Underwriting: Happy Birthday, LESA

Written by Ralph Rosynek

The role of the HECM underwriter continues to require flexibility as the program evolves into a more mainstream resource for today’s seniors. LESA, HUD’s Life Expectancy Set-Aside requirement that was a product of Financial Assessment guidelines, turned 2 on April 27. With LESA came the introduction of terms like “sustainable,” “theoretical” and “dissipation,” which are now used to describe a new set of factors that must be weighed by HECM underwriters.

Although perceived by some as another factor further limiting a senior’s ability to access HECM proceeds, LESA was designed to help sustain the MMI Fund and ensure the program’s longevity. Its enactment has had a significant impact on the underwriting checklists of old. Underwriting tools now include a more defined methodology to assess ability and willingness, with added resources to assist in determining borrower qualification.

Early HECM underwriting standards involved a series of factual, black-and-white checklist responses, which basically produced a pass-or-fail result with regard to borrower and property eligibility. In essence, early checklists required an underwriter to affirm compliance with program guidelines using limited tools and resources aside from the printed matrix. Assessing a borrower’s ability and willingness to meet the program’s terms and conditions was much easier and certainly less burdensome. But was the old method really better?

Perhaps we should first look at a term that greatly influences those working in the industry today: sustainability. Historical research indicates that many of the early underwriting guidelines do not appear to meet today’s definition of sustainability. Examples would include the mitigation of the impact of tax and insurance default by making them “current” at closing; the failure to provide for future property charge payments; and the failure to consider credit history as an indication of ability and willingness. One might say that early HECM underwriting guidelines failed the sustainability test—in many ways—for HECM program preservation.

Further refinements to LESA requirements in October 2016 led to the introduction of the term “theoretical,” which added a checklist matrix to help underwriters answer the question “Would the remaining proceeds available be able to address a shortfall in qualification due to other outstanding debts?”

New guidelines also granted the ability to dissipate borrower assets not already allocated for required needs to close the transaction, a compensation for those borrowers who meet some but not all of the eligibility guidelines.

While LESA may have complicated the work of a HECM underwriter, it does provide for a more comprehensive, upfront picture of borrower qualification through documentation and verified/allowable resources. And by utilizing the enhanced compensating factors and assists provided by LESA requirements, we can help more borrowers with tricky files gain approval, bringing them one step closer to financial security.

  • The_Cynic

    “The role of the HECM underwriter continues to require flexibility as the program evolves into a more mainstream resource for today’s seniors.” We are in a downward trend in secular stagnation and yet HECMs are evolving into a more more anything? Sounds like industry spin.

    “…LESA was designed to help sustain the MMI Fund.” LESAs have something to do with the MMI Fund but has mainly been a lender issue. Borrowers can have significant equity and still go into default for failure to pay taxes and insurance. There is a huge difference between cash flow and equity. This is lender spin. The problem is if the borrower does not pay it and the servicer paid it without borrower cooperation both now and in the future, if there is insufficient money available, if any, in the line of credit of credit, if any, then the liability passes for taxes and insurance passes to the lender UNLESS the loan is in assignment.

    “Its enactment has had a significant impact on the underwriting checklists of old.” Other than saying Congress and the President required LESAs, the quotation is true. LESAs are the creation of HUD in cooperation with NRMLA’s servicing group. So to some degree underwriters did participate in the creation of LESAs.

    Financial Assessment is a pass or fail system. LESAs were added so that applicants could still obtain a HECM despite good but insufficient cash flow to pay specified property charges.

    Overall this is a very upbeat article on LESAs. It overlooks applicants’ and even originators’ attitudes toward it.