Up until this month, one of the most attractive features of the HECM Reverse Mortgage was the lack of income or credit requirements. All homeowners 62 and older who lived in their homes in which the mortgage had either been fully paid or for which only a small mortgage balance remained were eligible for the loan. However, as of March 2015, a series of new Federal Housing Administration rules come into play which require that potential borrowers prove that they are able and willing to keep up their loan obligations.
What precipitated these new rules was the rise in property tax defaults by HECM borrowers. Borrowers were faced with foreclosure because they had violated their obligations under the reverse mortgage contract, putting them at risk of eviction. The Reverse Mortgage was intended to ease the lives of seniors so the FHA was, understandably reluctant to proceed with foreclosures. When such foreclosures did occur, political and public relations fall-out followed, putting the FHA in a difficult position and making it harder for the agency to enforce those obligatory payments.
As of this month, the FHA is imposing income and credit requirements on loan applicants. The purpose of these checks is to ensure that borrowers have both the capacity and the willingness to pay their loan insurance, homeowners insurance and property taxes while maintaining the property – all HECM loan obligations. The new rules won’t affect existing loans that are presently in default, but the new regulations should help to reduce the default rate on new loans. To offset the cost of implementing and maintaining these services, future borrowers will now be required to pay higher origination and servicing costs. It will also take longer for the loans to receive approval.
Senior rights advocates are concerned that the new underwriting requirements that lenders apply are overly detailed, and in some respects, tougher than the checks used with standard mortgages. Some provisions go beyond the checks that pertain to standard mortgages. Senior advocates protest that this is unnecessary because, while reverse mortgages borrowers pay only taxes and insurance, applicants for standard mortgages must also pay principal and interest, which is usually much more.
Reverse Mortgage applicants who don’t meet the new criteria have a second option, called a Fully-Funded Life Expectancy Set-Aside. The Set-Aside involves setting aside funds, drawn under the HECM. Which will be reserved for insurance and property tax payments. The amount is calculated using a formula provided by FHA, which believes that the set-aide will be sufficient to assure the required payments can be met though the life span of the borrower.
A third possible option involves the Partially-Funded Life Expectancy Set-Aside. This option is available to applicants who meet the HECM’s credit requirements and are viewed as willing to meet their obligations, but don’t have enough income. In such a case, the set-aside is much smaller Via the Partially-Funded Life Expectancy Set-Aside, funds are drawn from the HECM twice a year by the servicer who then sends the fund to the borrower to make his payments.
New underwriting requirements must be applied to every applicant. Senior advocates point out that fully-funded Set-Aside imposes no burden on borrowers who have large equities while the people who need the loan the most — those with smaller houses, or homes that aren’t located in “desirable” neighborhoods — will find the new costs prohibitive.
The new rules are also seen as weak in that they mandate that the lender make the required payments under the fully-funded Set-Aside. An alternate proposal involves giving borrowers the option to make the required payments with their own funds and then adding an inducement that an equivalent amount will be transferred from the Set-Aside account to the borrower’s credit line. In this way, borrowers become responsible for their payments and the servicing costs drop. No risk would be involved to FHA since the lender will make the payments if the borrower does not.