Are we already ‘assessing’ borrowers?

Shannon Hicks October 14, 2012 9

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Are we already assessing borrowers? Many have mixed emotions about the soon to be released financial assessment from HUD even though we know it is necessary to help reduce defaults due to taxes and insurance. The question is have lenders quietly begun their own financial assessment, albeit informal with tightening underwriting standards?

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9 Comments »

  1. jim spicka October 15, 2012 at 5:39 am - Reply

    The entire concept of financial assessment for the stated purpose is irrational. How could depriving a borrower of a reverse mortgage possibly improve the likelihood of timely payment of taxes and insurance?
    Financial Assessment WILL NOT do anything to reduce claims against the MMI Fund because the typical borrower going forward has a much different profile. They will qualify under the new regime but they are borrowing for much different reasons so there will be a much higher instance of strategic default which they are very much amenable to and comfortable with. (drawing more upfront and living longer severely changes the “velocity of money”)

    Financial Assessment is changing the program to serve a much different borrower than the program started out to serve. It will no longer serve its stated purpose.

    • James E. Veale, CPA, MBT October 16, 2012 at 11:49 am - Reply

      Mr. Spicka,

      The objective of financial assessment in its current form is not to ensure payments of taxes or insurance. It is to protect HUD and lenders against loss. One of those sources is clearly defaults on taxes and insurance, even in assignment.

      So far the MMI section of the HECM program has received over $2.2 billion in funds from the MMI Capital Reserve Fund to which the HECM program has contributed zero. How can we maintain a program for which Congress has shown no interest in subsidizing and still sustain that any level of loss? We are fooling ourselves if we think home values in some parts of the country will be sufficient to save this program? Gains from those increases are of limited value in offsetting losses.

      The purpose of the program is clearly stated in the law at 12 USC 1715z-20(a) as follows: “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.”

      Nowhere in that statement is there any reference to a specific economic group of seniors. This is not a needy senior based program but a needs based program which is true of most seniors in retirement. Even the client base the Sacks brothers assume in their February article in the Journal of Financial Planning is clearly covered in the statutory purpose statement.

      One can argue about subsistence but there is a huge difference between subsistence needs and basic subsistence needs. The former speaks of the costs of minimum support to maintain existence while the later is the minimum support of any human being just to stay alive. But here also is an unqualified statement about housing (no restriction on cost or value) and health (again without limitation).

      Some have made it their personal and industry purpose to help the needy. That is well and good but there is also a fundamental need to help all seniors as long as that can be done without impeding other programs or drawing upon funds from US taxpayers generally. Savers are far more likely to pay their own way than adjustable rate Standards (and historically, fixed rate Standards as well).

      If the industry is to maximize its ability to help the needy then it must expand to help the less needy as well. Savers are designed to provide profits from ongoing MIP to help offset losses from Standards. This is why class warfare should have no place in our industry but a different type of originator trained to meet with financial advisors (excluding Realtors) should.

  2. James E. Veale, CPA, MBT October 16, 2012 at 11:01 am - Reply

    Shannon,

    What is greatly misunderstood is that lenders are in the market to make the greatest profit possible. That means if there is a point of diminishing returns, lenders will and should be hesitant to cross that “point.”

    The big issue lenders face as to defaults are the contingent liabilities GNMA places on HMBS issuers and in return HMBS issuers, on lenders. Why make a loan today with a $8,000 gross margin if defaults will generate a $14,000 loss to that lender in the future?

    As auditors become more familiar with the risk, they will require some recognition of that loss on current financial statements. To lower those recognized losses currently, lenders will have to show how they are mitigating their risks to avoid realization of such losses.

    Quite frankly, reading the RMD article did not validate unspoken increased underwriting standards with one exception. What it did seem like some were experiencing is an increase in enforcing the underwriting standards already in place. The exception was in the area of defaults on taxes and insurance. If true, that is a positive step forward but also a weak and less precise method of trying to determine future defaults.

    What we do not need are financial assessments that simply deny or accept borrowers. We need a financial assessment which allows lenders to modify HECMs so as to mitigate against future loss and minimize the number of denials dictated through financial assessment.

  3. Bill Danner October 17, 2012 at 6:19 am - Reply

    If failurre to pay taxes and insurance on the property is the leading cause of foreclosure, I submit that the property would have been forclosed on or eviction would have occured through a tax lein sale, perhaps sooner, without the assistance of a HECM.. If we as RMC’S are not taking that extra step of reviewing the borrowers “habits” and impressing upon them that what we are about to embark upon is typically the one course that will keep them independant, which we as seniors cherish.
    We can never eliminate bad judgements, greedy kids, or advisors who mis-use the funds to their benefit. It doesn’t hurt to ask to speak with an advisor if in fact the revenue is going to be used by them. Ask some pointed questions, get a feel of what the intent is from that advisor. Sometimes the senior has blind faith and trust in those advisors, and perhaps a call from you will cause them to rethink their actions.
    The ultimate fact is, morality cannot be enacted or legislated. It is up to us to save our program and help bring about change that best serves the senior community. After all, I live in that community!

    • The_Cynic October 18, 2012 at 1:53 pm - Reply

      Bill,

      You miss a very big point our detractors make. By putting off the inevitable by a few years, the senior wiped out a portion of the equity with upfront loan costs and helped the senior keep the home when home values were falling. Thus all that was achieved is to help the senior stay in the home only to experience a worse result than if the home had been sold at the time of HECM funding and at the same time experienced that result when the borrower was younger and more probably better able to cope with the resulting changes. Add to that costs of foreclosure are also passed along to the borrower to the extent that the borrower has any equity left.

      So did we encourage bad judgment or misuse of funds by “educating” the senior about the reverse mortgage? We can shrug off bad markets, etc. but the seniors who are terminating their HECMs right now cannot. It is easy for us to do that since we have no stake in that outcome other than perhaps some reputation issues that do not seem to linger in anyone’s minds for long.

      What revenue are you talking about in the second line of your second paragraph? Are you referring to the proceeds from the HECM? To whom is that revenue?

      Perhaps more than mere moral conduct, one should be looking at ethical practices. If we are not discussing the risks of originating a HECM then all of our education is little more than propaganda. I doubt if many sufficiently warned borrowers about potentially falling market values back in 2007 through 2009 and the impact that plus upfront financed costs might have on the borrower other than looking at the amortization schedule.

  4. Wendy Clarke October 24, 2012 at 9:20 am - Reply

    I am commenting on your podcast where it was said that homeowners aren’t being told that they need to pay property taxes and maintain the home and your comment responding to that was that homeowners are already paying property taxes and homeowners insurance before getting a reverse mortgage.

    My comment to that would be “not always directly”. I am a reverse mortgage counselor and a lot of times, I am counseling people who currently have a traditional mortgage with an escrow account. They know they have to pay their taxes and insurance, but they are used to the bank handling it on their behalf. They might not be prepared to pay the taxes and insurance on their own. When I discuss this with them, I make them aware that their mortgage payment isn’t going to go away fully, they would still need to set aside for taxes and insurance.

    So while it is common knowledge that you have to pay taxes and insurance, they might not be doing it directly to the municipality or insurance company.

    • James E. Veale, CPA, MBT October 25, 2012 at 10:04 am - Reply

      Ms. Clarke,

      You are correct but most of us also provide that information as do most counselors. When it comes to taxes and insurance it is hard to believe that of all borrowers, HECM borrowers are blind sided by the need to pay taxes and insurance.

      Some of the problem is that with time comes incompetence in certain aspects of financial matters. Some comes from less spendable cash flow years after funding. Some results from little enforcement of defaults. Some comes as a matter of choice. No doubt a percentage, a very small percentage, comes from not knowing or not having any experience of paying taxes and insurance directly. The media plays up the last despite its very low percentage.

      • Wendy Clarke October 29, 2012 at 8:04 am - Reply

        I agree that the knowledge is passed on, but what the homeowner does with the knowledge, that may be the issue. I’m not going to say that’s every case. The media tends to pick a minor issue and turn it into a major problem. They don’t talk about the majority of reverse mortgage borrowers who do pay their taxes and insurance. That’s not newsworthy.

  5. Bill Danner October 29, 2012 at 12:26 pm - Reply

    Sir Synic
    Into everyone’s life a little rain must fall…makes the flowers grow and the weeds flourish.. Do you live in the rain forest? LOL

    I guess you feel we should take out the one element directed to our Senior community and unseat the senior instead of supplying a modicum of hope for them and hopefully fulfilling a dream of staying in their homes until they pass away.
    The revenue I referred to was aimed at the advisor community.
    There are no guarantees in this life, but our products produce the best thing since sliced cabbage and always is close to a better mousetrap, if your cat is lazy.

    Have a blessed day.

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