The Federal Housing Authority's Financial Assessment goes into effect on April 27 and will alter home equity conversion mortgage underwriting procedures to resemble those of forward mortgages. Senior borrowers will now have to prove, with more documentation and paperwork, that they can handle the ongoing property costs to qualify for a reverse mortgage. The financial assessment will be a positive change overall for the reverse mortgage industry because in taking on many of the practices used in forward mortgage lending, and slowing down the reverse mortgage application, more defaults will be prevented.
Forward mortgage practices should have been conducted all along by the reverse mortgage industry. When the only ongoing financial requirement that a reverse mortgage borrower has to pay attention to by virtue of the mortgage agreement are taxes and insurance, it doesn't make sense that the industry wouldn't prove that borrowers have the residual income to be able to pay those costs. Now that calculating residual income is required by law under the financial assessment, senior potential borrowers can better decide whether they are viable candidates for such a loan.
Reverse lenders can also now protect themselves through the requirement known as the Life Expectancy Set-Aside which, similar to an escrow account, earmarks funds to pay for property taxes and insurance over the course of the loan.
In addition to changes to practice through policy, lenders should also reevaluate three key business areas that affect how senior borrowers are served.
Hiring and maintaining skilled staff members — and paying them what they are worth — to handle the changes and continue to perform successfully without interruption is another seemingly obvious best practice but sadly it is an area that needs more attention. This industry has a tendency to underpay valuable employees in order to cut internal costs. While this might appear to positively affect the bottom line in the short-term, appropriate compensation and higher retention of skilled employees is much more cost-and time-effective in the long run. If loan officer compensation does not grow to meet his or her value, eventually these team members will leave for better opportunities. It is not beneficial to lenders to spend time and money training and educating the competition's future employees.
The relationship between the loan officer and borrower in the beginning is critical, and lenders training their loan officers to be comforting, helpful and communicative are lenders who are most successful when helping borrowers through the new requirement's process. Remaining sensitive to older borrowers' personality types and coaching loan officers to compensate for potential delays by planning strategically — for example, when collecting documents from borrowers — maintains efficiency and enhances productivity.
Improving operational processes is equally important when adapting to the financial assessment requirements. Lenders should eliminate any potential bottlenecks to the process by conducting routine efficiency audits and identifying any areas for improvement. Enhancing efficiency during the loan origination process is essential to maintaining profitable operations in a period of transition.
Last, the right technology carries most of the weight of the new required changes for the lender. Rather than rely on man-hours to accommodate the additional required steps of verifying borrower eligibility, calculating income after property insurance payments and taxes and verifying credit history.
The new financial assessment requirements pose a challenge, but they are necessary to the sustainability of the reverse mortgage industry. Healthy adoption of the policies, and some of the solid forward mortgage processes, will only propel the reverse mortgage industry into the future.
Alice Sorenson is an executive vice president at LRES.