Reverse mortgage originators have not been immune to the wave of regulatory and compliance changes sweeping the mortgage industry over the past few years.
However, the recent delay of new borrower financial assessment requirements for the Federal Housing Administration's Home Equity Conversion Mortgage program has provided a reprieve for lenders that have been scrambling to implement new training and systems updates ahead of its originally scheduled March 2 deadline.
"We've been just pulling our hair out," said Cecilia Delgado, a reverse mortgage wholesale account executive at lender Maverick Funding Corp.
The new financial assessment test ensures reverse mortgage borrowers can afford to pay property taxes and insurance along with cost of living expenses and other financial obligations. Maintaining tax and insurance payments has always been a tenet of government-backed reverse mortgage lending, but lenders have previously not been required to evaluate a borrower's ability to meet those obligations upfront.
The Department of Housing and Urban Development pushed back the deadline to April 27, citing "a delay in delivery of certain system enhancements." But the delay also gives lenders more time to train their employees, said Delgado.
Mortgage market participants have wondered whether recent service disruptions at ReverseVision a reverse mortgage loan origination system used by an estimated 60% to 70% of companies in the niche market segment were related to the technical challenges HUD cited in its delay.
But a ReverseVision executive said the service interruptions are unrelated and were not the reason for HUD's deadline change, adding the software company rolled out its updates for the new policy in time for the original deadline.
"We're ready. We have the bulk of the financial assessment features in our software. In HUD's case the delay, I think it's accurate to say, was driven by its own internal systems," ReverseVision President John Button said in an interview.
However, some calculations for comparing borrower loan options during the origination process still need to be added to the financial assessment capabilities, Button said. And there are still some HUD technology and clarification questions pending but they are minor, he added.
HUD did not return a call seeking comment.
A surge in volume early last week triggered a temporary outage in the ReverseVision's software, which is remotely managed within a cloud environment. Likely causes for the surge were some combination of the new financial assessment release, a rush by some lenders to use it, and a push by some to get borrowers in the door before the change was originally scheduled to take place, Button explained.
Volume fluctuations are a common operational risk for any technology system, Button added. This is particularly true for software used by an industry prone to spikes in activity, such as mortgage lending.
Reverse mortgage volumes generally have declined in recent years, so a surge in activity is even more unusual, noted Lyn Coffin, who works in the reverse mortgage division of Mortgage Network, a mortgage company in Danvers, Mass. Coffin also is licensed to originate in certain states. Mortgage Network brokers reverse mortgages and the lenders it works with use ReverseVision.
"With the declining endorsements in the past few years, we haven't experienced that," she said, adding that the most recent ReverseVision outage was fixed faster than an earlier incident that happened at month-end in January.
Delgado said the most recent outage was long enough that some lenders were forced to send staff home before service was eventually restored. There are currently few other alternatives as far as specialized reverse mortgage systems, she added.
ReverseVision is working to get a better handle on its capacity issues, said Button.
"We've learned a lot from such experiences," he said, noting that system capacity issues are difficult for both users and technology companies. "I think we can far more accurately gauge the right capacity to add in future situations."
The new financial assessment rules are designed to protect both the FHA and reverse mortgage borrowers. A key change includes how the Life Expectancy Set-Aside amounts are calculated. The LESA is a pool of money used in a reverse mortgage transaction to pay property taxes and insurance on a property. It is similar to an escrow account in a forward mortgage although unlike an escrow account, it allows for the set-aside of multiple years of taxes and insurance, Delgado noted.
Delgado said she's been anxiously awaiting the automated LESA calculations, because the required funds help determine some borrowers' proceeds from a reverse mortgage.
"The good news that it is not as high a set-aside as you would think," she said, noting the rule change won't restrict borrowers' proceeds as much as feared by lenders who often refer to LESA as "less-a," because the borrowers get "less-a" money.
The financial assessment rules may make originating reverse mortgages more challenging, but many industry professionals generally support the measure as a means of protecting borrowers and the FHA.
"It's going to really have a positive impact," said Randy Davis, a reverse mortgage loan officer and assistant vice president at Dollar Bank in Pittsburgh who also answers questions about the product on a local radio show.
Davis said he hasn't rushed any borrowers through the process to get ahead of the new requirements because he likes the protections they offer, but acknowledged that some lenders may have. Davis estimates the number of HECMs originated will fall about 10% to 20% initially due to the financial assessment rules, but added he expects they will eventually rebound.
One concern about the financial assessment rules and other reforms is that they will make reverse mortgages a tool for wealth management planning by higher income individuals, rather than the product's original mission, to help senior citizens supplement their income and protect their financial security.
But others note that if more financially sound borrowers participate in the HECM program, it will help less affluent borrowers take advantage of the opportunity.
And the financial assessment rules are useful to cash-strapped borrowers because it helps ensure they won't be in danger of foreclosure because they can't afford tax and insurance payments.
"We don't want to set somebody up to fail," Davis said. "If a reverse mortgage is not a long-term solution for consumers, they need to look at other options."