On November 10th HUD finally came out with the long expected “Financial Assessment” rules.
Last year, FHA requested a $1.7 billion Treasury draw – or “bailout” – in order to keep its Mutual Mortgage Insurance Fund (MMIF) reserves up to the mandated
levels. The draw was necessary, FHA officials said, to compensate for losses in the HECM program as well as a high rate of default among FHA borrowers.
The changes made last fall to reduce the principal limit and restrict the upfront draws to 60% of the principal limit did help the MMIF, but HUD now states
the goal in having borrowers go through financial assessment is “to improve fiscal soundness and protect the viability of the HECM program.”
As per the HUD letter, lenders must – starting on March 2, 2015 – consider a borrower’s “willingness and capacity to timely meet his or her financial obligations
and to comply with the mortgage requirements,” before approving a reverse mortgage.
The financial assessment, according to HUD, “must take into consideration that some mortgagors (borrowers), seek a HECM due to financial difficulties,
which may be reflected in the mortgagor’s credit report and/or property charge payment history.”
As such, a lender “must also consider to what extent the proceeds of the HECM could provide a solution to any such financial difficulties.”
In a nutshell, this means that all new applications beginning on March 2, 2015, must go through this financial assessment process.
I have an overall working knowledge of the program, but HUD issued 87 pages of rules and forms on exactly how lenders are to evaluate a borrower’s credit
and income, so it may take me a while to digest it all.
Over the next couple of months I will review the impact of these new rules once they go into affect. My goal today is to let you know the timeline for
implementation as well as provide a cursory over-view of what to expect.
On the previous page I mentioned that HUD wants lenders to look at a borrower’s “willingness and capacity” to timely meet their financial obligations.
A borrower’s willingness is measured by their credit.
We will not be measuring people’s credit by looking at the credit score, but HUD does want borrow-ers to have “satisfactory” credit which is defined as
“The borrower has made all housing and installment debt on time for the previous 12 months and no more than two 30-day late payments in the previous 24
months; and no major derogatory credit on revolving accounts in the previous 12 months.”
Major derogatory credit on revolving accounts include any payment more than 90 days late or three or more payments more than 60 days late.
Housing payments also include homeowner’s insurance and property taxes.
If there are extenuating circumstances such as an illness, or a death in the family, these are taken into consideration but must be “fully documented and
consistent with other information in the file.”
This is just a brief view of how we have to consider a borrowers willingness. But we must also consider their capacity as well. This is measured with their
“verifiable effective income.”
To be considered effective income, it “must be reasonably likely to continue through at least the first three years of the mortgage.” In order for the
income to be considered, it “must be legally derived and, when required, properly reported on the borrower’s tax returns.”
Negative income, such as a monthly loss on a rental property, must be subtracted from the gross monthly income.
A normal mortgage loan will consider a borrower’s debt ratio—the percentage of income going to pay bills. The way we will be calculating a borrower’s
capacity for reverse mortgages is with residual income. Basically, the borrower will need to have a certain amount of money left over once the housing
expenses, installment debt and credit cards are all accounted for.
As you can probably guess, even if you know that you will qualify without any trouble, these new rules will increase the paperwork required to verify all
of these details.
In next month’s blog, I’ll go into more detail on the credit requirements.