What is the Average Life Cycle for a Reverse Mortgage?

Written by Ryan LaRose Friday, 30 April 2010 20:30

Articles - Servicing

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This is both a great and timely question. When most people think about the life of a mortgage, they tend to think in forward mortgage terms and, depending on the market conditions affecting prepayment speed, it could be as little as 2-3 years. Reverse mortgage professionals know things are a bit different in our corner of the world. The answer, or at least what we have experienced, is that the typical life of a reverse mortgage is approximately seven years.

This is a great question because it calls to mind the tremendous responsibility and duties a servicer assumes after the loan is closed and funded. A forward mortgage generally concludes when new opportunity arises, a good investment has been made, or the borrower is ready to upgrade to a new home. (I am purposely not taking into consideration the current foreclosure crisis.) Before our culture became so mobile and transient, it was not uncommon for borrowers to purchase a home with the intent of remaining there for life. In the past, once the mortgage was paid in full, a party may have been held to celebrate liberation from monthly payments.

Reverse mortgages, on the other hand, generally do not close out in celebratory circumstances. They may close out as the result of the death of the borrower, a permanent vacancy of the home, or a default (taxes or insurance unpaid or other conditions not met). When the borrower has no money for taxes or insurance, a servicer is faced with a very complex and delicate situation. Some borrowers have family members who can help them, while others may have access to financial reserves outside of their reverse mortgage. However, other borrowers may have only social security income to live on and their reverse mortgage proceeds have been fully drawn and spent. When the decision is made to foreclose by the investor or insurer, a servicer must work diligently, yet compassionately with borrowers to explore all options available to satisfy the debt or cure the default.

The death of the last surviving borrower is, without a doubt, the most difficult situation a servicer has to deal with on a daily basis. Servicers work closely with grieving family members, and may provide assistance through handholding and counseling of the repayment options available under the terms of the mortgage. In this particular situation, it is not uncommon for serving staff to spend countless hours with family members for up to a year after the death. But, we all accept it as the one thing we can do to help the family get through the loss. Most servicers have staff that truly enjoy this delicate work and have the innate skill set necessary for what I consider the toughest task we do.

The question posed is also very timely because the average number of years a servicer will hold a reverse mortgage may very well be increasing. A number of factors make that so. First, life expectancy in the United States has doubled in the past century. According to the US Census Bureau, the average life expectancy today is 78.8 years and is expected to increase each year. Second, on January 1, 2011 and every day thereafter for the next 18 years, somewhere between 7,000 and 10,000 baby boomers will turn 62. Since their eligibility for a HECM begins at 62, a possible additional 16 years or more stretches before them.

Interestingly, much has been written about this generation’s lack of financial preparedness for retirement, so it is anticipated that many will look to the equity in their homes for sustenance. Taking this into consideration, a reverse mortgage servicer could be expected to be working with HECM borrowers for many years beyond the current “life-of-loan” calculations of seven years. In fact, it could easily double rather quickly.

Do you have much direct borrower contact during the life of the loan?

Take a look at the typical life cycle of the reverse mortgage as it is passed to the servicer. The marketing, sales, and closing process of a reverse mortgage generally runs around six months, though from time-to-time it may run significantly longer. When a servicer receives a loan after closing, it is being entrusted with a valuable asset that will be in its possession for an average of seven years (at the present time). There are multiple “touch-points” that originators have with borrowers in the origination process, but they number far less and pale in comparison to the touch-points a servicer will make with the borrower over the life of the loan.
 
These touch points begin with the servicer’s initial contact with the new borrower. On forward loans, the first call to a new borrower may be as brief as 45-60 seconds. Not on the reverse side! In the reverse world, that first borrower call averages 7-8 minutes and it is not uncommon for them to go on for 20+ minutes. The average senior borrower requires more explanation and more patience, and those of us who service this product understand and accept this responsibility willingly.

Every month, shortly after statements are mailed, incoming calls are simply off the charts. The senior borrower is much more attentive to detail and they will ask about anything they do not understand at length. One particular item that drives us servicers crazy is that we have to explain the servicing fee set-aside every month, month-after-month, often to the same borrowers.

From our experience, the percentage of incoming calls each month is approximately 25% of the size of the portfolio and it has remained at that level for more than 4 years. In 2005, when my department was servicing 5000 loans, it received approximately 1500 incoming calls per month. My department now services 45,000+ loans and can expect at least 10,000 incoming calls (each a separate touch point with a borrower) per month.
 
It is tempting to commoditize the servicing process without understanding the very “high touch” aspects of the reverse mortgage product. The truest value of servicing extends above and beyond the cost of processing paperwork.

When a servicer takes on each loan, and for the life of that loan thereafter, it becomes the calm, reassuring voice of reason on behalf of the lender or investor, the monthly point of contact for all things financial, the helpful hand to hold during inevitable grief and transition, and, more often than not, just a listening ear to a lonely senior.

Servicing reverse mortgages can be incredibly challenging, but it is truly the most rewarding job I have experienced.

I look forward to receiving any questions you may have regarding servicing at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it . There is no such thing as a stupid question. The question you ask may be in the minds of other readers as well.