NRMLA Guidance Limited Underwriting For Property Charges

Transcription

1 National Reverse Mortgage Lenders Association th Street NW Suite 420 Washington, DC NRMLA Guidance Limited Underwriting For Property Charges NRMLA Guidance - Limited Underwriting For Property Charges Page 1 of 6

2 Guidance On Limited Underwriting for Property Charges 1.0 Introduction From time to time, the National Reverse Mortgage Lenders Association (NRMLA) develops Guidance and recommendations for consideration and adoption by individual NRMLA members. This document provides NRMLA s Guidance for limited underwriting procedures related to a HECM applicant s Property Charges including property taxes and homeowners insurance. To mitigate risks associated with a HECM borrower s technical default, NRMLA is providing guidance to its members around limited underwriting procedures for Property Charges which are intended to help determine a HECM applicant s capacity and willingness to meet on-going HECM loan obligations including paying property taxes, homeowners insurance, and any required property association dues (Property Charges). 1.1 Problem Statement Home Equity Conversion Mortgage (HECM) originators and lenders would like to reduce borrowers risk of tax and/or insurance technical defaults by implementing limited underwriting procedures to better assess an applicant s willingness and capacity to pay for Property Charges, which are generally required to be paid by a borrower throughout the term of the HECM loan. Lenders and originators understand that, historically, they had limited options under the current HECM regulatory guidance from FHA to underwrite for a loan applicant s willingness and capacity to meet ongoing Property Charge obligations. To help provide better guidance to the reverse mortgage industry, NRMLA has been in talks with HUD since 2007 regarding new limited underwriting solutions to address Property Charges. HUD has indicated it remains committed to issuing formal policy guidance on the matter. NRMLA and its members continue to support HUD s efforts to develop new rules designed to reduce the risk of future technical defaults. During the summer of 2011, HUD informally indicated through various meetings with NRMLA and NRMLA members, that current HECM regulation does not prevent a lender from making responsible lending decisions. However, according to HUD s informal guidance, a lender may not limit the otherwise available HECM loan payment plan options of the borrower on the basis of any capacity or credit related tests. Additionally, a lender is not permitted to mandate any Property Charge related set asides (including but not limited to tax and insurance set-asides) as a condition of approving the HECM loan. On October 5, 2011, HUD issued a HECM Program Update from the desk of the FHA Commissioner which states, in part: NRMLA Guidance - Limited Underwriting For Property Charges Page 2 of 6

3 FHA is currently in the process of revisiting its Regulations to propose and ultimately adopt changes that are necessary to make the HECM program even more successful. Many changes that are under consideration will require notice and comment rule-making, which is a complex and lengthy process. As we begin this process, I want to reiterate that HUD s HECM criteria represent the mandatory baseline requirements for approval of a HECM. HUD does not prohibit the inclusion of additional financial capacity and credit assessment criteria and processes in the origination and approval of HECM transactions. Such criteria or processes, however, may not violate FHA statutes and regulations, or other applicable law, such as Fair Housing/Fair Lending laws, the Equal Credit Opportunity Act, Regulation B, etc. Following HUD s new guidance, NRMLA has developed this Guidance for limited underwriting procedures related to Property Charges. NRMLA believes that if this Guidance is widely adopted by NRMLA members and applied fairly and consistently across the reverse mortgage industry, it will serve the best interests of the industry, the seniors we serve, HUD, and the FHA. The adoption of this Guidance for NRMLA Members should help: better inform HECM applicants about their Property Charge obligations during the term of a HECM loan, mitigate the risk of a borrower s technical default and potential foreclosure resulting from unpaid Property Charges, and reduce the costs to the FHA insurance fund related to technical defaults from unpaid Property Charges. NRMLA Guidance - Limited Underwriting For Property Charges Page 3 of 6

4 2 Guidance 2.1 Definitions Asset Dissipation - Any asset that reasonably may be considered to be liquid and easily converted into cash, including, any available HECM Principal Limit amount. The assets should be amortized according to a straight line methodology based on a term that is equal to the number of months of the youngest borrower s life expectancy as determined in the TALC life expectancy tables as of loan application date. Capacity Test Gross Monthly Cash Flow minus Property Charges. Compensating Factors Conditions under which an application may be approved if the Capacity Test and Applicant Conditions warrant further consideration. Gross Monthly Cash Flow Applicant s gross monthly income from all sources, including HECM Term and / or Tenure payments, if applicable, plus monthly Asset Dissipation amount, if applicable. Life Expectancy The life expectancy of the applicant is to be determined by utilizing the life expectancy tables used in the TALC. Principal Limit Usage (PLU) - PLU is a percentage of the Initial Principal Limit of the HECM loan which will be used to satisfy mandatory payoffs paid when the loans is funded. It is a determination of how much a borrower was required to use from HECM loan proceeds as opposed to how much the borrower elected to use. PLU is calculated by adding mandatory payoffs of liens against the property, past due Property Charges, mandatory payoffs of outstanding judgments, and repair set aside amounts, and dividing that sum by the Initial Principal Limit of the HECM loan. Property Charges Property charges are any applicant obligations that might jeopardize the first and second lien positions created by the execution of the HECM Mortgage/Deed of Trust and any obligations that might jeopardize the financial protection of the collateralized property. Property charges consist of taxes, hazard insurance, flood insurance, ground rents, home ownership association dues and assessments. Lenders should add clarifying details to the definitions and other provisions as appropriate as they determine whether and how to implement a Limited Underwriting initiative. NRMLA Guidance - Limited Underwriting For Property Charges Page 4 of 6

5 2.2 NRMLA Recommendation The Limited Underwriting for Property Charges Guidance includes a review of the applicant s ability (capacity) and willingness to pay for ongoing Property Charges with a reverse mortgage. To test for the applicant s ability to pay Property Charges, it is recommended that originators collect and verify the applicant s income and liquid asset information and perform a limited Capacity Test. The limited Capacity Test considers an applicant s Gross Monthly Cash Flow, which includes income from all sources, all available liquid assets, and available HECM benefits (loan tenure or term payments, and line of credit proceeds), and subtracts the mandatory Property Charges from the Gross Monthly Cash Flow. To test for an applicant s willingness to pay Property Charges and other risk elements, it is recommended that originators test for the existence of the following three (3) Applicant Conditions: The applicant(s) had delinquent real estate taxes during the 12 month period prior to application date, or The applicant(s) are not able to provide evidence of homeowners hazard insurance coverage in-force at least 90 days prior to application date, or The Principal Limit Usage (PLU) will be greater than 80%. The willingness related Applicant Conditions listed above are not intended to limit or restrict a review of additional willingness factors if an originator deems it appropriate to review others. Based on the results of the Capacity Test and existence of any Applicant Conditions, it is recommended that lenders (1) decline the loan, or (2) end the limited underwriting process and continue processing the loan, or (3) consider additional Compensating Factors. Additional Compensating Factors may include but are not limited to: predefined excess equity after the close of the HECM, or the applicant s willingness to establish tax and/or insurance set asides, or Capacity Test results which exceed a certain amount, or any other compensating factors that the lender determines may be appropriate. Such Compensating Factors should be well defined and documented under each originator s policies and procedures to help assure consistent treatment of all applicants. The applicant should be clearly and fully informed that any such compensating factors and exception processing does not alter the borrower s obligations to meet the terms of the loan agreement, including but not limited to the payment of all required Property Charges. The lender should gather only the minimum amount of information necessary and appropriate to perform and document the Capacity Test and the Applicant Condition tests. NRMLA Guidance - Limited Underwriting For Property Charges Page 5 of 6

6 This Guidance recommends that each NRMLA member will develop its own detailed Limited Underwriting for Property Charges policies and procedures and incorporate these into their broader HECM program underwriting requirements. 2.3 Effective Date It is recommended that members who chose to adopt this Guidance should do so as soon as possible. NRMLA recognizes that implementing this Guidance may involve systems changes, updating education and marketing collateral, and employee training. 2.4 Examples Asset Dissipation: The applicants are 72 and 71 years old with $225,000 in a 401k account, publiclytraded stocks, mutual funds, cash balance on a life insurance policy, available HECM proceeds, or other such liquid assets. The amortization period equals the youngest borrower s life expectancy as detailed in the TALC: 14 years, or 168 months. The monthly cash flow from Asset Dissipation would therefore equal $225,000/ 168, or $1,339 per month. Capacity Test: Monthly Cash Flow Social Security benefits $ 1,200 Pension benefits 300 Asset dissipation 1,339 Total Monthly Income $ 2,839 Monthly Property Charges Property taxes $ 200 Homeowner's insurance 100 HOA / PUD 30 Total Monthly Property Charges $ 330 Cash Flow After Property Charges $ 2,509 Principal Limit Usage Test: Mandatory lien payoffs $ 95,000 Mandatory judgment payoffs 7,500 Past due property taxes payoffs 6,000 Initial repair set-aside 5,000 Total Mandatory Payoffs $ 113,500 Initial Principal Limit $250,000 Principal Limit Usage %age 45% [113,500/250,000] NRMLA Guidance - Limited Underwriting For Property Charges Page 6 of 6