The Department of Housing and Urban Development is developing a set of policy changes that would require reverse mortgage lenders to better underwrite Home Equity Conversion Mortgages. But lenders may beat HUD to the punch.
According to Karin Hill, who is responsible for the home mortgage insurance division in HUD's Single-Family Program Development Office, HUD has concerns about the health of the HECM program, especially considering today's economic conditions.
"We really need to be sure (HECM borrowers) understand their obligations, and have sufficient cash flow" to pay their property taxes, homeowners' insurance and association dues and still be able to maintain their properties in good working order, Hill said at the American Association of Residential Mortgage Regulators' annual conference in San Francisco.
The proposed changes come in the wake of two large reverse lenders – Bank of America and Wells Fargo & Co. – exiting the HECM market this year.
HUD has seen a major shift in the types of mortgages HECM borrowers are choosing and in the way they use the proceeds of their loans. Up until 2008, the majority of borrowers opted for adjustable rate loans and took their money on a monthly basis as a steady income stream. But fixed-rate HECMs were introduced in 2008, and now 67%-70% of all borrowers opt for a fixed rate, drawing out all their money at closing.
"Only a small number of borrowers now use their reverse mortgages as an annuity," Hill told the meeting. Many of the rest use the proceeds to pay off their mortgages, she said, and in some cases, they are, in effect, "doing their own loan modifications" to stave off foreclosure. But in "a lot" of those cases, she added, borrowers still don't have the wherewithal to remain in their homes."
Nearly 1,100 reverse mortgages have gone delinquent because of property charges during the first nine months of fiscal 2011, the HUD official told the conference. That's nearly triple the number which became late for that reason during all of fiscal 2010.
HUD is considering a number of ideas covering a range of issues, Hill said. Among other things, it is looking into requiring lenders to perform a full financial assessment of potential HECM borrowers, giving lenders wider latitude in requiring set-asides for property charges, and giving borrowers the option of allowing lenders to escrow for the taxes and fees.
Hill also said that, as with any program changes, whatever HUD decides will be published for public comment prior to any final determination. But she told the regulators meeting that some HECM lenders may change the way they operate before any government edict is laid down.
Even though lenders are not presently required to better underwrite reverse mortgages and make allowances for property charges, Hill said, there's nothing to stop them from doing so. "There's nothing wrong with that," she said. "There's nothing to say they can't do it now."
