Reverse Mortgages: A Compelling Product For Forward Originators Seeking New Business
Friday, 09 July 2010 07:55
Practitioners know the reverse mortgage sector is undergoing some serious changes, from declining home prices to tighter government insurance standards, all of which have left less equity for seniors to tap.
As the amount of funds available to borrowers drops and insurance mandates rise, underwriting standards will continue tightening. But that doesn’t mean all is lost. Larger originators are cutting fees to attract more business, and for those working on the forward side of the mortgage market, times might even be considered tougher.
Admittedly, the reverse mortgage industry is currently under a lot of pressure. Major changes in the FHA’s Home Equity Conversion Mortgage (HECM) program are likely to take effect with the 2011 federal fiscal year, which begins Oct. 1. Unless HUD, FHA’s parent, can secure $250 million in new funding to support the HECM program, the industry will have to devise ways to make HECM a self-sustaining program and less reliant on the federal government. With a great deal of pressure on the Congress to cut the Federal budget, unless members of Congress can be made aware of the positive impact that the program has for seniors, the appropriation may not pass.
However, the need for reverse mortgages will be driven upward by demographics, and those in the forward world eyeing a move into the reverse sector should not be put off by today’s concerns, but they should proceed with eyes open.
Currently, there are 34 million Americans aged 65 or older. By 2030, that number is expected to more than double, to 71 million, or fully 21% of the population. Moreover, there are presently more than 12 million seniors in the U.S. who own their homes free and clear, owning an estimated $4 trillion in equity. That is a lot of collateral to be tapped.
What’s more, the reverse industry has achieved only 2 percent market penetration, so there is obviously a lot of room to grow.
In addition, there is a lot of pent-up demand for securities backed by reverse mortgages; indeed, there is more demand than supply. Until about a year ago, Fannie Mae was the biggest buyer of reverse mortgages, but the agency has pulled back on pricing. The loans are being shifted to Ginnie Mae’s HMBS, a popular product with investors, who like the fact that those loans are backed by FHA insurance, as well as the Ginnie Mae government wrap, giving the securities a double guarantee. The bonds are typically purchased by traditional zero-coupon bond buyers.
Big lenders are starting to take notice
So, instead of looking at the glass as half-empty, let’s consider its fullness. To mix clichés, we’ve barely scratched the surface.
The reverse mortgage business is still largely a cottage industry, but some big lenders are starting to take notice. For example, Quicken Loans recently moved into reverse mortgages through One Reverse Mortgage, an existing company that it acquired and retooled.
But, before forward mortgage lenders consider getting into the reverse market, they should be aware that while there are apparent similarities between the two businesses, there are some significant, fundamental differences between the two, both on the originations side as well as the servicing side.
Unlike a purchase or refinance forward mortgage, in which the borrower pays the lender back, in a reverse mortgage the lender pays the borrower, up to the size of the loan. Borrowers may pick one of five separate payment plans, ranging from equal monthly payments for as long as at least one of the principal borrowers lives, to a line of credit, which the borrower draws down as needed until the line is exhausted. Funding in both markets is similar.
FHA requires that borrowers make any necessary repairs to the property using proceeds from the loan, and they must also participate in a consumer information session given by an approved HECM counselor. But, there are no credit qualifications, asset or income limitations, and closing costs may be financed as part of the transaction.
Indeed, there are only three items that reverse mortgage originators are required to obtain from the borrower: proof of age, proof of title, and a home appraisal. Credit scores do not matter. And, while we ask for the borrower’s income, we are currently not required to validate it – income is not part of the underwriting process.
By contrast, of course, in the forward mortgage business, the originator and underwriter must obtain all of these items – and more.
While the underwriting process in the reverse world is much simpler than in the forward world (focusing primarily on the appraisal), the sales process in the reverse world is much more involved than in the forward market. Indeed, in the reverse mortgage business, it is not so much a sales process as it is an explanation endeavor.
A long gestation period
Unlike the forward mortgage origination process, which is relatively quick, there is a long gestation period in the reverse mortgage world. Not only is there a government-mandated education process, but the prospective borrower also needs to think long and hard about whether this is the right thing to do. Often he or she consults with adult children and other family members – and even a financial adviser. Some years ago, I talked to a senior about reverse mortgages and recently, when I saw him again, he told me he is now ready to apply for a reverse mortgage. That’s an unusual occurrence, perhaps, but exemplary nonetheless. The point is you cannot push borrowers to make such an important decision. There is no instant gratification for loan sales reps.
As a result, reverse mortgage sales representatives require greater training than those on the forward side. These sales people will also require a formal testing period. This holds true for people on the servicing side of reverse mortgages as well.
In fact, if you are a forward mortgage company looking to get into reverses, I would strongly advise you to totally segregate the reverse product from the forward product, both on the sales side and the servicing side. You shouldn’t have the same sales people selling both products; they must focus on one product or the other, not both. The same goes for the servicing end. Ideally, you should have sales and servicing staffs dedicated to one product or the other.
To be successful as a reverse mortgage loan originator, you must truly be concerned about what is best for the senior. While the program can help a lot of seniors, it is not for everyone. The senior, armed with information, will make the decision based on his or her needs.
Along with a longer gestation and sales training period, marketing and advertising costs tend to be higher in reverse mortgages than on the forward side. On the forward side, customer leads tend to come from real estate agents and banks. By contrast, reverse mortgage lenders rely heavily on more expensive informative channels, such as television commercials and direct mail. However, the higher marketing costs on the reverse side are somewhat offset by the higher fee income.
Big commercial banks have an advantage over independent reverse mortgage lenders in this area and may be able to avoid some of those high marketing costs. Unlike independents, banks can piggyback reverse mortgage messages onto their other products. They can also use their lists of existing customers, such as retirees and retirement account holders, to better target reverse mortgage marketing.
Reverse, forward worlds different
Not surprisingly, loan servicing systems in the reverse and forward worlds are totally different, which stands to reason - instead of receiving checks each month from borrowers and then paying lenders, investors, insurance companies, and tax authorities, reverse mortgage servicers send out checks to borrowers. As noted, borrowers have five options on how they want their money sent to them, from a monthly check to a line-of-credit they tap as needed, similar to a home equity line, but without required payments from the borrower.
Reverse mortgage servicers, by contrast, do not need to set up escrow accounts to make tax and insurance (T&I) payments; borrowers are required to make those independently. However, sometimes borrowers fail to make those payments, either because they forget or because they don’t have the money to pay them.
As a result of these servicing differences, reverse mortgage systems tend to be custom-built. There are currently five or six servicing systems used in the forward industry, and all of them are very similar. But, there is no one standard for servicing in the reverse mortgage industry. Each company tends to have a completely different system that was built from scratch according to its own specifications.
For that reason alone, it makes the most sense for a company getting into reverse mortgages to outsource the servicing function to a company that specializes in this area. Indeed, it is usually not cost-effective to do your own servicing unless you have at least 20,000 loans in your portfolio.
Finally, of all the many differences between forward and reverse mortgage operations, there is one element on the reverse side that cannot be ignored, and that is character. Working with the senior population exclusively, we believe in compassion, integrity, and doing the right thing. It really does take special commitment to succeed in this segment.
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