October 22, 2017

FHA Tightens Guidelines On Broken Reverse Mortgage Program, Major Lenders Exit The Business

courtesy: consumer-action.org

Reverse mortgages, which have been available to elderly borrowers for over two decades, will become more difficult to obtain in the future.  Major reverse mortgage lenders have abandoned the product and the FHA has indicated that they will tighten underwriting guidelines due to the large number of reverse mortgage defaults.

Last year, two of the country’s largest banks, Wells Fargo and Bank of America, decided to exit the reverse mortgage business due to  soaring default rates and the fact that reverse mortgages are a niche product.  For the current fiscal year, the FHA estimates that it will receive 1.75 million applications of which only 105,000 will be for reverse mortgages.  Only 4,635 FHA reverse mortgages were approved during December 2011, a decrease of 29.3% from last year.

Despite being a relatively small FHA program, reverse mortgages have received a lot of negative publicity due to the high rate of defaults.  Although the whole point of taking out a reverse mortgage was to allow the elderly to live in their homes without a mortgage payment, the homeowner was responsible for properly maintaining the home and paying for property taxes and home owners insurance.

As it turned out, many of the borrowers given reverse mortgages had taken the financing as a last resort option to remain in their homes and had no ability to pay for taxes, insurance and home maintenance.  The problem has gotten so bad that during the FHA’s latest fiscal year, there were almost 8,000 defaults on reverse mortgages.  The number of reverse mortgages defaulting actually exceeded the number of new loans being written.

The problem with reverse mortgages has become a crisis of major proportions.  HUD estimates that 46,000 borrowers are in default on reverse mortgages.  This is equivalent to approximately all of the reverse mortgages approved by the FHA over the past six years.  Clearly, the reverse mortgage program as currently structured has major deficiencies.

The cause of the skyrocketing default rate on reverse mortgages is due to FHA lending policies that ignore both the credit scores and income of borrowers.  The ultimate result of “no income, no credit check” lending policies benefits neither party – the defaulting homeowners are facing foreclosure and a financially weak FHA is burdened with large losses on defaulted mortgages.

Clearly, for many elderly homeowners, a reverse mortgage was not the best option and the high level of defaults could eventually imperil the entire program and deprive qualified elderly homeowners of a viable financing option.  By running a program similar in many respects to the notorious sub prime “no income no credit” loans of the past, the FHA allowed and perhaps encouraged many people to make poor decisions that were ultimately not in their best interest.

In order to better serve those seeking a reverse mortgage and to ensure the solvency of the reverse mortgage program, the FHA has been slowly moving to adopt new procedures.  Over the past several years, the FHA has reduced the principal amounts allowed to be borrowed and has increased the mortgage insurance premiums that cover loan losses.

In an effort to rectify the problems arising from ignoring the income and credit profiles of reverse mortgage applicants, the FHA is expected to implement new underwriting guidelines during 2012 known as “HECM Underwriting 2.0”.  The new guidelines will evaluate both credit and income in order to ensure that the reverse mortgage applicant is making an informed and financially viable decision.

Some FHA lenders are not waiting for the FHA’s new guidelines and are implementing their own credit and income overlays.  MetLife, a reverse mortgage lender, now requires that a financial assessment be conducted on all applicants.  Craig Corn, head of reverse mortgages for MetLife explained why the new guidelines were implemented.  “When we think about financial assessment we think about it in the context of responsible lending.  It is (not only) ensuring that applicants can responsibly meet the obligations of the HECM loan, but also that they can responsibly age in place and meet the essential expenses of living.  That was the spirit of financial assessment to us.  If we determine after analysis that someone has $100 a month left over, maybe a HECM is not the right thing for this individual.  Maybe we should look at other options.”

Mr. Corn is essentially saying that mortgages should not be approved for borrowers who have little or no ability to service the debt.  What’s really amazing is that it took four years after the mortgage meltdown began in 2008 for the FHA and reverse mortgage lenders to finally figure this out.