Can Reverse Credit Scoring Reduce Foreclosures?
November 28th, 2008
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Here is something new, different and smart, the creation of a reverse mortgage score.
Since reverse mortgages are not income or credit based, you might wonder why a reverse mortgage score would be necessary or even interesting. The answer is that such scoring provides an easy way for lenders and loan servicers to identify borrowers who might be able to use a reverse mortgage to avoid foreclosure.
Of course, if a lender can convert a distressed borrower from a toxic loan to a reverse mortgage there are a number of benefits: No foreclosure, no loss on the lender’s loan and less foreclosure inventory to hold down local home values.
Developed by the First American Corporation (NYSE; FAF), the program looks at the number of borrowers on a loan and their ages. The related property information is analyzed to determine the score. The factors considered include:
___ Eligible residences (reverse mortgages are not permitted on second homes and investment properties)
___ Property types
___ Appraised values
___ Outstanding mortgages and liens
___ The new HECM national loan limit of $417,000.
“The weighted value score generated predicts the likelihood of the loan being eligible for an HECM reverse mortgage,” says the company.
“The evaluation also considers factors that tend to complicate reverse mortgages, such as living trusts, bankruptcy filings and powers of attorney. The servicer receives a report that includes an estimated principal limit after paying off current liens, servicing fees, originations fees, mortgage insurance and estimated closing costs. Using the score, the servicer can then determine whether to offer a HECM loan as one of its loss mitigation workout options. The score considers all HECM loan options and provides alterative choices to traditional loan modification.
“Last year, 648,000 Americans age 50 and older fell behind on their mortgage payments, and nearly 50,000 went into foreclosure, according to the American Association of Retired People (AARP),” says Randy Gilster, of First American’s Outsourcing and Technology Solutions business line. “Homeowners who are 62 years or older and who have equity in their homes can often qualify for a federally-insured reverse mortgage, without regard to their credit score. Our new score helps lenders identify the best candidates for these loans and gives default managers new options to help senior homeowners.”
One could see the use of reverse mortgage credit scoring in the context of an overall lender effort to reduce foreclosures. For instance, the waiver of prepayment penalties and late fees for borrowers who convert, lower interest rates and, of course, no monthly payments for principal and interest.
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