HUD’s long-awaited changes to its Home Equity Conversion Mortgage (HECM) underwriting requirements are set to go into effect. This impacts all transactions in which the FHA case number was issued on or after April 27, 2015.
These changes were deemed necessary by HUD/FHA due to an unexpectedly large number of HECM cases that went into default/claim status. They indicate that this is due to the senior borrowers failing to pay their taxes and insurance payments after their reverse mortgage loan closed.
In order to address this concern, HUD drafted a rather comprehensive set of instructions and procedures for lenders to follow in analyzing a prospective HECM Borrower’s financial capacity and willingness to comply with mortgage provisions. In this regard, lenders will be required to complete a Financial Assessment of all prospective HECM Borrowers prior to loan approval once these changes are implemented.
These new requirements were originally scheduled to be effective for HECM loan transactions that obtain their FHA case number on or after March 2, 2015. However, in an FHA News Update from February 12, 2015 (FHA Info #15-14), it was stated that a delay in delivery of certain system enhancements required to support the policies published in Mortgagee Letters 2014-21 and 2014-22 necessitated an extension.
Although an immediate reaction for participating reverse mortgage lenders may be to originate less HECM loans due to these new underwriting requirements, in the long-term, these changes should be welcomed by the industry as they will result in better qualified HECM mortgagors and a more fiscally sound book of business for HUD/FHA which is always under scrutiny by Congress.
The HECM program is unique and is needed as a viable “age-in-place” option for many seniors. The demographics for this program are extremely positive as more and more baby boomers are becoming eligible for this type of financing. (Note: the age of the youngest borrower must be at least 62 years old)
In light of this, let’s hope that these new Financial Assessment rules do not discourage lenders from participating in the reverse mortgage market going forward. My opinion is that the new Financial Assessment criteria will become more accepted by industry groups as time goes on and, through the utilization of automation, will not even impede processing times nor HECM loan origination volumes in the future.