The National Reverse Mortgage Lending Association (NRMLA) announced new guidelines this week at its annual meeting in Boston to help members begin "limited underwriting" of reverse mortgages.
The only pre-requisites to obtaining a reverse mortgage have been for the homeowner to be 62 or older and to have sufficient equity in their home. But during the economic downturn of the past several years, many seniors have fallen behind on tax and/or insurance payments, placing reverse mortgaged homes at risk for foreclosure.
Under pressure from the Federal Housing Finance Agency – which insures reverse mortgages – the industry is now attempting to work out underwriting procedures for the loans, which would help identify borrowers at risk of defaulting on tax and insurance payments before they take out a reverse.
"It’s a departure…but it’s a departure in accord with reality," said James Brodsky general counsel for NRMLA and a partner at Washington, D.C.-based law firm Weiner Brodsky Sidman Kider.
The guidelines suggest that borrowers be evaluated on two fronts: Ability to pay, and willingness to pay. With regard to the ability, the guidelines outline a procedure for comparing monthly property charges that borrowers face to the cash flow they’ll have following the issue of the reverse mortgage, as well as their total liquid assets.
As for willingness, the guidelines suggest lenders look for and consider factors such as prior lapses in homeowner’s insurance and late payments of property taxes. The guidelines focus on the property charges, and do not suggest any specific thresholds for a borrower’s monthly expenses as a whole which would bar or permit lending.
"If there’s lots of cash left [at the end of the month], that’s encouraging. If there’s only a little bit of cash, how did they do in the past, and are there other compensation factors?" Brodsky asked. "Lenders need to think through these issues."
Brodsky emphasized that the guidelines were only that, not requirements, and that lenders would still have to use their own judgment in determining whether to issue a loan.
"Members will make their own decisions," Brodksy added, saying he hoped following the rules would help members avoid enforcement actions. "But the hope is that [the guidelines] will affect HUD’s thinking."
