Reverse Mortgage Guidelines: Changes Coming
From December 2010 to June 2011, Wells Fargo, Bank of America, and Financial Freedom decided not to originate reverse mortgages any more. Together they represented about 45% of all reverse mortgages originated, and their exit was a wake-up call for the entire industry.
They left because of a rising tide of defaults from seniors who could not keep up with property taxes and homeowner’s insurance. They were faced with foreclosing on seniors, which they didn’t want to do, but they didn’t have the authority to change the eligibility requirements to prevent at risk seniors from getting reverse mortgages. This meant with every passing day they were bringing more seniors into their portfolio who were likely to default.
The FHA was aware of this, and was already talking to all the lenders about making changes, but the Big 3 who left the marketplace were not prepared to wait for however long it might take for those changes to be implemented. Many of the changes being considered would require notice and comment rule-making by the FHA, which is a complex and time-consuming process.
On October 5, 2011, Carol Galante, Federal Housing Administration Acting Commissioner, issued a statement saying that while the FHA works on these issues, the lenders are allowed to implement their own additional criteria for borrowers. On October 24, 2011, the National Reverse Mortgage Lenders Association (NRMLA) published their guidance on changes to underwriting procedures. These were merely recommendations and not required of any lender, but the short time span between Galante’s statement and this announcement indicates how eager the lenders have been to do something. NRMLA’s guidance was pretty mild and general, basically saying that lenders should look at 1) the borrower’s capacity to pay ongoing property costs, 2) the credit history to see if it reinforces this capacity, and 3) how much of the initial principal limit the borrower has to use.
On November 4, 2011, MetLife made history with its announcement of guidelines to be effective with loans submitted on or after November 14. MetLife took the three areas of NRMLA’s guidelines and came up with specifics. The borrower’s capacity to maintain the property will be assessed by reviewing the last two year’s tax returns and determining if they have sufficient residual cash flow. The credit report will need to show no late mortgage payments beyond 30 days in the last 24 months. If there is a history of bankruptcy, tax liens, foreclosure, or outstanding judgments, there will be additional review and assessment. Finally, if the borrower has to use more than 75% of the principal limit (90% for HECM Saver) to pay off an existing mortgage, debts, or repairs, this will be a problem.
MetLife has stated that it’s possible for compensating factors to still qualify the borrower, even if the above factors are not met, and that MetLife will continue to modify and review these guidelines as it goes along, in consultation with the FHA and other industry leaders. Nevertheless, it is clear that some borrowers who would have qualified before will not qualify now. Everyone involved says that while this is unfortunate, it is also necessary in order to ensure the long-term viability of the program. Other lenders will be coming out with their own guidelines in 2012, and the FHA will also likely complete its assessment process sometime in 2012.