal 2010 that HUD itself completed and OMB rejected? Somehow HUD believed OMB was drastically wrong and its projections were exactly right and even a little conservative but just in case HUD reduced the PLFs at the previous floor of 5.56% and above.

          Reverse Mortgage Daily gave an example of a 70 year old borrower with a home appraised at $250,000 who would get almost $11,000 more in principal limit because of the PLF changes at 5.06% (http://reversemortgagedaily.com/2010/09/21/fha-updates-hecm-program-increases-proceeds-for-many-borrowers/). But why would HUD drop the floor while increasing its PLFs when fiscal year 2009 was almost finished and the endorsements for that fiscal year are still the highest on record? Was HUD trying to prove OMB wrong? Could the MMI Fund losses, the increase of the ongoing MIP and the subsequent reductions of PLFs all have been avoided or at least greatly mitigated if HUD had done everything but not changed the floor and not increased the PLFs at and close to it? Some like myself now believe that is the case. However, to say that the HUD action in reducing the floor and increasing its PLFs would be detrimental to the MMI Fund was not a popular position as the leadership at New View Advisors can confirm. At the time I thought HUD had a good handle on the numbers and Joe Kelly and the boys at New View were exaggerating the severity of the situation. But as we later learned such was not the case.

          There is little question the PLFs needed to come down this fiscal year. Are PLFs of 85% when to compared to the Standard PLFs the right reduction? That is hard to say. 90% might have been better but more of a reduction could have been needed later so one shock is probably best.

          As to the first year disbursements limitation, 80% might have been a better choice but that is a pure guess. I have not seen any independent research on this. So for right now all I can do is support the HUD changes for this fiscal year.

  2. Steve Sayetta June 9, 2014 at 4:33 am - Reply

    The problem with the Reverse Mortgage program seems obvious. The powers that be at FHA don’t know how to create the guidelines in a way that help the homeowner’s and the lenders to get the homeowners insurance and property taxes payments secured. The changes this past September should not have been to cut loan amounts by 15%+ but to create a set aside for every new borrower for (T & I) and start escrowing for taxes and insurance for all new borrowers. The major concern after closing for FHA is to make sure taxes and insurance are paid. Right? So why didn’t they, from day one, escrow so they would exactly where the program was at? Now they’re making changes in the dark. They should immediately go back to old limits implement (T & I) set asides and staring escrowing for new loans. Now that’s a win, win. What are your thoughts?

    • James E. Veale, CPA, MBT June 9, 2014 at 12:21 pm - Reply

      Mr. Sayetta,
      If the only problem HUD was facing when it created Mortgagee Letter 2013-27 was from property charge payment and maintenance (or PCPaM) defaults, your suggestion is a great one. In fact, however, most changes coming down the pipeline now will be solely about those might have a propensity to default. None of the changes which took place on September 30, 2013 were as a DIRECT result of PCPaM defaults even though the 9/30/2013 changes by themselves will eliminate most such defaults in the early years of the HECM by cutting off those who would be the most likely to default in the early years of their loans.

      PCPaM default issues are addressed in the financial assessment package yet to be released and the life expectancy set asides contained in that package. The package was supposed to have been created years ago but no one at HUD wanted the responsibility for being the one who created it; who can blame them for not wanting that responsibility? Default issues were not addressed in the 9/30/2013 changes although one of the chief byproducts of those particular changes is cutting off those who would have the greatest propensity to default in the first few years of their loan.

      So what really happened on 9/30/2013 and why was it necessary? Those changes totally eliminated all HECM Standard products, period. In fact all remaining principal limits (i.e., the Saver) were slightly increased. Added in that drastic action was the creation of a barrier to reduce the ability to get more than 60% of the principal limit of a HECM in the first year following funding.

      So why was the elimination of all Standards and the addition of a new barrier needed? It is because projections on the HECMs accounted for in the MMI Fund showed that the overall active pool of HECMs then in existence would result in a significant loss to the government, i.e., to taxpayers, within a decade. Although those who were projected to default on their PCPaM requirements in the first few years after funding were a problem, it was the 90% who would not default in the first few years who proved to be a far greater potential problem to the MMI Fund. Projections showed that even with MIP collections, balances due would overwhelm termination values to such an extent that addition government funds would be needed. By reducing loan sizes, HUD was not only stopping future endorsements from having such troubles but their size meant that a good share of their MIP collections could be used to offset the losses from older endorsements in the MMI Fund.

      However, remember when we talk about older endorsements, all we are talking about are all endorsements since 9/30/2008 and that is it. The much older endorsements are still being accounted for in the General Insurance Fund and have absolutely NO impact on the MMI Fund.

      It is the large outstanding fixed rate Standard principal limits which no one expects will ever be paid down and their sisters, fully drawn adjustable rate Standards which are projected to do the most damage to the MMI Fund. That is why we no longer have Standards. But it also means we have slightly higher Saver principal limit factors than we had before the changes.

      The reason for the first year disbursements limitation (or the barrier) is because it has been shown that most of those who do not take out more than 60% of the principal limit in the first year will not draw down all of the monies available to them in the HECM.

      So the success of the fixed rate Standard directly led to the downfall of all Standards.

    • tom June 10, 2014 at 3:53 am - Reply

      Well said

  3. James E. Veale, CPA, MBT June 9, 2014 at 1:02 pm - Reply

    If the borrowers in the article were originating a Traditional HECM now, even though they are in default, the existing mortgage balance due would qualify as a mandatory obligation but it is probable that the proceeds would be insufficient to pay off the existing mortgage due including unreimbursed insurance and property taxes and thus the couple could not qualify for the HECM now.

    But let us say, the existing mortgage payoff was not an issue, then if financial assessment were in place, financial assessment might prevent origination. However, if proceeds were sufficient at initial funding to fund a life expectancy set aside (or LESA), then the HECM could be originated and insurance and property tax payments would be up to date. The question is, would the LESA be sufficient if a large insurance increase occurred? Probably not for as long as it was originally funded for but as long as the LESA can provide these payments, the borrowers have time to find alternate living arrangements.

    What many originators do not understand is that the borrowers in the article might have been much better off financially, if they had downsized rather than refinanced into a Traditional HECM. Yes, the seniors would most likely have hated doing it but depending on how they purchased the new home or financed it later, they could have probably preserved more equity than right now.

    This example is what I call how people become destitute by refinancing into a Traditional HECM. This is not to blame the HECM but rather to condemn the idea that it is always best to save a home out of foreclosure by using a HECM. Of course, no one could have predicted the heavy toll that the mortgage meltdown had on home values but few of us doubted that home values were not inflated and sometime bad was going to happen and happen soon.

    If there had been no mortgage meltdown would all have been well for these folks? Probably not, since they had no idea how much they had drawn out in the way of loan proceeds. All the mortgage meltdown did was to intensify the problem they now face.

  4. Jim Walsh June 9, 2014 at 1:59 pm - Reply

    The new financial assessment will probably result in less negative print regarding defaults but, knowing the press’ inclination, will now feature negative stories about “poor” prospects who have been denied a loan by the heartless industry.

  5. Mark Draper June 11, 2014 at 5:03 am - Reply

    I agree with Mr. Walsh, financial assessment will not reduce these stupid stories.

  6. Tbabs June 11, 2014 at 5:51 am - Reply

    If the loan had set asides, this issue would be solved. used to be that 3 years of Homeowners insurance and taxes plus 1% was set aside in the calculations of the loan, but at that time it was an optional choice made by the borrowers. We definately want this program to be available going forward, so if the taxes and insurance are a problem, just escrow! then we don’t have all of these complicated financial assessments. Since circumstances can change very quickly for these seniors, (one fall, that’s all) a financial assessment isn’t going to help anyway. Just because they appear to be able to pay their taxes today doesn’t mean that tomorrow, if something catastrophic happens, that money won’t go to an in home health care provider, medications, etc.?

  7. Patty Wills June 11, 2014 at 10:34 am - Reply

    Agreed that in time, the new FA will create less negative press and will also reduce access to some that would be excellent borrowers. But this loan would likely not be allowed after August 2014 with or without the FA. They removed the younger spouse and with new PL factors it is unlikely they would get enough money to make it work. He is 87 and she is 71. Never did like the idea of removing a spouse from the deed but know that sometimes it made sense and hate to lose options for all because of those that use it unwisely. But, these borrowers were living in denial. The reverse mortgage delayed their problem and made it “our” fault. They would be in financial trouble with or without the reverse. How would they be paying rent?

    I know that borrowers sometimes only hear what they want to hear but a good explanation of the pros and cons is not an option. All borrowers deserve to understand how the reverse can impact them. A competent originator does that. We have no way to know if things were really explained to them or if their originator was knowledgeable.

    I am concerned about the continued negative press and think it will continue for some time because of the reduced home values. If the current home value covered the loan balance, this would not be as interesting a news article. They could still sell, get some cash and move. That is how the loan was designed, it was simply not designed for falling home values. The poor economy hurt HUD and the borrowers. And ultimately the reverse industry as a whole.

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