May 2010
THE
REVERSE review
To Be, Or Not To Be: FHA Loan Correspondents Face a Looming Question Weiner Brodsky Sidman Kider, PC page
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In April, HUD reformed some of the FHA regulations, and developed the “Final Rule�. This change takes effect on May 20, 2010, and brings new regulations that FHA loan correspondents must understand and abide by, which can quickly become overwhelming. In an effort to help originators and lenders see the light in these changes, Joel Schiffman and Fed Kamensky, of the law firm of Weiner Brodsky Sidman Kider, P.C. explain the upcoming shift.
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Publisher Aman Makkar Editor-in-Chief Erica English
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© 2010 The Reverse Review, LLC. All rights reserved. The Reverse Review, LLC is a California limited liability company and is the publisher of The Reverse Review magazine. Reproductions or distribution of any materials obtained in the publication without written permission is expressly prohibited. The views, claims and opinions expressed in article and advertisement herein are not necessarily those of The Reverse Review, its employees, agents or directors. This publication and any references to products or services are provided “as is” without any expressed or implied warranty or term of any kind. While effort is made to ensure accuracy in the content of the information presented herein, The Reverse Review, LLC is not responsible for any errors, misprints, or misinformation. Any legal information contained herein is not to be construed as legal advice and is provided for entertainment or educational purposes only. Postmaster : Please send address changes to The Reverse Review, 16745 W. Bernardo Drive Suite 450 San Diego, CA 92127
ORNEY A TT
TRUST REVIEW
If you are a Lender and you review Trusts in house, you are taking unnecessary risk! Title companies insure that a trust owns the property but does not insure a trust meets HECM guidelines. In an industry that focuses on Risk Management, Attorney Trust Review eliminates the Risk of a loan being unsalable because a Trust approved by the lender turns out not to meet HECM guidelines. We provide: • Risk Management • Amendment To Trust containing required HECM language • Attorney Opinion Letter • 48 Hour Turn Around No risk to lender, our fee is paid only if the loan closes.
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note from the editor
igns of Life
Creative Destruction is one of those terms that gets overused, but it seems to apply well to today’s recovering economy. It happens when something new — an especially innovative company, product or idea — replaces something older or more established that isn’t working anymore. While the process can be scary for many people, it gives businesses and investors a chance to take stock and jump on new opportunities. While we were out at the Philadelphia Road Show with NRMLA this month, we had an opportunity to catch up with those who do see signs of life in our industry. NRMLA is talking about rolling out a positive press campaign on the Reverse Mortgage Product and almost everyone we had a chance to catch up with really seemed optimistic for the next few quarters.
In this month’s issue, you’ll find several examples of these news signs of life. Michael Banner starts out this month, commenting on “How Times are Changing” and how the ups and downs of the reverse mortgage issues are actually very positive for us. Featured this month, we have Weiner Brodsky Sidman Kider, PC writing on the new regulations that are effective May 20, 2010. Among these, is the “Final Rule”, something that affects originators and lenders — a must read for all! Our May issue is packed with a variety of wonderful articles, so read on! Thanks to all and have a great month!
Erica English Editor-In-Chief
May 2010 TRR
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CONTENTS
14 The Times, They Are a Changing…
Michael Banner
18 FEATURE: To Be, Or
Not to Be: FHA Loan Correspondents Face a Looming Question
22 Spotlight Interview:
Weiner Brodsky Sidman Kider, PC
Forensic Counseling Tools for Whole-person HECM Lending: A Conversation with NCOA’s Barbara Stucki Atare E. Agbamu, CRMS
26 Reverse Mortgages and
Long-Term Care Insurance Jonathan Neal
ESSENTIALS 5 Note From the Editor
8 Ask the Underwriter
12 Industry Stats
30 Ask the Servicer
33 Directory
34 The Last Word
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May 2010
Featuring an In-Depth Reverse Mortgage Lending Track
MBA’s GovernMent housinG ConFerenCe 2010 Hilton n ew York + n ew York C itY M aY 23-26, 2010
10
Attend MBA’s Government Housing Conference 2010 to learn about significant changes being made to government lending programs. Get the latest information on how to benefit most from Federal Housing Administration (FHA), Veterans Administration (VA) and U.S. Department of Agriculture (USDA) loan programs and examine alternative sales approaches and evaluate new strategies, products and technology. This conference is the one place you can hear from a range of government officials and industry experts who know how to succeed in this complex arena. New for 2010: IN-DeptH reverse MortGAGe LeNDING trACk Explore ways to start or grow your reverse mortgage lending business by attending unique sessions that highlight the latest developments in FHA’s Home Equity Conversion Mortgage (HECM) program and provide useful insights into the private reverse mortgage market.
Visit www.mortgagebankers.org/GhC10.htm for conference details and registration information. 9787
On a recent vacation, I visited a Florida theme park and was confronted with a very interesting decision – “red or blue”? I was advised “red” was the pathway to my destiny, so, acknowledging the health warnings, I joined a procession of thrill seekers inching their way into a cavern of excitement to board the ride of my life. Heart throbbing, thoughts of common sense and caution being overruled by the lure of the experience of a lifetime, I stepped forward in confidence, girded myself into the dragon’s transport device, feet dangling, and held on for dear life. In four or five minutes, I was delivered back to the cavern after what seemed to be a mental eternity of ups and downs, bends and turns, thrills and chills, and an occasional obscenity. Upon exiting, the red decision was questioned by my accompanying support crowd, leading me to confirm that I had, in fact, experienced the ride of my life. Foolishly, I gave way to public opinion by mindlessly following the pack back into an alternate inching line headed for the “blue”. Was I a glutton for punishment or returning to face yet another fear with a renewed sense of strength? Actually, in the end I realized I would survive “blue”. I needed to survive “blue”, as, after all, “red” had educated me to a confidence and I felt “blue” would ultimately prepare me to undertake the “green” one, which I am sure is out there being built somewhere! What a thought process! So, are you feeling like you have been on the “red and blue” roller coaster of late? Could it be that more revised HUD Guidelines, new pricing, revitalized products, enhanced forms, increasing state legislation and greater disclosure are begging to question if you are a “glutton for punishment?” I had the opportunity to speak with a good friend, who, like many of us, has been part of our industry for many years. His company, a mortgage brokerage firm, consistently places statistically in the top HECM 100 lender listings. I noted nervousness during our conversation, wherein he came out and asked me, “Will I be here tomorrow - should I be underwriting my own loans?” I couldn’t resist to answer his question with one of my own – “red or blue?” The choice to underwrite your own loans is a very complex strategy to overcome fears, resulting preparedness and recognizing challenges yet to come. I commented that many more of us are underwriters than we give ourselves credit for, but that in itself is only the beginning and should not be the sole criteria to get into the next line.
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The foundation of “handbook and regulation” knowledge and skills is probably the first bend and turn on the underwriting ride which TRR May 2010 we all will agree is a key component to answering the question.
However, reconfiguring your company to compete in the current and future HECM market requires consideration of the supporting checklist of questions. The final decision to underwrite is part of a body of skills and knowledge, which must be attended to on a continual basis: • • • • • • • • • •
Do you have the necessary capital and cash to support the process change? Do you have the ability to undertake the increased HUD authority requirements? Do you have an adequate source of warehouse funding? Do you have a backup source of funding for impaired or uninsured loans – or the reserves to effect indemnification? Do you have the requisite insurance coverages and bonding? Do you understand the state mortgage banking requirements for this change? Do you have the appropriate compliance and documentation resources to effect this process change as well as resources to monitor the process for changes going forward? Do you have a secondary marketing plan and the ability to meet the representations and warrants your “investors” may additionally require? Do you have enhanced internal controls – i.e. augmented policies and procedures? Do you have a quality control program designed to evaluate the underwriting and approval process as well as determine the quality of your production?
Given the material evidence that is necessary to move to a “banking” strategy, and newly promulgated tightening of some of the requirements, business as usual does not appear to be a debate that will gather much steam going forward or perhaps provide for your long term survival. In fact, one might conclude the HECM product will probably become a specialty product represented by a select few lenders in the market. There are also those who believe the current market will soon be replaced by a new wave of eager investors who will provide the additional products and competitive capital to enhance the HECM value to seniors. Obviously, we will rule out those few who believe that this latest ride we are on is a diabolical governmental plot, atonement for decades of subprime, or safer than healthcare as a reform platform for politicians to gain re-election!
• • • • • •
Do you understand the increased scope of audit and exam requirements? Do you understand the additional reporting requirements and to whom you report? Do you have a servicing or subservicing plan? Do you have accounting and settlement procedures which recognize the process? Do you understand the additional training and monitoring requirements? Do you understand the need to employ experienced personnel to effect the change?
I believe that for those who have made the decision, the choice to take on underwriting does not in itself guarantee a measure of success. As we have seen with the number of lenders that have exited or consolidated recently, the business plan must be flexible, scalable, and measurable…and the market, to some degree, must work hand in hand. Regardless, there needs to be a long and serious effort made to evaluate where you are today and perhaps the all important question - are you and your company ready to take the ride of your life? The risks and the rewards are both large. Red or blue?...been there, done that, bring on the green one!
May 2010 TRR
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Ralph Rosynek - Ask The Underwriter, page 8
Ralph Rosynek is President and CEO of 1st Reverse as well as a HECM DE Underwriter. Mr. Rosynek has been involved in mortgage lending for over 30 years with the last 5+ years exclusively providing reverse mortgage lending solutions. To contact Mr. Rosynek or to learn more about 1st Reverse Financial Services, Please visit www.1streverse.com or call 877.574.1000.
John Lunde - Reverse Market Snapshot, page 12 John K. Lunde is President and Founder of Reverse Market Insight, Inc. a performance data analysis and consulting firm specializing in the reverse mortgage industry. RMI clients include 8 of the top 10 reverse mortgage lenders plus investors, servicers and vendors to the industry. Find out more at www.rminsight.net or call 949.429.0452.
Michael Banner - The Times, They Are a Changing…, page 14
Founder of LoanWell America, Inc., Michael is one of few Reverse Mortgage professionals accredited to teach continued education classes to CFP’s, CPA’s, attorneys & insurance agents. Michael has been interviewed by the Wall Street Journal, Tampa Bay Business Journal & the Reverse Mortgage Wire. A member of NRMLA’s State and Local Issues Committee & sits on the Board of Directors of FPA of Tampa Bay. For more information: Michael.Banner@loanwellamerica.com or 877.700.0555.
Joel Schiffman - FEATURE: To Be, Or Not to Be: FHA Loan Correspondents Face a Looming
Question, page 18 Joel Schiffman is a member with the law firm of Weiner Brodsky Sidman Kider, P.C. The firm serves as General Counsel to the National Reverse Mortgage Lenders Association and advisor to reverse mortgage lenders and industry participants throughout the nation. Mr. Schiffman can be reached at schiffman@wbsk.com or by telephone at 949.798.5570.
Fed Kamensky - FEATURE: To Be, Or Not to Be: FHA Loan Correspondents Face a Looming Question, page 18 Fed Kamensky is an associate with the law firm of Weiner Brodsky Sidman Kider, P.C. The firm serves as General Counsel to the National Reverse Mortgage Lenders Association and advisor to reverse mortgage lenders and industry participants throughout the nation. Mr. Kamensky can be reached at kamensky@wbsk.com or by telephone at 202.628.2000.
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May 2010
Forensic Counseling Tools for Whole-person HECM Lending: - Atare E. Agbamu, CRMS A Conversation with NCOA’s Barbara Stucki, page 22 Author and columnist, Atare E. Agbamu, is director of reverse mortgages at Minneapolis based AdvisorNet Mortgage, LLC. A member of BusinessWeek Market Advisory Board, Agbamu is author of Think Reverse and more than 130 articles on reverse mortgages. He can be reached by phone at 612.436.3711 and e-mail at aagbamu@advisornet.com or atare@thinkreverse.com. Forensic Counseling Tools for Whole-person HECM Lending: - Barbara Stucki A Conversation with NCOA’s Barbara Stucki, Spotlight Interview, page 22 Dr. Barbara Stucki. Ph.D. heads the Home Equity Initiatives for the National Council on Aging. She directs NCOA’s efforts as a HUD HECM Counseling Intermediary, including the Reverse Mortgage Counseling Services network. She also conducts consumer and policy research on how homeowners can appropriately use home equity to sustain financial security in retirement. Reverse Mortgages and Long-Term Care Insurance, page 26 - Jonathan J. Neal Jonathan Neal is the senior partner at CCG-Capital Consulting Group, LLC a sales and training consulting firm located in Atlanta Georgia. Through his 30 years of experience John’s primary focus has been on post-retirement and estate planning. Jonathan is recognized nationally as an author and coach, managing and training financial/insurance professions who work principally in the senior market place. Jonathan can be reached by phone at 678.906.2850 or email at jneal@ccgcap.com. Ask The Servicer, page 30 - Ryan LaRose Ryan LaRose is the Executive Vice President of Celink, an independent reverse mortgage subservicer. Ryan has over 12 years of servicing experience; exclusively in reverse mortgage servicing since 2005. In addition, Ryan is an active member of the NRMLA servicing and technology committees. Visit his website at www.CeLink.com or contact him directly at 517.321.5491. The Last Word, Page 34 - Sam Collins Sam Collins is the President of Sam Collins Reverse Marketing, LLC and Founder of REMALO, the Reverse Mortgage Association for Loan Officers. REMALO is a web based National sales, marketing, training, and full service center, created exclusively for Reverse Mortgage Loan Officers, Correspondents, Branch Managers, and key executives, and brokers. www.remalo.org or 877.262.7656.
May 2010 TRR
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On an endorsement volume basis, Generation Mortgage took the lead on the wholesale side of the business in February, with 831 loans endorsed during the month. This is a major improvement over where they were in the second half of 2009, where they were a little late in getting a competitive fixed rate product to market. With over 70% of the reverse mortgage business being fixed rate product in the latter portion of the year, not having it proved costly. However, it appears they have fixed that, and in a big way. Before we anoint them as the new kings of the wholesale biz, it’s worth a wait of a few months to see if the performance is consistently good, or if there was some catching up in endorsements from prior periods. Genworth also gained in February with a more attractive fixed rate product offering to underline the point, although they saw less pickup than Generation. Rounding out the trio of higher performers this month is Urban, recently bought by Knight Capital Group. Their wholesale volume of 653 units put them in 3rd place for the month, behind Generation and Bank of America. What are some other trends to point out for February? • Wholesale endorsement volume dropped 12.6%, vs a 1.5% decline in Direct Endorsements. One month does not a trend make, particularly since this still leaves broker/wholesale activity considerably above direct retail lending, given the better figures in December & January, although we’ll continue to watch closely for signs of a trend given that the current environment seems tilted toward direct retail lenders right now. • Another way to look at whether big lenders are faring better than small is the combined market share of top 10 lenders. On that score, we’re getting early indications that the big are getting bigger, as a full 92.5% of all volume in February went through either retail or wholesale channels at the top 10. That may not surprise anyone who has been in the business a while, but it underlines the point that smaller volumes point to more concentration as smaller players exit the business.
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May 2010
The RESPA Challenge the f o e p dsca s n a l e r fee enti s n e o h i t t a ; in ed ed g t i n a r e n O p i p . m a d i h it h try change e totally el RMLA t n o m us .N er st But, la mortgage ind aside fees w to the client ositive p e t n revers shed, the se ve been give ign to get a least, a la ha were s extra funds lations camp certainly not re t e and th ted a public and, last bu n the major r c, ee has sta to the publi oing on betw e g messag a price war e we hav ers. al wholes
Stricter RESPA rules, lower principal limits, a more complex FM1009 and other changes pose a serious challenge to our industry. Lenders will take on additional responsibilities and need to be meticulous while working with brokers. Brokers will lose all or most of the YSP and any mistake made in the GFE could cut into their origination fee as well. But there is also good news around the corner... ReverseVision Inc.
3310 Pollock Place • Raleigh, NC 27607 www.reversevision.com (919) 834 0070 • info@reversevision.com
May 2010 TRR
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Now, let’s look at these major changes one by one. The Reduction in Origination Fees and Elimination of Set Aside Fees I don’t think many would disagree that the upfront costs of securing a reverse mortgage have always been the #1 obstacle in our path. It gives pause for thought with every client that does not have an “immediate need for a reverse mortgage”, and has always been the first negative comment out of every financial advisor’s mouth regarding “why he doesn’t suggest his clients use a reverse mortgage.” The upside – Make no mistake about it—cutting the origination fees and totally eliminating the set aside fees brings the cost of a reverse mortgage to almost exactly the same as a forward FHA mortgage. This is a great thing on two levels. First, it saves our clients money and gives them more proceeds at closing. Second, it removes the #1 obstacle in building referral relationships with other segments of the financial industry. The downside – There isn’t one! Increased Premiums Paid to Correspondents The upside – I may be a little biased, but between declining property values, decreased principal limits, caps on origination fees, and all the misinformation on the reverse mortgage that seems to never end, it’s about time the professionals of this industry got a break. The downside – Unfortunately, there is a downside and anyone not willing to take a serious look at it should give it additional thought.
Isn’t a fixed rate better? Doesn’t the client always get significantly more money? Really, shouldn’t everybody get a fixed rate? No, they should not! Our critics will say that the problem is worse than before. The ignorant ones will continue with the ludicrous claim that we are all in this business for the big money. (They should look at my P&L). But the truth is no different than it has ever been. It’s about identifying the needs of the client and doing what is right. It’s about SUITABILITY! —It always has been and always will be, in this industry and every other… So lets do it right! NRMLA’s Landmark Public Affairs Campaign to Improve the Image of Reverse Mortgages This is what they are calling it, but in order for this one to be a “landmark campaign”, there would have to have been campaigns before this, and there hasn’t been! Our noble industry has been sliced, diced, and insulted for several years. The information that has been put forth by government officials and national publications has been as false and as damaging to us, as an industry, as the recession. And not a peep from NRMLA... I am happy to see this finally happening, but it is way overdue! The upside – It can do nothing but help. The downside – Who is going to pay for it? The Price War Between the Wholesalers
Now, before we go any further, fixed rates have always paid correspondents more than adjustables, this is nothing new. But, with current pricing ranging from 103-105+, the disparity has never been so large. The temptation to “urge” a client into a fixed rate when a credit line might serve them better continues to exist—it always has— but the new improved pricing on the fixed product will bring this sensitive and volatile subject up more often than before.
Well, of all the unexpected changes in the industry, this has got to be the one that makes us smile. Suddenly they all want our business. Premiums are through the roof and service has never been better. It’s just amazing what a volume that is 50% less than it was 12 months ago will do to a wholesaler’s way of thinking! The upside – We’re finally making respectable money again. This is the first time this has happened since the end of 2008 and it feels good—we should feel good about it!
We’re not talking legality here—we’re talking morality! Nobody ever wants to say it, but I’m going to! The difference between half of a point on the back (pricing on an adjustable) and 5 points on the back (pricing on a fixed) is thousands, and, in some cases, between 10 & 20 thousand dollars.
“
The downside – It’s not going to last and there are going to be many causalities. Don’t get used to these margins, and don’t project your future earnings on them. Certainly enjoy them while they are here and
I may be a little biased, but between declining property values, decreased principal limits, cap
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the reverse mortgage that seems to never end, it’s about time the professio May 2010
repair some damage that has been done over the last 18 months, but the price of 105 will disappear after the price war is over and the victors are clearly defined. What the “standard” pricing will be by the end of this year is anybody’s guess, but my best advice is to be prepared for a substantial reduction.
The RESPA Opportunity
What will happen when the victors are clearly defined? Will the smaller independents be able to compete with the larger players? Will the larger players be able to compete with the mega giants? If this truly is a price war, who really can compete with the balance sheets of Met Life, Bank of America and Wells Fargo? Is this the future of our industry? Are the mega giants going to be the only ones left standing? And if so, with applications 50% off, how many additional people will be losing their jobs as the smaller wholesalers fall? Where will they go? So, here we are. It seems that every few months, over the last year and a half, the world of reverse mortgages underwent major changes. Every time we take a deep breath and adjust, more changes happen. These last few weeks have brought us some of our biggest and, in my opinion, some of the most positive changes we have experienced. But still, we must adjust. My advice is to stay steadfast, and continue to spread the good word. The reverse mortgage industry is still in its infancy and it is going through the same growing pains that every other major industry has experienced in its early years. There is no doubt in my mind that this is our year. This is the year of education. This is the year that the public and the other segments of the financial planning world will recognize the true strengths and many options that this great product offers to the seniors of this country.
ReverseVision's international team of software engineers, attorneys and mortgage specialists turn these challenges into opportunities. They build the tools that give their customers a competitive advantage. This is why over 6000 reverse mortgage specialists in over 600 companies rely on ReverseVision every day.
So let’s get out there and help as many seniors as we possibly can!
Can you afford not to use ReverseVision?
ps on origination fees, and all the misinformation on
”
onals of this industry got a break.
ReverseVision Inc.
3310 Pollock Place • Raleigh, NC 27607 www.reversevision.com (919) 834 0070 • info@reversevision.com
May 2010 TRR
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May 2010
Alas, with passage of the Final Rule, current FHA loan correspondents must answer an age-old question of Shakespearean proportions: “To be an FHA-approved lender, or Not to be an FHA-approved lender?” Whether it is nobler to suffer the slings and arrows of originating mortgages as a third-party originator, or to take arms against a sea of troubles in becoming approved as an FHA lender 1? Whether it is better to bear those ills we have, than fly to others that we know not of? As the Final Rule imposes its will upon us, this article will hopefully help you understand these changes and highlight some of the important decisions that HECM lenders and originators must soon make. FHA-Approval for Loan Correspondents: No Longer Available In a sweeping policy change, HUD has eliminated the approval process for loan correspondents. As of May 20, 2010, FHA will no longer issue separate approval for loan correspondents to participate in FHA programs. Instead,
entities that wish to originate FHA-insured loans may do so as non-FHA-approved “third-party originators” (or “TPOs”) through FHA-approved lenders (i.e., “sponsors”). An entity may also choose to itself become an FHA-approved lender. According to the Final Rule, non-FHA-approved mortgage brokers may originate FHA-insured loans as TPOs by working with FHA-approved lenders (sponsors). A TPO may originate and transfer an FHA-insured loan to its sponsor. The sponsor must underwrite the loan and submit the loan to FHA for insurance. The sponsor also must ensure that the TPOs legal name and Tax ID number appear in the FHA loan origination system record for the subject loan. A TPO may not purchase or hold an FHA-insured loan. Also, a TPO may not close FHA-insured loans in its own name. Although this limitation is still being reviewed by HUD and might later be changed, as of the effective date of the Final Rule, an FHA-insured loan originated by a TPO must close in the name of the sponsoring FHA-approved lender.
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oan correspondents currently approved by FHA will retain their existing FHA approval and may continue to act as an FHA-approved loan correspondent through December 31, 2010. In addition, current FHA-approved loan correspondents may continue to have loans closed in their own name through December 31, 2010. However, beginning January 1, 2011, unless the loan correspondent itself becomes an FHA-approved lender, it may only originate FHA-insured loans as a TPO through an FHA-approved sponsor. The Final Rule does not provide for an automatic transition of FHA loan correspondents to FHA-approved lenders. Loan correspondents that elect to become an FHA-approved lender must apply to FHA for approval as a mortgagee. Importantly, in order to become an FHA-approved lender, among other things, the loan correspondent must meet the increased FHA new worth requirements discussed below. Currently approved loan correspondents will need to make a business decision whether to seek approval as an FHA-approved lender or forego FHA approval and become a TPO. As noted above, the Final Rule extends the existing FHA approval through December 31, 2010. FHA-approved loan correspondents should use this time to either apply for FHA-approved lender status or, if the entity elects to act as a TPO, confirm existing relationships with their sponsoring FHA-approved lenders and establish new sponsoring relationships. Oversight of Third-Party Originators Under the Final Rule, FHA-approved lenders must verify that the TPO is eligible to participate in the origination of FHA-insured loans. Among other things, the sponsoring mortgagee must verify that the TPO or the TPOs officers, partners, directors, principals, managers, supervisors, loan processors or loan originators have not been subject to an administrative action or sanctions that would disqualify them from the FHA program. In addition, FHA-approved lenders are responsible for the actions of their sponsored TPOs. The Final Rule provides that FHA-approved lenders must ensure that the loans they fund originated by their TPOs meet all applicable FHA loan origination and processing requirements. FHAapproved lenders are subject to sanctions (e.g., civil money penalties) when their sponsored TPOs fail to comply with all FHA requirements. Note that the requirement to supervise TPOs is not entirely new. HUD’s long-standing policy has been that FHA-approved lenders are responsible for the actions of their loan correspondents. In addition, FHA-approved lenders must comply with HUD’s existing quality control requirements. HUD’s quality control requirements are extensive and include the review of loan files originated by loan correspondents. The Final Rule does not establish minimum requirements for TPO approval. However, the Preamble to the Final Rule provides several recommended measures that FHA-approved lenders should develop and implement if they plan to work with TPOs: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Procedures to verify TPO compliance with all federal, state, and local requirements that govern their activities; Procedures to verify TPO compliance with the requirements of the SAFE Act; Procedures to ensure that TPOs are not suspended, debarred, or under a limited denial of participation (LDP) in HUD’s Credit Alert Interactive Voice Response System, or on the Federal Government’s Excluded Parties list; Institutional guidelines and systems for establishing and maintaining relationships with TPOs; Procedures that govern the performance of due diligence; Systems for monitoring loan quality and performance for each sponsored TPO; Procedures for addressing potential problems with TPO operations, business practices, or customer service, and clearly articulated remedial processes for instances when such problems occur; Enhanced quality control plans and procedures that ensure appropriate evaluation of TPO originations; Ongoing renewal processes to ensure that TPOs continue to meet the lender’s approval standards; and Procedures for evaluating the financial capacity of TPOs.
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Importantly, a lender may not knowingly or willingly conduct business with a TPO that is not in compliance with FHA rules and all applicable laws and regulations. A lender that becomes aware of non-compliance by a TPO must cease sponsoring such TPO and immediately notify HUD. HUD noted in the Preamble to the Final Rule that, because of FHA’s existing loan correspondent oversight requirements, the increased burden upon lenders that elect to sponsor non-FHA-approved mortgage brokers would be “minimal.” Given HUD’s list of recommended oversight measures for FHA-approved lenders, it seems at least the initial changes necessary to begin originating loans through TPOs may be significant for many lenders. At a minimum, FHA-approved lenders must implement robust policies and procedures for approval, setup and supervision of mortgage brokers as TPOs. This includes the initial determination of TPO qualifications and monitoring the ongoing performance and financial capacity of the TPOs. Even lenders that already have policies and procedures in place for approval and oversight of loan correspondents will undoubtedly need to revise such existing policies and procedures to tailor them to their new relationship with TPOs. FHA-approved lenders will also need to revise their existing Quality Control Plan to take into account their new TPO relationships. As noted above, lenders that have an existing relationship with FHAapproved loan correspondents may continue such relationships through December 31, 2010. This gives lenders some “breathing room” to implement broker setup and oversight policies and procedures, and to start entering into new relationships with TPOs. It remains to be seen whether lenders will elect to continue to rely on existing relationships with loan correspondents through the end of the year, or will start sponsoring new mortgage brokers as TPOs prior to the end of the year. Of course, for the remainder of 2010, a lender might do both: sponsoring new TPOs after the effective date of the Final Rule (assuming it has implemented TPO setup and oversight policies and procedures), while continuing to do business with its existing loan correspondents. Commencing on January 1, 2011, a lender wishing to work with mortgage brokers may only do so by sponsoring them as TPOs.
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FHA-approved responsible for the a sponsored Third Part
Increase in Net Worth Requirements Net Worth Requirements for Years 2010 and 2011 Under the Final Rule, effective on June 21, 2010, new applicants for FHA approval must have a net worth of not less than $1 million. At least 20 percent of such required net worth must be comprised of liquid assets consisting of cash or its equivalent, as may be acceptable to HUD. Existing FHA-approved lenders (including both supervised and nonsupervised mortgagees) must comply with these increased net worth requirements as of May 20, 2011. As such, while new applicants for FHA approval must comply with the increased FHA net worth requirements upon application, existing FHA-approved lenders are afforded a full year to comply. Note, also, that existing FHA-approved lenders that meet the definition of a small business must have a net worth of not less than $500,000, of which no less than 20 percent must be liquid assets consisting of cash or its equivalent, as may be acceptable to HUD. The definition of a small business currently established by the Small Business Administration is no greater than $7 million in annual receipts.
Net Worth Requirements for 2013 and Subsequent Years Effective as of May 20, 2013, in order to participate in FHA single family programs, all existing FHA-approved lenders (irrespective of their size), and applicants for approval to participate in FHA single family programs, will be required to have a net worth of at least $1 million, plus an additional net worth of 1% of their total loan volume in excess of $25 million of FHA single family insured mortgages originated, underwritten, purchased, or serviced during the prior fiscal year, up to a maximum required net worth of $2.5 million. No less than 20 percent of such required net worth must be liquid assets consisting of cash or its equivalent, as may be acceptable to HUD. As noted above, existing FHA-approved lenders have one year to comply with the initial net worth increase to $1 million, and have two more years to comply with the additional volume-based net worth requirements. Existing FHA-approved lenders that are unable to meet the new net worth requirement within the proscribed deadlines must relinquish their FHA approval, but may continue conducting FHA business as non-FHA-approved TPOs, to the extent they are accepted by an FHA-approved lender as sponsor. FHA-approved lenders participating in FHA multifamily programs are subject to higher net worth requirements that are not discussed in this article. However, note that if an FHA-approved lender participates in both single family and multifamily programs, such “dual approved lender” would be required to meet the higher multi-family net worth requirements. New Rules for Principal-Agent Relationships Generally speaking, in a Principal-Agent relationship, an authorized agent may perform part of the HECM origination process on behalf of the principal. FHA previously permitted a great deal of flexibility in structuring a Principal-Agent relationship, and either party was permitted to originate or underwrite the loan as long as they had the appropriate approval authority. However, the loan was required to be closed in the name of the principal.
d lenders are actions of their ty Originators.
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The Final Rule has changed how the parties must structure the Principal-Agent relationship. Specifically, the principal is now required to originate the loan and the authorized agent must underwrite the loan. Further, both the principal and authorized agent must now be approved as Direct Endorsement (DE) lenders in order to participate in a Principal-Agent relationship. The loan may be closed in either party’s name. The Principal-Agent relationship must be recorded as such in FHA Connection. Other FHA Changes
The Final Rule also incorporates certain changes arising from amendments to the FHA program made by the Helping Families Save Their Homes Act of 2009. The Final Rule requires FHA-approved mortgagees to use their HUD-registered business name in all advertisements and promotional materials related to FHA programs. A registered business name includes any alias or “doing business as” (or “DBA”) name on file with FHA. The lender must keep copies of all print and electronic advertisements, and promotional materials for 2 years. The Final Rule also includes a requirement for FHA-approved lenders to notify FHA in the event the lender or its employee, including any officer, partner, director, principal, manager, supervisor, loan processor, loan underwriter or loan originator, are subject to sanctions or other administrative action. The Final Rule also updated the list of administrative actions and sanctions
that disqualify an FHA-approved lender or a non-FHA-approved entity from participation in FHA programs. No Exemption for HECM Loans The Final Rule, in effect, allows non-FHA-approved entities to participate in the origination of FHA-insured loans. However, as industry participants are no doubt aware, HUD’s prior guidance expressly prohibited non-FHAapproved entities from participating and receiving compensation for the origination of FHA-insured HECM loans. This interplay between the Final Rule and HUD’s prior guidance generated some concern among reverse mortgage industry members. The National Reverse Mortgage Lenders Association (“NRMLA”) raised this issue in comments submitted to HUD on behalf of the reverse mortgage industry. Specifically, the Housing and Economic Recovery Act of 2008 (or “HERA”) added Section 255(n)(2) to the National Housing Act (or “NHA”), requiring all parties that participate in the origination of FHA-insured HECMs to be approved by HUD. HUD implemented this legislative initiative by Mortgagee Letter 2008-24. In responding to NRMLA’s comments, HUD clarified that another piece of federal legislation enacted after HERA allows limited participation by non-FHA-approved entities in FHA programs, including the HECM program. Section 203(b) of the Helping Families Save Their Homes Act of 2009 (or “HFSH Act”) requires HUD approval of mortgage lenders participating in the origination of FHA-insured mortgages, “except as authorized by the Secretary.” HUD concluded that this language in Section 203(b) of the HFSH Act applies broadly to all FHA-insured single family loans thereby permitting HUD to authorize participation by non-FHA-approved TPOs in FHA programs, including the HECM program. As is apparent, the Final Rule creates new requirements that may change the way originators and lenders conduct their business. Most importantly, however, these changes are ultimately designed to strengthen FHA and thereby ensure its long term viability. That result, given FHA’s critical role in promoting housing credit during these perilous times, is cause for optimism, harkening yet another Shakespearean muse when reflecting on the Final Rule - What light through yonder window breaks? This article provides only an overview of some of the federal and state laws and regulations that may affect reverse mortgage lending, marketing and finance matters. Although the practice of Weiner Brodsky Sidman Kider P.C. is national in scope, attorneys within our firm do not actively practice law in all jurisdictions, and these materials are not intended to and do not provide legal advice. Because of the generality of this article, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. By Joel Schiffman and Fed Kamensky, of the law firm of Weiner Brodsky Sidman Kider, P.C. The law firm serves as General Counsel to the National Reverse Mortgage Lenders Association and advisor to reverse mortgage lenders and industry participants throughout the nation. The firm has offices in Washington, D.C., Newport Beach and Dallas. Additional information can be found at www.wbsk.com or by telephone at 202.628.2000. Messrs. Schiffman and Kamensky can be reached at schiffman@wbsk.com and kamensky@wbsk.com. Under the existing FHA parlance, there are four different classifications of “mortgagees”: FHA-approved mortgagees (which can be either supervised or non-supervised), FHA-approved loan correspondents (which also can be either supervised or non-supervised), investing mortgagees and government mortgagees (i.e., a governmental institution or a GSE that is approved as an FHA mortgagee). As of the effective date of the Final Rule, FHA approval will only be available for FHA-approved mortgagees, investing mortgagees and government mortgagees. In this article, we refer to FHA-approved mortgagees as “FHA-approved lenders.” 1
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F
or some seniors who take reverse mortgages, potential financial problems are often rooted in “non-financial” matters.
Slowly, financial problems ooze out of everyday issues. “Soft” issues that financial people may not always appreciate, such as losing a spouse, having difficulty getting out of bed or dressing, taking a lump sum reverse mortgage advance, relying on reverse-mortgage funds for too many needs, having frequent falls and being in poor health, and lacking information about private and public benefits programs for which they may qualify eventually mushroom into an inability to meet borrower obligations. Yes, they become “financial problems.” Built around traditional budget analysis, information about reverse mortgage alternatives, and disclosures of obvious borrowers’ risks, the best conventional HECM counseling often misses these existential issues and their financial implications, let alone attempts to address them. That is about to change, thanks to two evolving forensic reverse mortgage counseling tools developed by the National Council on Aging (NCOA): Financial Interview Tool (FIT) and BenefitsCheckUp (BCU). Any day now, FHA Commissioner David Stevens could issue a mortgagee letter mandating their use in HECM counseling. To understand these vital and emerging front-end HECM-borrower risk-management tools and to share that understanding with you, I spoke with Dr. Barbara Stucki, Vice President of Home Equity Initiative at NCOA. NCOA is one of four HUD HECM Counseling Intermediary organizations, and Dr. Stucki runs the national reverse mortgage counseling network for NCOA. A former researcher for the American Council of Life Insurers and AARP, Dr. Stucki directed NCOA’s highly-regarded 2005 study on aging-in-place via reverse mortgages, “Using Your Home to Stay at Home.” She has testified before Congress and the Federal Reserve Board, and her research has been quoted in the New York Times, Wall Street Journal, USA Today, BusinessWeek, Fortune Magazine, Bloomberg News, Washington Post, Money Magazine, Kiplinger’s Personal Finance Magazine, and National Public Radio, among other media. AA: What are FIT and BCU, and what are their purposes? BS: FIT is an acronym for Financial Interview Tool. It is a series of additional questions that reverse mortgage counselors will ask their clients in discussion about immediate financial shortfalls as well as their ability to stay at home over time. These questions help to inform the decision older homeowners make about the appropriateness of a reverse mortgage for their situation and the loan features that might meet their needs. BCU stands for BenefitsCheckUp. It is the nation’s most comprehensive Web-based service to screen for benefits programs for seniors with limited income and resources. Using a simplified version specifically designed for reverse mortgage counseling, counselors can quickly screen more than 1,800 public and private benefits programs from all 50 states and the District of Columbia. For seniors with limited incomes, benefits from existing federal, state, and local programs could be an important alternative or supplement to a reverse mortgage. AA: Are FIT and BCU creations of the National Council on Aging? BS: That’s right. We developed and started using the original questions for FIT when we began as an HECM Counseling Intermediary in 2007. Our national reverse mortgage counseling network is distinctive because it consists of agencies that primarily serve seniors. From the beginning, we felt that reverse mortgage counselors should discuss this loan using a holistic perspective that looks at factors that could affect a senior’s stay in the home, and their level of dependence on the loan funds. BenefitsCheckUp was developed and is maintained by NCOA. Since 2001, over 2.4 million people have used this online tool to find benefits programs that help them pay for prescription drugs, health care, rent, utilities, and other needs. We streamlined both FIT and BCU so they do not overwhelm our clients and help them look at the big picture. Seniors who have received counseling through NCOA have all gone through this process. Many have told us how much they appreciate the additional discussion. We have never received any complaint on this approach from lenders.
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AA: Why is FIT an improvement on the existing HECM counseling model? BS: For people in dire financial straits, a traditional budget analysis can be important to solve their immediate problems. HUD also recognizes the longterm consequences of taking a reverse mortgage, and FIT will help counselors engage their clients in this deeper conversation. It is a tool to promote discussion, not just a checklist. It is a way of getting people, whose judgment may be clouded by immediate needs, to think long-term about how they plan on staying at home so they can get the full value of this loan. FIT has counselors ask seniors a series of questions relating to risk factors that may not be considered a normal part of the discussion in taking out a loan. For example, is the person living alone? Have they had a recent fall? Do they live in a house with stairs or other barriers? By themselves, each of these issues may not be a risk, but they can add up. For example, seniors who live alone may have few other resources so they may be overly dependent on a reverse mortgage. If they are also in poor health and their financial needs exceed their expectations, they may soon find themselves unable to fulfill their borrower obligations, such as paying property taxes, homeowners’ insurance, and home maintenance. These types of risks, which we call “yellow flags,” are important and should be added to the overall assessment of a person’s needs and goals. BenefitsCheckUp produces a customized report, which describes federal, state, and some local programs for which a client may be eligible; it also provides contact information to help them apply for these benefits. For many middle-income families, the types of public programs they can get may be modest. But getting help with programs such as weatherization, home repairs, or with Meals-on-Wheels can make the difference between being able to stay at home, and not. AA: Is HUD going to make FIT and BCU mandatory tools for counselors? BS: That is our understanding. HUD is partnering with NCOA and the Administration on Aging (AoA) to provide the FIT and BCU as budget tools for reverse mortgage counseling. Counselors will be required to complete a budget with every client during the counseling session, based on information obtained from the client using these tools. As part of FIT, counselors will review their clients’ monthly budget shortfalls, including extra cash needed for everyday expenses, health needs, family support, and property taxes. They will also review their need for a lump sum amount to pay off existing debt, make home modifications, and to meet other financial goals. AA: What are the benefits of these tools for reverse mortgage lenders? BS: FIT can be a valuable risk-management tool for lenders. Seniors who go through counseling will receive a customized FIT summary printout, showing the types “yellow flag” issues raised and the | TRR Maythese 2010issues may have on their 24implications ability to fully benefit from a reverse mortgage.
Lenders can use this report as a tool to further conversation, understand the risks their clients may face, and for gaining insight into the suitability of the loan for different senior homeowners. Having this discussion upfront could help lenders manage reputation, litigation, and financial risks. Through FIT, NCOA also collects data on counseling clients to better understand the potential needs and risks of this group of seniors. These data could help to inform product design, develop seniorssensitivity training for lenders, and provide a better handle on the nature and magnitude of the potential vulnerabilities of reverse mortgage borrowers beyond anecdotes. AA: Now, I can see some lenders saying, “Hey, seniors go through trained counselors; that’s enough for me. Why do I have to duplicate the process by putting them through these touchyfeely questions again?” How would you respond to people who might say that? BS: Taking out a reverse mortgage is a decision that has long-term consequences and carries significant costs, so people who make these decisions about these loans should be as informed as possible. That is just good business. It is due diligence and making sure the loan is suitable for the borrower. For example, borrowers in poor health and on marginal income may find themselves at some point needing public assistance to stay at home. If they select a loan that requires a lump sum advance, they will probably not qualify for that kind of assistance. This could make it hard for them to meet their borrower obligations. For certain borrowers, the combination of public benefits with a reverse mortgage can make this whole package work. So, there are a lot of ways that lenders can benefit from this approach that looks at the bigger picture. That is part of what we are trying to do here: to think more holistically about seniors and reverse mortgages. AA: How should lenders use FIT? BS: Along with the counseling certificate, counselors will send each client a FIT review report, which includes two things — a FIT number and a list of advice that is based on the client’s responses. The FIT number summarizes the total number of “yellow flag” issues raised during the counseling session. For example, if a person is in poor health and recently had a fall, FIT will count two yellow flags. FIT numbers range from a high of 5 (no “yellow flag” issues) to a low of 1 (10 or more “yellow flag” issues). The more yellow flags, the more issues a senior is facing, and the more pressure may be put on the reverse mortgage as a solution. Lenders should encourage clients to share the FIT summary, to ensure that the choices borrowers make in taking out a loan meet their needs. It will also be important to take yellow-flag issues into consideration to ensure that clients select appropriate loan types and loan features. AA: How would a FIT number of 3 affect the selection of specific loan features?
BS: The FIT number reflects the intensity of needs that a person might have. Someone with a FIT number of three would have mentioned between four to six “yellow flag” issues during counseling. As a result, these older homeowners may be trying to solve several different problems, which can make decisions about a reverse mortgage more challenging. For example, if a borrower lives alone, is in poor health, has recently had a fall, and owns a house that has stairs, they will likely need some home modifications to live there safely. Unless they have other funds to pay for these renovations, they could benefit from a line of credit or some kind of lump sum payment. It is often a combination of problems that needs to be solved, and there may be trade-offs. Some of these needs can be conflicting. For example, the borrower may also want to have a high monthly income to enhance their quality of life. AA: I like the description of FIT number as an indication of the “intensity of need.” How should loan officers use this review?
FIT number does not mean a person should not get a reverse mortgage. It means that they are dealing with many issues, which will required a lot of thoughtful discussion, and perhaps some honesty about how long this person is going to be able to stay at home. For some, reverse mortgages may be exactly the tool that will address this diverse set of needs. One of the great strengths of a reverse mortgage is that it can be used for any purpose. Similarly, if a person has a high FIT number of 5, they may not be facing any imminent risks or cash needs. For these older homeowners, the question may be “why are they taking out a reverse mortgage”? Is it really appropriate for somebody who may not have much need for these types of loans to incur those costs? Perhaps they should wait until there is a more immediate need. On the other hand, they may want to liquidate some of their home equity so that they can prepare for emergencies. The FIT number itself does not give the answer, but it opens up a more fruitful and broader-base discussion about the various issues people are trying to solve by taking out a reverse mortgage.
BS: To the extent borrowers continue to meet their obligations, there are no risks to lenders. But, if borrowers expect to use a reverse mortgage to meet a lot of needs, then their money could be depleted very quickly. If they don’t have additional resources such as help from family or other financial assets, they could find themselves in a difficult situation. Putting those two factors together gives loan officers a better sense of the risk. To the extent that lenders keep track of a person’s FIT number, they may be able to evaluate the impact of these potential risks over time, in terms of who decides to take out a loan and whether they are likely to face foreclosure.
AA: Why are you excited about FIT and BCU for counselors and lenders?
AA: Again, you said earlier that this is a conversation tool. Somebody might have an FIT number of 1 or 2 and that might indicate a high level of risk. If a lender turns somebody like that down on the basis of a FIT number, that lender might be violating some lending rules, such as Equal Credit Opportunity Act (ECOA). If the person is in dire financial need, the lender might be doing a disservice. What should a lender do if a borrower has an FIT number of 1 or 2?
AA: Are FIT and BCU essentially HECM counseling enhancement tools?
BS: As I mentioned, the FIT number is a measure of the level and range of need, and those needs do present financial risks to borrowers. A low
BS: Counseling about reverse mortgages offers an important “teachable moment” because it occurs when people are making important decisions that could affect the rest of their lives. It is also an opportunity to reach out to middle-income families, who may not have the luxury of working with a financial planner or who may not easily qualify for public benefits. Enhancing this counseling through FIT and BCU helps to strengthen financial planning and the financial education continuum.
BS: Absolutely! That is the way we’ve always looked at it. People need to know about the loan basics, but we believe it is not just the life of the loan, but also the life of the borrower that needs to be considered in making these types of decisions. Copyright © 2010 ThinkReverse LLC/Atare E. Agbamu. All Rights Reserved.
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877.882.4368 ext. 866| 25 May 2010 TRR
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ave you ever looked at one of those pictures that at first glance appear to be nothing more than a bunch of dots and then suddenly see an image after you stare at it long enough? Personally, I have looked intently at a number of those and have never been able to see anything other than the dots. Although my inability to convert dots into pictures may indicate that I am artistically challenged, I have been able to do something similar with reverse mortgages and long-term care insurance. Like most people, at first glance it didn’t appear to me that Reverse Mortgages (RMs) and Long-Term Care Insurance (LTCi) had much, if anything, in common. However, even though I have never been able to convert dots into pictures, after years of experience in the financial/insurance industry and untold hours researching RMs, I have come to realize that there are some uncanny similarities between the two. For the most part, these similarities follow two paths; the most obvious is that they share a primary market in which they have experienced analogous growth pains, including the limited success both suffered through in their early years. The second is the hard, drawn-out fight both have waged in an effort to be accepted, regardless as to why. The fact is that both should be enjoying a much greater and more significant position then they presently do. The bright side is that the more informed your target market becomes, the greater the level of acceptance your product will enjoy. Of course, educating prospects is one thing, finding them is something else altogether. The often overlooked similarity here is that the majority of LTCi owners and prospects fit the RM prospect profile. Logic dictates that anyone who has been in the LTCi arena for any length of time has a list of seniors who would buy LTCi if they could find the money to pay for one. So the more LTCi salespeople you can bring up to speed on RMs, the greater the likelihood they will share that information with clients and prospects, which in turn greatly increases your imprint in that market place. Here is the rub: the majority of LTCi salespeople fail to see any connection between these two products, in fact many hold negative opinions about RMs. The problem here is simply a matter of education; in other words, those RM salespeople who are capable of converting dots into clear pictures for LTCi salespeople will find pots of gold.
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Consider that over 80% of all seniors surveyed say that longterm care is a great concern, yet after more than twenty years of marketing and sales efforts, less than 7% have ever bought LTCi. The reasons for this are numerous, but far and away the ability to comfortably pay the required premium(s) is the number one reason people give for not buying LTCi. So here’s a question for you: Do you think, as an RM specialist, you might have a solution for the number one problem LTCi salespeople face on a regular basis? Let’s put all the marketing approaches, sales techniques, and dazzling statistics aside and take a look at the fundamental realities most seniors are faced with prior to deciding whether or not they should use funds from a Reverse Mortgage to pay for Long-Term Care Insurance. Call me crazy, but I am going to assume that if you’re reading this magazine, you already have an elementary understanding of reverse mortgages. I am also going to assume that you are smart enough to only work with professionals in the LTCi industry who have credible experience combined with an extensive and ongoing educational background in LTCi. Even though there is no reason for you to be an expert in LTCi, it is essential that you have a rudimentary understanding of the three primary forms these policies can take. Although the benefits provided are for the most part the same, the chassis on which these policies are built on are unreservedly different. The first and most common is what I refer to as Health LTCi. These policies work similar to health insurance. Premiums are based
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on your age, health, and the coverage you want and are paid on a monthly, quarterly, or annual basis. If and when you ever need long-term care services, benefits are paid in accordance to the schedules and limits as spelled out in the policy. There are two variables that must be closely examined when we use an RM as the funding vehicle for Health LTCi. One variable is time. For the most part, in order to keep this type of cover in force, the premiums must be paid for the lifetime of the person, or until they start using benefits. In either case, we can’t just pick a number out of the air because neither you, nor the LTCi salesperson ever wants to explain how a client outlived the available RM money needed to pay their premiums. After all, the best LTCi policy in the world is worthless if it lapses before it is needed. The second part of the problem is even testier, due to the fact that LTCi policies are subject to rate increases. For some reason, there
“The problem here is simply a matter of education; in other words, those RM salespeople who are capable of converting dots into clear pictures for LTCi salespeople will find pots of gold.”
are LTCi salespeople that dance around this issue. My advice to you is that if an LTCi salesperson suggests that the policies they sell are not subject to increases, have them show you that in writing on their company letterhead. If they won’t or can’t, don’t do business with them. The second type of LTCi is Life-Long-Term care. This is nothing more than a life insurance policy that pays for long-term care services in the form of accelerated death benefits from the face value of the policy. The insurance company pays LTCi benefits from the life insurance policy until such time as the policy is depleted. At that time, additional long-term care benefits will continue to be paid from an extended Long-Term Care Insurance provider. These policies can offer clients benefits from a few years to the lifetime of the insured. There are even products that allow for the coverage of two people on one policy. One of the best features these policies offer is that any part of the death benefit that is not used for LongTerm Care is paid to the beneficiaries at the death of the insured. Another feature that separates this type of coverage for health LTCi is that premiums can never be increased. As such, it is much easier to identify how much money will be needed. The final type of LTCi we will cover in this article is annuity based LTCi; these products work very much like Life-LTCi, with the primary difference being that they don’t offer the leverage advantage that life insurance does. What I mean is that an LTC-Annuities pay benefits based on its value which is made up of principle deposits
and interest, Life-LTCi on the other hand, pays benefits from their face value, which is significantly greater than the premiums paid. Please take into consideration that it takes me three hours to cover an introductory course on these three products; these exceedingly brief descriptions should in no way be considered enough to give you even a rudimentary understanding of these products. To obtain a better understanding, you should either do your own research, which will be time consuming, or turn to those who actually sell these products. I’m willing to bet that most people working in the RM industry would take umbrage to the notion that all reverse mortgage advisors were the same, likewise you might want to keep in mind that not all LTCi salespeople are equal. The majority of Health-LTCi salespeople do not sell, and in many instances don’t even know about Life and/or Annuity based LTCi. This is not a problem unless, of course, you are under the bizarre notion that the prospects you work with should be aware of all the information and choices available to them before they make a decision on what, for many, will be the largest asset they ever own. In closing, I would like to take a moment to address all of you that have been so kind as to bring to my attention that I am using the wrong abbreviation. Here’s the skinny: in the long-term care industry the most commonly accepted abbreviation for long-term care insurance is LTCi, not LTCI.
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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.
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.
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.
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.
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.
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.
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
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May 2010
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.
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.
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.
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.
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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.
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.
Servicing reverse mortgages can be incredibly challenging, but it is truly the most rewarding job I have experienced.
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I look forward to receiving any questions you may have regarding servicing at: ryan@celink.com. There is no such thing as a stupid question. The question you ask may be in the minds of other readers as well.
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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
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Timing is critical for any business and what better time than now to be in the reverse mortgage business. Opportunities abound for those who go after the business. Lenders are positioning themselves to maintain and grow their market share of the senior reverse mortgage business. With the elimination of the Service Fee Set Aside and Monthly Service Fee on fixed rate HECMs, this change has opened up the market place in many ways. Now many more senior homeowners will qualify for a reverse mortgage, which opens up a shift in profit opportunities for originators. In October, when the new principal loan limit formula was reduced, coupled with continued reductions in home values and consumer confidence, there was a major impact on reverse mortgage originations. This was witnessed by most of us seeing our originations falling at or near 2007 levels. The move by lenders to eliminate the Service Fee Set Aside and Monthly Service Fee has and will impact origination growth positively and return growth to the industry.
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May 2010
Other significant changes, such as reductions in upfront origination fees are also having a significant impact on senior clients and originators. Most recently, one lender has now eliminated upfront origination fees for the HECM monthly adjustable and there are surely others that will follow in order to maintain their market share. Regardless of whether you are an originator, correspondent/broker or lender, you are being challenged. How long will these changes last? How should you do your pricing? As we are often reminded, our business is under a constant microscope from many venues. I made a prediction two years ago, that at some point we will move closer to mirroring the forward business and it appears that that time may have arrived. So be it, competition is good and the winners are, no doubt, our senior clients, which is the way it is supposed to work. Exciting times is an understatement! What will be next? Stick around and we will surely see more changes. Welcome to the Wild, Wild West!
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