The Reverse Review - April 2008 by The Reverse Review

THE

REVERSE “Forward Thinking in Reverse”

review Volume I, Number 1

Seniors and Reverse Mortgages: Taking a Look at the Road Ahead With the expensive costs of long term care, reverse mortgages can help ease this burden on your senior clientele.

Valerie VanBooven

Interest Rates: How Today’s Environment Can Impact Your Client Read about the past, present, and future of HECM rates and products.

Jerry Wagner Top 10 - Things You Should Know Before Oﬀering Reverse Mortgages If you are moving from forward to reverse mortgages, read the Top 10 basics before getting your feet wet.

David J. Cesario ALSO IN THIS ISSUE

Reverse Mortgage Adolescence:

How the wrong assump�ons can stunt your growth

Monte Rose

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Developmentally, the indusry has entered into its adolecent stage. Read about the Top 5 Wrong Assumptions originators make about the reverse mortgage business.

• The “ABC’s” of Reverse Mortgage Lending • Start Da�ng Your Customer? • How Do You Rate? Oﬀering LIBORbased reverse mortgages • Voice of Ignorance

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THE

REVERSE

review

April 2008

Cover Story Reverse Mortgage Adolescence: How wrong assump�ons can stunt your growth by Monte Rose

Volume I, Number 1

Start Dating Your Customer?

Read about the surprising similari�es between going out on a ﬁrst date and mee�ng your senior client for the ﬁrst �me.

by Stephen Kinney

15 Seniors and Reverse Mortgages: Taking a Look at the Road Ahead

Reverse Mortgages can help seniors stretch their spending limits to live more comfortably.

by Valerie VanBooven

10 How Do You Rate? Offering LIBOR-based reverse mortgages

Compare the Constant Maturity Treasury (CMT) rate index against the LIBOR index.

by Adrian Prieto

24 The “ABC’s” of Reverse

Mortgage Lending Learn about the basic program requirements for origina�ng Reverse Mortgage Loans.

by David J. Cesario

12 Top 10 -

Things You Should Know before Offering Reverse Mortgages

Are you just ge�ng involved? Here are the non-technical basics you need to know.

by David J. Cesario

Note From the Editor

Ask the Underwriter

Directory

The Last Word: Voice of Ignorance by David Bancro�

26 Interest Rates: How Today’s

Environment Can Impact Your Client

Do you know the history of the Home Equity Conversion Mortgage (HECM)? Read about the evolu�on of HECM rates and products.

by Jerry Wagner

Got Ar�cles? If you would like to contribute an ar�cle for a future issue, please email your ar�cle for review to editors@reversereview.com

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Editor Aman Makkar Design Editor Harpreet Makkar Production Manager Jason Westbrook Sales Manager Gina Smiar Printer The Ovid Bell Press, Inc. Contributing Authors Monte Rose Stephen Kinney David Cesario Adrian Prieto David Bancro� Valerie VanBooven Ralph Rosynek

Advertising Information

Rates, speciﬁca�ons, and deadline informa�on available. phone : 858-217-5332 email : adver�sing@reversereview.com

Subscriptions and Editorial Content

phone : 858-217-5332 email : informa�on@reversereview.com website : www.reversereview.com THE

REVERSEreview 10801 Thornmint Rd Suite 250 San Diego, CA 92127

© 2008 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. Reproduc�ons or distribu�on of any materials obtained in the publica�on without wri�en permission is expressly prohibited. The views, claims and opinions expressed in ar�cle and adver�sement herein are not necessarily those of The Reverse Review, its employees, agents or directors. This publica�on 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 informa�on presented herein, The Reverse Review, LLC is not responsible for any errors, misprints, or misinforma�on. Any legal informa�on contained herein is not to be construed as legal advice and is provided for entertainment or educa�onal purposes only. Postmaster : Please send address changes to The Reverse Review, 10801 Thornmint, Ste 250, San Diego, CA 92127

April 2008

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“Forward Thinking in Reverse”

Note From the Editor Have you ever reached a �pping point? Many of you may know what a �pping point is, some may not. A �pping point, according to Malcolm Gladwell, author of The Tipping Point: How Li�le Things Can Make a Big Difference, is a level at which the momentum for change becomes unstoppable. Here’s a short story about how I reached my �pping point. I a�ended the February 2008 Na�onal Reverse Mortgage Lender’s Associa�on (NRMLA) regional conference in Denver, Colorado. Compared to the annual NRMLA conference held in San Diego last year, this was an in�mate gathering of reverse mortgage professionals who were here to educate, or to be educated. I was there to be educated. I’m the CEO of an appraisal management and technology company, AppraiserLo�.com. My interest in the reverse mortgage industry came to life through AppraiserLo� a year ago when we saw a no�ceable increase in FHA reverse mortgage appraisal requests. As the requests came in, every week and every month we would see more and more originators ordering FHA appraisals for reverse mortgages. This intrigued me. I knew what a reverse mortgage was, but I didn’t realize how or why the industry was growing… which was very rapidly. As I normally do when something intrigues me, I “googled” reverse mortgages, and then “googled” again every company that turned up in the search results. The results were endless. There were a plethora of websites with oversized fonts and cozy images of elderly couples. I was now on a mission to learn everything I could about reverse mortgages. A�ending reverse mortgage conferences and trainings was just a way for me to further educate myself, even though I wasn’t involved as a retailer or wholesaler. While being educated in Denver, I reached a personal “�pping point”, the point at which I was pushed over the edge and caused to do something I may not have normally done. For me, that was star�ng a publica�on. I quickly realized this industry was growing rapidly, we were star�ng to see the early signs of satura�on, and this was caused by many forward mortgage originators seeing the light. With my technology background, star�ng a print publica�on was not a part of my game plan; but I saw a different light. Our mission in launching this publica�on is to educate and create awareness in the industry. The gleam of big commissions and seemingly easy sales causes many to originate reverse mortgages for the wrong reasons. We love that originators are ge�ng involved, but it must be for the right reasons. We have an opportunity to help seniors through their re�rement years with a special product that can ease their financial worries. The purpose of this publica�on is therefore to work together, help one another, and create a community of reverse mortgage professionals that will con�nue to help this industry grow in the right direc�on. I personally invite everyone who reads this to contact us, find a way to contribute, and help us protect this industry in the many years to come. Thank you for picking up our premier issue of The Reverse Review. We look forward to working with you in the near future.

April 2008

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Ask the Underwriter by Ralph Rosynek

A compila�on of ques�ons for, and answered by a HECM Direct Endorsement Underwriter. Today’s ques�ons are answered by Mr. Ralph Rosynek of 1st Reverse Financial Services, LLC. Mr. Rosynek has been a HECM DE Underwriter for over 4 years and is also one of the founding members of 1st Reverse Financial Services, LLC, a na�onal wholesale reverse mortgage lender based in Westmont, Illinois.

Q: A:

Can any FHA Direct Endorsement (DE) Underwriter underwrite an FHA Reverse Mortgage Loan?

The short answer is no. Addi�onal training and test cases are required by an approved FHA Mortgagee (Full Eagle) desiring to underwrite and insure Home Equity Conversion Mortgages (HECM’s). For speciﬁc creden�al requirements and approval informa�on, DE Underwriters should contact their respec�ve Underwri�ng Branch Team Coordinator through the Home Ownership Center (HOC) which granted their original approval.

Q: A:

What is underwri�en in a Reverse Mortgage loan since credit scores are not used for qualiﬁca�on?

While credit scores are not used, the credit report is an essen�al part of the underwri�ng process for purposes of assessment of federal debts and obliga�ons which may impact the final reverse mortgage decision if they are a�ached to the property and/or are past due. Also, the appraisal becomes a key component in the final underwri�ng decision in addi�on to the preliminary �tle report with correctness and completeness of disclosure, counseling requirements, and verifica�on of the borrower’s eligibility being priority ac�ons as well. A thorough working knowledge of property ves�ng, trusts, life estates �tle clearance requirements and investor guidelines is also a prerequisite skill set to complete the reverse mortgage underwri�ng. Perhaps the best comparison would be the actual

April 2008

diﬀerence in approach to the underwri�ng process. While the “forward” market is fairly automated with AUS technology, the HECM underwri�ng process is largely manual and not “technologically” assisted. The mind-set of the HECM underwriter is similar to that of a collateral auditor and the process is fairly structured. Unlike the forward market, there are very few, if any, “compensa�ng factors” which when reviewed would overturn or correct a fault/failure of the borrower or collateral. Ul�mately the decision not to approve is based upon the inability of the borrower to meet program requirements, the collateral mee�ng safety, soundness, occupancy and/or established minimum property standards.

Q: A:

Is There a Special Appraisal Required for a Reverse Mortgage Loan?

With the excep�on of the Fannie Mae HomeKeeper, all HECM products require a sa�sfactory review of a standard FHA Appraisal for purposes of loan approval.

Do Late Payments, Credit Collec�ons or Even Foreclosures Prevent Borrowers from Qualifying for a Reverse Mortgage Loan?

Borrower qualiﬁca�ons for a HECM do not include credit ra�ngs, FICO scores or payment history. The presence of collec�ons on the credit report, unless Federal in nature, do not typically preclude a borrower from eligibility nor do foreclosures (unless the property has been sold) or many other types of credit issues. Credit concerns become a priority for the underwriter when there may be or is a poten�al for a�achment to the real estate collateral. Generally, when the credit issue is in the form of a lien/encumbrance against the property, the underwriter must resolve the issue per guidelines in order to allow for the transac�on to be insured.

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“Forward Thinking in Reverse”

Is It Possible That Someone Applying for a Reverse Mortgage Loan Would Ever Be Rejected, and if so, Under What Condi�ons?

Yes, reverse mortgage loan applica�ons can, and some are, rejected. The most obvious would be a borrower or co-borrower not yet 62 years of age; borrowers not occupying the property as his or her primary residence, or when total indebtedness to be repaid exceeds the principal limit available for the requested HECM product and other means to address the funds shortage are unavailable. Addi�onally, there may be speciﬁc collateral, legal or borrower credit issues which may preclude the transac�on from being approved should they remain unresolved.

A note about our subject ma�er expert: Mr. Rosynek has been involved in mortgage lending for over 30 years with the last 5 + years exclusively providing reverse mortgage lending solu�ons. To contact Mr. Rosynek or to learn more about 1st Reverse Financial Services, please visit www.1streverse.com or call 877-574-1000.

Have a question for the underwriter? send your questions to asktheuw@reversereview.com

April 2008

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Start Dating Your Customer? by Stephen Kinney

Not Really but, developing a client or mortgage referral rela�onship is a lot like da�ng. If you talk too much during the first date, and don’t ask your date about themselves, then you are not likely to get a second date. For sure if you ask them to marry you, you will be out on the curb. Many reverse mortgage salespeople have trouble ge�ng started on a sales campaign, especially to referral sources. A large part of the problem for many reverse mortgage salespeople is that they have the wrong expecta�ons of success. Here are some interes�ng sta�s�cs: • Only 1% of all sales are made a�er the first contact with a Client or Referral Source! • Only 50% of loan officers ever make the second contact! • Over 80% never make a third contact! • 81% of all sales are made a�er the fi�h contact! • Only 8% of loan officers ever make the fi�h contact! The first thing you must realize is this; Stop selling in the early calls and start learning! Resist the urge to get to the proposal right away. The harder you sell when you first contact a client or referral source, the less likely you are to find success. Your prospect might not even want to see you again! Instead, you need to create a blueprint for a successful sales or referral campaign that is based on as series of encounters over a set period of �me, with a minimum contact of at least 2 to 3 �mes a week. Like da�ng, the expecta�ons for the ini�al calls should be limited and build on past calls. If you don’t call again within a reasonable amount of �me the person you are trying to woo may think you lost interest. As the rela�onship becomes more comfortable, you can ask for more, and expect more, from the person you are cour�ng.

April 2008

It is important that you give the rela�onship a fair chance, If over �me, however, the rela�onship does not meet your expecta�ons you should seek a more suitable partner, one who will fulfill your needs. To be sure no one wants to be stuck in a dead end rela�onship. There are plenty of fish in the sea, so don’t be afraid to try your luck somewhere else. Here are a few ques�ons to ask yourself to determine the success of a sales call: • Did I do far more listening than talking? • Did I learn the important needs and wants and explore them in depth? • Do I know the problems he or she faces, and will I be able to help in some way? • What are his/her expecta�ons of me? Did I find out the most important things he or she looks for when working with a mortgage pro? • Did I create a common ground of personal and professional interests? • Did I make a personal connec�on? • Did I set a follow-up mee�ng that will add value and take the rela�onship to the next level? Like da�ng, reverse mortgage sales can be hard, there are lots of opportuni�es for rejec�on, and both par�es might get hurt. However, the more you date, the easier it gets. You’ll learn the things that work, things that don’t, and you get be�er at it. Sales is the same way, the more you sell the easier it gets, and over �me, you enjoy it more and even thrive on it. We all know someone who dates frequently and easily, and you envy him or her. I bet if you ask them why they date so much they will say, “I like the prac�ce”. About Stephen Kinney: Stephen Kinney is CEO of Stephen Kinney Associates a company that specializes in training and consul�ng services to the reverse mortgage industry. Stephen has 26 years experience in the mortgage industry and an expert in reverse mortgages.

“Like da�ng, reverse mortgage sales can be hard, there are lots of opportuni�es for rejec�on, and both par�es might get hurt.” reversereview.com

At Lender Lead Solutions we know that one size doesn’t ﬁt all. Products for every client; Wholesale for every lender

A traditional, government-insured Reverse Mortgage.

For clients who want the comfort of a ﬁxed rate.

Lower closing costs and eligibility starting at age 60.

Clients can make the most of their higher-valued homes.

To contact Lender Lead Solutions call 888.775.3631 or visit our website at www.lenderleadsolutions.com This is for mortgage professional use only, not for distribution to the general public.

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How Do You Rate?

Oﬀering LIBOR-based reverse mortgages beneﬁt you and your borrower by Adrian Prieto

If you are reading this, it is likely you realize the significant impact reverse mortgages have made on the industry during the past year. The number of brokers moving into the reverse mortgage marketplace con�nues to climb daily. The fact that Baby Boomers are turning 60 at a more rapid pace, combined with the constant uncertainty of the forward mortgage industry has many brokers looking to reverse mortgages as a niche product offering that can help them in differen�a�ng their business. From a lender’s perspec�ve, the current market condi�ons have provided an opportunity to offer improved reverse mortgage products that not only compete, but also present greater value to both senior borrowers and brokers, while assuming less risk in the secondary market. Since the introduc�on of the reverse mortgage product, lenders and brokers have generally calculated the Home Equity Conversion Mortgage (HECM) based on the CMT (Constant Maturity Treasury) rate index. The CMT index is an average yield on United States Treasury securi�es adjusted to a constant maturity of one year, as made available by the Federal Reserve Board. While the CMT rate index has typically been the index used when genera�ng reverse mortgage loans, new programs have recently been introduced that offer different interest rate op�ons benefi�ng both the borrower and broker. LIBOR index offers new benefits In July 2007, the Department of Housing & Urban Development (HUD) approved the use of the LIBOR (London Inter-Bank Offertory Rate) index for all FHA ARM and HECM products. HUD issued a Mortgagee Le�er to inform lenders of the changes in Federal Housing Administra�on (FHA) opera�ons, policies and procedures, at which �me lenders were approved to rollout a LIBOR-based HECM product. The LIBOR index provides a daily rate of interest at which banks offer to lend unsecured funds to each other in the

April 2008

wholesale money markets, making it the index for all of the secondary liquidity measures. To determine the amount of a loan, the LIBOR product uses an ini�al rate and an expected rate, similar to the way the CMT index works. Making the switch Currently, most HECM reverse mortgages are offered to borrowers based on the CMT rate while banks borrow money based on the LIBOR index, making it a challenge to effec�vely price the loans because of the difficulty to predict the future spread of the CMT and the LIBOR index. Historically, the spread between the CMT and LIBOR rates has created a greater cost to fund HECM loans resul�ng in reduced margins. This spread between CMT and LIBOR has caused a reduc�on in the value of HECM loans in the secondary market, crea�ng lower returns on HECM products sold. As a result, lenders have either had to reduce their payout to brokers or discon�nued offering the lower margin op�ons such as the HECM 100. “Most investors in the secondary market like assets that are LIBOR-based, which forces lenders to enter into a swap to convert the return from HECM CMT-based products into LIBOR-based,” said Gagan Sawhney, managing director of KBC Financial Products. “This hedge is expensive and imperfect. Though the senior does not directly pay for it, banks do factor these costs when they design reverse mortgage products. By origina�ng LIBOR-based assets, banks are effec�vely taking out a ‘middle man’ that provides the CMT/LIBOR swap, making the structure more streamlined.” The LIBOR rate index is widely used in the forward mortgage marketplace, and so the migra�on to LIBOR-based products seems to be �mely for the reverse mortgage industry. LIBOR products with flexible margins provide brokers added margin while giving them the flexibility to structure rates and loan closing costs to meet the individual needs of

“Most investors in the secondary market like assets that are LIBOR-based, which forces lenders to enter into a swap to convert the return from HECM CMT-based products into LIBOR-based” reversereview.com

“Forward Thinking in Reverse”

borrowers. This in turn keeps brokers from being exposed to market vola�lity and allows them to increase profitability at the same �me. How do senior borrowers benefit? When considering the reverse mortgage demographic, perhaps the most important aspect of LIBOR-based products is the benefit they offer to senior borrowers. As reverse mortgages have become more commonplace, borrowers are now seeing them as a way to not only stay in their home, but to maintain their desired lifestyle. Seniors are typically looking to maximize the amount of cash they can receive from the equity in their home while minimizing upfront costs, instead of seeking a lower interest rate over the life of the loan. The interest rate for the loan, while important, does not have the same relevance as in a tradi�onal mortgage, as the borrower is not as rate-driven. A�er paying off their exis�ng mortgage, the remaining cash available to them from a reverse mortgage is far more advantageous than a modest credit line. Addi�onally, the use of LIBOR based HECM products shows no effect on the borrower’s loan proceeds and the net principal limit provided by either rate is comparable. Brokers also benefit Brokers can provide benefits back to the borrower while also earning more than if they offered a HECM CMT product. Because HECM loan rates based on the LIBOR index provide a broker with a higher unpaid principal balance (UPB), or yield spread premium (YSP), the broker is able to maximize the borrower’s equity proceeds by decreasing the upfront costs to the borrower. The LIBOR products based on flexible margins enable brokers to increase or decrease margins in order to eliminate upfront costs associated with a reverse mortgage or provide seniors with greater discounts. Brokers are able to absorb these costs due to the increased premiums available through LIBOR-based products, allowing them to earn more money to grow their business. Lenders can encourage the growth of this product among brokers by providing the tools necessary to make for a smooth transi�on, such as loan calculators and training programs that assist in educa�ng the consumer and offering the right product.

tradi�onal expecta�ons of secondary capital markets. As the market con�nues to evolve, the switch to LIBOR reverse mortgage products should con�nue to grow among lenders who want to oﬀer more stable, risk averse products. The product is �mely for the industry, and the beneﬁts to both the broker and senior borrower make it a highly logical op�on. About Adrian Prieto: Adrian Prieto is vice-president of sales for Lender Lead Solu�ons, a reverse mortgage wholesale lender and a division of World Alliance Financial Corp. Prieto’s responsibili�es include managing customer rela�onships for the eastern region of the United States. He has served more than ten years in the reverse mortgage industry.

“As reverse mortgages have become more commonplace, borrowers are now seeing them as a way to not only stay in their home, but to maintain their desired lifestyle.”

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Conclusion Introducing products with the LIBOR rate index is a cri�cal step for the reverse mortgage market as it aligns with

April 2008

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Top 10

Things You Should Know Before Oﬀering Reverse Mortgage by David J. Cesario

With the current tumult in the residen�al mortgage lending industry, lenders are looking to new and innova�ve products to augment their product offerings and to generate new revenue streams from new customers. Reverse mortgage loans (although not a new product - - formally introduced in 1989) is one of the very few lending programs today that presents lenders with an exci�ng product with a vast poten�al customer base. More and more lenders are looking into offering reverse mortgage products, but before you “jump” into this brave new world, you must do your homework and gain a basic understanding of the program and how to successfully interact with a different borrower demographic, the senioraged borrowers. With this in mind, I believe there are ten cri�cal things that you must know or consider before your company decides to offer reverse mortgage loans:

Reverse Mortgage Lending is Not Just a “New” product for your company; it’s a “New Business”. Many experienced lenders subscribe to the no�on that “a loan is a loan”. That is absolutely not true with regard to reverse mortgage lending. The process of finding poten�al customers, product features and transac�onal requirements along with the back room processes are different from most other loan programs you have ever offered. While reverse mortgage lending is not rocketscience, it is clearly different and dis�nct from anything you may have previously done. To be successful in reverse mortgage lending, I recommend you consider this as a new business within your business and not just a new loan product. This mind set will prove useful as you develop the program within your organiza�on.

just the opposite of what you would expect would be true is actually true in reverse mortgage lending. The hard part is to set aside some of your past experiences to learn new methods that are eﬀec�ve in reverse mortgage lending. This may be one of the rare excep�ons where your experience as a lender may actually be a disadvantage.

It is Time to Learn a New Language! The following, familiar mortgage terms really do not apply to reverse mortgage lending: LTV, Credit Scores, Ra�os, Reserves & APR. These new phrases or acronyms will need to incorporate into your vocabulary if you are a reverse mortgage lender: TALC, Servicing Set-aside, Maximum Claim Amount & Principal Limit. As they say, when in Rome...

You Cannot “Sell” a Reverse Mortgage Loan. Reverse mortgage borrowers are very skep�cal and require a signiﬁcant amount of �me, educa�on and resources to familiarize themselves with the product. If you a�empt a “one-call-close” on a senior-aged borrower, you will ﬁnd that your conversion rates will be unacceptably low. Take the �me to educate poten�al borrowers and they will turn into customers, if and when they are ready.

Tradi�onal Loan Marke�ng Efforts Do Not Generate the Same Response Rates. Most tradi�onal marke�ng programs (i.e., telemarke�ng, direct mail, etc…) do not generate the same conversion rates for reverse mortgage borrowers. Different marke�ng approaches should be considered as you chose to market to senior-aged borrowers. Do not expect to just “plug-in” the reverse mortgage program into your current marke�ng methods. While you may achieve limited results, these results will be significantly different than past experiences would indicate.

Forget most of what you know about how tradi�onal mortgage loans work. The unique features of a reverse mortgage loan are o�en counter to the knowledge base you have amassed during your career. In many cases,

April 2008

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“Forward Thinking in Reverse”

Get Ready To Create a New Type of Loan Originator! Your best “forward” mortgage loan originator may be completely ineffec�ve in producing reverse mortgage loans. Some�mes the high powered, high intensity originator that is currently your top producer may actually turn off reverse mortgage borrowers. Reverse mortgage borrowers respond well to those originators who listen well, are not opposed to spending significant �me educa�ng and can empathize. It’s not a ma�er of hand holding for reverse mortgage borrowers, it’s a ma�er of building trust and confidence that the decision they are about to make is the right decision.

Some�mes the Prospect You are Working With Won’t Apply for Years! You should plan on a long-term customer informa�on and marke�ng strategy for poten�al reverse mortgage customers. While it is true that a number of borrowers will make a decision rela�vely quickly regarding if a reverse mortgage is right for them or not; don’t be surprised if it takes a while for the decision to be made. In fact, it might even take years! By way of example, our current company record is a prospect that we pre-qualiﬁed that actually began their reverse mortgage applica�on 3 years a�er the ini�al contact! While this is obviously the excep�on to the rule, don’t be surprised if your customer takes a while to decide. Stay in touch with them, but don’t try to hurry them into a decision.

Your Company Does Not Have to be FHA Approved to Offer FHA-Insured Reverse Mortgage Loans! If your company is FHA approved, then you are already authorized to offer FHA-insured reverse mortgage loans. But did you know that non-FHA approved lenders can offer reverse mortgage loans too? HUD has created a methodology that allows nonFHA approved lenders to offer FHA-insured reverse mortgage loans under a program referred to as the HECM Advisor program. A HECM Advisor can educate borrowers on FHAinsured reverse mortgage loans and assist with a number of func�ons that takes the borrower to the point where they are ready to apply. The HECM Advisor cannot take an applica�on for an FHA-insured reverse mortgage program. They must have an established rela�onship with an FHA approved lender, who will actually originate and transact the reverse mortgage loan.

This is a great tool for many banks and other lenders who do not have, or do not wish to have FHA lending creden�als; but are s�ll interested in providing access for borrowers to FHA insured reverse mortgage loans.

Do not Begin Processing a Reverse Mortgage Loan Un�l the Mandatory Counseling is Complete! One unique feature of a reverse mortgage loan is the requirement that borrowers complete a reverse mortgage counseling session with an approved reverse mortgage counselor PRIOR to the start of their transac�on. This is an addi�onal layer safeguards and protec�ons provided to reverse mortgage borrowers to ensure that they fully understand the transac�on they are about to take part in. If your company originates a reverse mortgage loan and begins processing the applica�on prior to the comple�on, issuance, and signed acknowledgement on a Counseling Cer�ﬁcate, your company will not be able to charge the borrowers for any services ordered (third-party or otherwise). It is a great way to lose a lot of money for your company, so my advice is to make sure the counseling is complete before beginning the transac�on!

If Frequent Program and Product Changes Cause You Problems, Then Don’t Become a Reverse Mortgage Lender! The only certainty about reverse mortgage lending is that which exists today is certain to change. By way of example, only two years ago there were 3 types of reverse mortgage loans to choose from FHA monthly adjustable, FHA annual adjustable & Fannie Mae annual adjustable. Today, there are mul�ple products to choose from and more are on the drawing board to be released in the near future. Most the changes have been for the benefit of the borrowers and the new op�ons give lenders many new ways to assist borrowers. From fixed rate FHA-insured loans to JUMBO reverse mortgage loans that can even finance second homes, the reverse mortgage product is ever changing. The ability to adapt to changes in the reverse mortgage world is a must. As the product con�nues its growth to maturity (which is s�ll somewhat in the future), the only certainty is that change will happen, and happen regularly. In conclusion, reverse mortgage lending is a tremendously rewarding and exci�ng new opportunity for

April 2008

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lenders to serve a special market. I strongly encourage you and your company to explore the possibili�es that reverse mortgage lending oﬀers, but be sure you look carefully before you leap. About David Cesario: David Cesario is the Execu�ve Vice President of 1st Reverse Financial Services, LLC, a na�onal wholesale reverse mortgage lender, located at 410 Quail Ridge Drive in Westmont, Illinois, 60559. The company’s website is located at www.1stReverse.com where informa�on can be found about 1st Reverse’s wholesale lending programs and op�ons for lenders interested in oﬀering reverse mortgage loans.

�� If you would like to receive The Reverse Review in your oﬃce, please visit us at reversereview.com or call us at (858) 217-5332

“Your best ‘forward’ mortgage loan originator may be completely ineﬀec�ve in producing reverse mortgage loans.” advertisement info@RMInsight.net h�p://www.RMInsight.net (949) 429-0452

New Reverse Mortgage Market Opportunity Report Gives Originators ‘In-The-Know’ an Edge Aliso Viejo, CA - April 7th, 2008 - Doing their part to ensure another banner year for reverse mortgages, Reverse Market Insight, Inc. (RMI) seeks to improve the reverse mortgage industry’s already incredible growth with the innova�ve new ‘Market Opportunity Report’. Un�l recently, due to their “newcomer” status on the financial services scene, reverse mortgage originators have suffered from a profound lack of reliable market intelligence. RMI’s new Market Opportunity Report now allows key decision-makers to efficiently allocate both marke�ng dollars and sales representa�ves in geographic loca�ons that offer the best chance to mone�ze their efforts based upon the size of new customer and refinance markets, average transac�on amounts, and the degree of local compe��on. Knowing where a refinance strategy will be profitable or where the compe��on is likely to affect poten�al origina�on fees is key to maximizing revenues in this growing field. The report also conveniently illustrates those states and coun�es na�onwide that would provide higher conversion rates (i.e., more customers and/or lower penetra�on) or be�er origina�on fees (fewer compe�tors), resul�ng in substan�al improvements in marke�ng campaign ROI. The Market Opportunity Report will also benefit reverse mortgage business planning, as lenders will now understand the actual size of the total market opportunity for reverse mortgage origina�ons, as well as have the ability to compare recent growth rates to quickly iden�fy the most ac�ve markets. This report compliments RMI’s first offering, the already successful HECM MIC Report which provides origina�on units volumes, market share and ac�ve lenders counts, including growth rates and distribu�ons, across mul�ple geographic regions na�onwide. “By launching this service, we are pleased to answer our customers’ call for data-driven targe�ng informa�on in an increasingly compe��ve reverse mortgage marketplace, and underscore our commitment to innova�ve reverse mortgage intelligence solu�ons” said John K. Lunde, President of RMI. About RMI - Reports, KPIs (key performance indicators) and metrics are useless unless they are rooted in a solid understanding of your business. RMI’s unmatched experience with and exclusive focus upon the reverse mortgage industry allows for trusted solu�ons to your most difficult problems. Providing the complementary services of Market Intelligence, Business Intelligence, and Reverse Mortgage Consul�ng, RMI offers unique exper�se and unparalleled excellence in strategic decision making for the reverse mortgage industry. Please visit www.RMInsight.net for more informa�on. For A Sample Report Sent Directly To You At Absolutely No Charge, Email RRSample@RMInsight.net Today

April 2008

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“Forward Thinking in Reverse”

Seniors Taking anda Look Reverse Mortgages: at the Road Ahead by Valerie VanBooven

As “market weary” mortgage brokers look for a place to hang their hat, the Reverse Mortgage Industry seems like a good fit (and it is a good place to be!). The warning shot across the industry has already been firedthe message reads: ‘one bad apple can spoil the whole bunch’. Everyone who enters this highly regulated market needs to stand back and assess their true interest and reasoning for working with seniors, and for good reason. Senior law and senior needs are complicated at best. One wrong move by a well-meaning originator can disqualify a senior from much needed long-term care services down the road. That being said, there is a fantas�c synergy between long-term care and the Reverse Mortgage product. It’s all about suitability and appropriate case design strategy. Each senior and each family has their own set of issues, needs, and expecta�ons for how the senior family member will live out their remaining days. Staying at home is obviously the first choice for most of us. Maintaining our independence and choice is just as important. Involving adult children of aging parents in this type of financial transac�on is almost always a good idea- everyone needs to be on the same page. Reverse Mortgages and LongTerm Care fit together in two ways: 1. Using Reverse Mortgage proceeds to pay for care that is needed in the home right now. 2. Using Reverse Mortgage proceeds to pay for Long-Term Care Insurance premiums so that when care is needed in the future, the senior has coverage to receive care at home. April 2008

It’s important for all of us to understand what the true cost of care is in the U.S. today. • The na�onal average daily rate for a private room in a nursing home is $206, or $75,190 annually. • The na�onal average daily rate for a semi-private room in a nursing home is $183, or $66,795 annually. • The na�onal average hourly rate for home health aides is $19. For only 5 hours of care 7 days per week, the monthly average cost is $2660 per month or $31,920 annually. • The na�onal average hourly rate for homemakers/ companions is $17. For only 5 hours of care 7 days per week, the monthly average cost is $2380 per month or $28,560 annually. Privately paying for long-term care means that a senior would have to find an addi�onal $28,560 to $75,190 per year in their budget for just ONE person to receive care. Most of us, seniors or not, could not afford to privately pay for our own care year a�er year. Long-term care insurance will pay for in-home care, assisted living, and nursing home care. This is the most appropriate and needed form of insurance protec�on available to us today. Long-term care insurance should be termed “lifestyle” insurance (it’s NOT nursing home insurance!). Reverse mortgages (Home Equity Conversion Mortgages) have become one of the most popular and accepted way of paying for many different expenses, including the cost of long-term care. Reverse mortgages are designed to keep seniors at home longer. A reverse mortgage can pay for in-home care, home repair, home modifica�on, and any other need a senior may have.

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Example: The Stephenson Family Story Jim and Sue Stephenson (ages 72 and 65) have lived in the same home in Des Moines, IA for 30 years. Admi�edly, their home is less than senior friendly. Jim’s knee problems make it diﬃcult for him to get up and down the stairs. He does not qualify for LongTerm Care Insurance. He and his family know he is at a signiﬁcant risk for falling. Their 2-story home is worth about $150,000 and is paid in full. They do not want to move at this �me. Jim and Sue’s children have become increasingly worried about the two of them living at home without assistance.

The annual premium total for both to have coverage is $5460.

A�er a one-hour consulta�on and some educa�on on the op�ons, the Stephenson’s decided to take ac�on. Home modifica�on and repair were one of their first priori�es, but the repairs would be expensive. Jim and Sue decided to take out a reverse mortgage to help them afford the needed maintenance. They were able to receive approximately $71,000 from the equity in their home. They used the cash to install a stair li� for Jim ($2500). They also installed safety bars in all bathrooms and showers and installed a safety rail in the hallway for Jim to hold on to if needed ($800).

They can also leave the $99,657 in a line of credit.. This means that if they didn’t need the extra cash for any reason, they could take approximately $6328 annually out of their line of credit to pay for their long-term care insurance premium.

They then decided to purchase a personal emergency response system for their home in the event that Jim or Sue need addi�onal assistance ($35/month). Sue and her children could feel comfortable leaving Jim at home for short periods of �me - long enough to do the grocery shopping or run other errands. Jim and Sue’s children have peace of mind knowing their parents are safe. Jim and Sue le� the rest of the money from the reverse mortgage in a “line of credit” and will access it as needed for further repairs, maintenance or upgrades. In this case, the Reverse Mortgage was absolutely an appropriate planning strategy for the Stephenson family. Today many seniors who are healthy enough to qualify- are taking advantage of reverse mortgages to pay their longterm care insurance premiums. Example: Aﬀording Long-Term Care Insurance

Mary and Joe Brown live in St. Louis, Missouri and are both 65 years old. They own a home worth $200,000. Both are in good health. They are interested in a 5 year long-term care insurance plan, with compound inﬂa�on protec�on, and a 90-day elimina�on period (wai�ng period). They chose $150 per day coverage because they have other income and assets to make up for any shor�all. The average cost for a nursing home bed in 2008 is around $206 per day.

April 2008

The Browns are eligible to receive $605 per month for life from the equity in their home (a reverse mortgage), or a lump sum of $99, 657, or any combina�on of the two.

Alterna�vely, they could pay their monthly premium of $455 with the $605 monthly check that they would receive from the reverse mortgage lender. Either way they have protected themselves from the catastrophic expense of long-term care without touching a penny of their savings, investments, or current income. The Browns really wanted to give their children the value of their home as an inheritance. They were concerned that if they took out a reverse mortgage to pay for long-term care insurance, there wouldn’t be anything le� over to give their children! So in addi�on, the Browns increased the value of their estate for their heirs by purchasing a “2nd to Die” life insurance policy (which pays a�er both spouses have passed away) for $350,000. This leaves an inheritance of $350,000 for their heirs instead of the $200,000 home value. Plus, that inheritance of $350,000 is all tax free money for their heirs, and avoids probate. Finally, it is important to remember that although Medicare is not aﬀected by Reverse Mortgage proceeds, Medicaid (Medi-Cal in California) is easily aﬀected without

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proper planning. None of us know for sure what the future holds with regard to long-term care. However, when working with seniors who have no assets other than their home, and cannot qualify health-wise for long-term care insurance, beware of Medicaid qualifica�ons looming down the road. Dumping a lump sum of money from a Reverse Mortgage into the checking or savings account of a senior can have serious consequences with regard to Medicaid. They may end up being disqualified un�l that money is spent down to almost nothing. As stated from the beginning, senior laws and issues are complicated at best. Anyone who works with seniors, especially in the Reverse Mortgage Industry should brush up on some of the facts related to long-term care and Medicaid in their state. Network with senior service providers who deal with the law on a daily basis- including elder law a�orneys, geriatric care managers, and long-term care insurance specialists. Those professionals are not only good referral sources but can help you be a be�er advocate for the seniors and families you serve. Valerie VanBooven RN BSN is the Na�onal Marke�ng Director for Next Genera�on Financial Services, a Division of 1st Mariner Bank. She is a professional speaker and the author of the books “Aging Answers” (2003) and “The Senior Solu�on” (2007). Her websites are www.ngfs.net and www.seniorserviceselling.com . Valerie can be reached at valerie@nextgenfinser.com

“Privately paying for long-term care means that a senior would have to ﬁnd an addi�onal $28,560 to $75,190 per year in their budget for just ONE person to receive care.”

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Reverse Mortgage Adolescence:

How the wrong assumptions Adolescence is an interes�ng developmental stage. Among other things, it’s a period when can stunt your growth we think we know far more than we really know. by Monte Rose

We’ve all said, “It’s funny how smart my father became a�er I was grown up.” Developmentally, the industry has entered into its adolescent stage. We are in a period of rapid change. We’re growing like crazy, a li�le insecure, and ﬁnding our own “look and style.” Originators are ﬂocking to the space. Some

“Forward Thinking in Reverse”

entrants to the marketplace are searching for their iden�ty or re-branding themselves to the mature market buyer, others are content to “live with their brand” and amplify it. However, simple demographic segmenta�on is far too incomplete to provide laser-like direc�on for the selec�on of media and message preferences. The reverse mortgage space always had an element of the unconven�onal. Its inhabitants or prospects are unique and complex. To become acclimated to the environment requires pa�ence and an appe�te. The purpose of this ar�cle is to iden�fy and describe the key assump�ons about the reverse mortgage business that many people miss. Success is not just a ma�er of will power and stamina, although these are certainly important prerequisites. The essen�al determinant for sustained success is correct insight, underlying strategic and tac�cal execu�on. “Wrong strategy” can be a result of a “correct solu�on” applied to the wrong set of assump�ons. It is cri�cal that one is able to formulate (and test) the “basis of the game” (i.e., the map) against the objec�ve reality. The key is to see things the way they truly are, rather than what we expect them to be. Formula�ng correct strategy depends on having the correct assump�ons about the market -- its dynamics, its terrain, and its cons�tuents. Clarity begins when we are able to confront the validity of widely accepted, conveniently lingering assump�ons from a previous era. The Top 5 Wrong Assump�ons about the reverse mortgage business:

Wrong Assump�on #5: Intelligence Wins It’s not just adolescents who presume to have all the answers. For centuries, smart people have made erroneous assump�ons and thus, blinded themselves from seeing opportuni�es and deprived themselves of progress. “The world is flat.” “The earth is the center of the universe.” The belief and ensuing confidence that because “we’re smart” and/or possess a track record of “success,” we’ll do well in reverse may blind us from exploring the depth and sophis�ca�on of the RM space. Larry Wilson offers these words of cau�on. “Nothing fails like success.” What worked before, in a different marketplace, may not work now. The converse Correct Assump�on #5 is: Engagement Wins At first blush, this may sound “so�.” But think about the products you purchase which have a very low “emo�onal quo�ent.” Why are you so loyal to the product or provider? You and the brand have made an emo�onal connec�on -- whether you’re a BMW guy (the ul�mate driving machine), a Rolex lady (luxury), or a FedEx person (When it absolutely posi�vely has to get there). Engagement is about branding and loyalty. There’s nothing “so� ” about the benefits derived from emo�onal engagement. It’s all about Customer Experience.

5. Intelligence Wins - The reality is Smarts and Hearts win. 4. Anyone can sell this stuﬀ - The reality is not many do this well. 3. Large market = Automa�c success - The reality is the market is yet to be accurately sized. 2. “Seniors” are simple - The reality is the mature market is complex. 1. It’s the loan business - The reality is “forward and reverse” inhabit two dis�nct worlds.

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This is the one area that is the easiest to control, but most frequently ignored. It gets lip service, but li�le ac�on. When all is said and done, there’s more said than done. At least that’s what Forester Consul�ng found in a study about the subject. Microso� commissioned Forrester to conduct a survey about customer experience. (Forrester Research online study commissioned by Microso� in November 2006, February and March 2007) “While 55% of the respondents said that the top business issue for their organiza�on was customer rela�onships, only 32% selected customer rela�onships as the top priority for IT spending. Similarly, only

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35% selected it as the top priority for human capital investment.” What good is it to have state of the art IT, if your customer feels abandoned? Certainly, indica�ve of smarts, but the lack of heart (being placed on hold for eternity, voice mail instead of a live person, statements that are “impossible to understand”) undermine the posi�ve poten�al of the customer’s experience. “At first glance this seems surprising, but the findings correlate with those of a separate Forrester survey of 74 customer experience execu�ves that indicates many companies are not disciplined in their approach to customer experience management.” The challenge is to treat “a�er the transac�on” with as much a�en�on and focus as one treats the “customer acquisi�on” effort. There are five steps to cra�ing a customer experience plan: 1. Define the customer experience 2. Establish experience expecta�ons, priori�es, and performance percep�ons 3. Map the customer experience against these priori�es and performance percep�ons 4. Iden�fy and measure opportuni�es for improvement; 5. Create a customer experience scorecard. At MonteRose.Biz, we have the TIES Quo�ent scorecard (on a scale of 1-5, rate Trust, Integrity, Ethics, Service) and suggest that the originator ask the client to “rate my performance.” The TIES survey gives the client the opportunity to confirm if I have provided the desired solu�on in a manner that validates my brand and creates enough emo�onal engagement to create a post-sale referral situa�on. The ability to maintain the connec�on began at the �me of the sale will pay huge dividends over �me. It costs seven �mes as much to obtain business from a “new” customer than one of your exis�ng customers. From a revenue perspec�ve, research indicates you’ll derive two �mes more net profit from an “emo�onally engaged” customer compared to a “ra�onally engaged” customer. The posi�ve impact of engaged employees to the bo�om line is a proven rela�onship. Payback comes in terms of produc�vity, reten�on, and profitability.

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In the Mature Market, you must integrate intelligence and engagement. Emo�onal customer engagement fosters fervent loyalty. Would you like to protect your customers from the “refi raiders?” The answer is simple yet frequently overlooked: fervent loyalty yields repeat and referral business. Emo�onal engagement adds to the “bo�om line.” Wrong Assump�on #4: Anyone can sell this stuff. RM sales may appear to be easy. Not many products to explain or qualifica�on issues that require support documenta�on to resolve. The client receives money, rather than making payments. Where’s the challenge? This assump�on is based upon an incomplete view of the product, process, and prospect. All are viewed as uncomplicated, straigh�orward, and predictable. I will address the prospect in a later wrong assump�on. First, let me describe the product. A nega�ve amor�za�on loan built upon an ARM (adjustable rate mortgage) chassis, the approval of which is predicated upon one’s age, residency, condi�on of the home, and �tle. Most of the �me the loan is insured and the borrower is charged for this insurance. There is no rela�onship between the insurance cost, and the amount of money you actually borrow. It is always weighted in favor of the product’s creator. The fees and costs are never �ed to actual money borrowed, but a “worst case/borrow the maximum” scenario is used for the baseline. Then there is the “1st Deed of Trust/2nd Deed of Trust” protocol to explain. Add to that…disclosure forms that are redundant and confusing. Sign your name a mul�tude of �mes on the front end and back end. Flavor all this with ample doses of legalese, and you definitely don’t have an “Anybody can do this” transac�on. When agreement to proceed is reached and the file is submi�ed, the fun is just beginning. Cycle �me inconsistencies, missed appointments for counseling or inspec�ons create tension and stress for all par�es. Plumme�ng values or unfulfilled expecta�ons (which were unreasonable from the start and perhaps not relevant to this transac�on) cause the borrower’s appe�te to diminish. The deal begins to fall apart.

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Sooner or later, one begins to realize: RM sales is definitely an acquired taste. In fact, the ability to excel in reverse mortgage sales requires a unique blend of character, like-ability, skills, talent, and will. The converse Correct Assump�on #4 is: Communica�on Counts The ability to ar�culate in the appropriate “dialect” for a specific audience is paramount. For “direct to consumer” sales, build a sales team with whom your parents would find comfort, and who possess an achiever’s resolve. For a “face to face” sales force, would your parents enjoy their company and trust them? If it’s a phone crew, does the sound of their voice and pace of speech evoke confidence and trust? If you’re designing an online approach, could your parents comfortably navigate, possess a clear understanding of their ac�ons, and feel “cared for” at the conclusion of their experience? Is the sales candidate or process… “kitchen table” compa�ble?

“What good is it to have state of the art IT, if your customer feels abandoned?” When u�lizing a “business to business” approach, ask yourself: Does the poten�al hire have an established niche from which they can launch their business? Do they possess the drive to “reach out” to other professionals? Will they follow through? Do they have a knack for expressing the prac�cal applica�on of their program that is of benefit to the prospect? Where would this person fit best? Is this sales candidate “board room” material? It’s harder than it looks. RM sales requires flexibility and persistence…passion and compassion. You either need to be a “dead on” empathy fit or highly malleable to excel in this space. The perfect RM sales person is a combina�on of John Wayne, Jimmy Stewart, Jerry Lewis, James Garner, Robert Wagner, Walter Cronkite, Be�e White, Bea Arthur, Donna Reed, Barbara Walters, Billy Graham, The Pope, and Oprah. Wrong Assump�on #3: Immense Market = Automa�c Success

��

In �mes of mortgage market decline and business evapora�on, the RM niche appeals to many. Trillions of dollars in home equity controlled by millions of persons over age 62 deﬁnes a lucra�ve market. And remember, the

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boomers are coming…all 70+ million of them.

Therefore, innovate and think “blue ocean.”

The reality is: The size of the market has yet to be determined, but deﬁnitely has been over-stated.

Wrong Assump�on #2: Seniors are Simple.

If this is such a great market, why is market penetra�on hovering around 1%? Not enough providers, nor enough product variety, or perhaps the delivery systems are too small? Let’s focus on this issue. The recent AARP Public Policy Ins�tute Paper #200722, affirms the decline in interest. While awareness has increased from 51% to 70% (1999-2007), interest in u�lizing the product has decreased from 19% to 14% during the same �me period. The AARP Paper suggests the following to make reverse mortgages a more mainstream financial instrument: 1) reduce costs, 2) increase product innova�on to meet the diversity of consumer need, 3) improve counseling and informa�on, and 4) improve the marke�ng prac�ces of lenders. The converse Correct Assump�on #3: Insigh�ul Innova�on and “blue ocean” strategic thinking yield success. First, allow me to state the obvious. There are about 350,000 households who need the HECM product that the reverse mortgage industry currently has to offer. That is the size of the market, and that’s why there are 350,000 loans on the books. Therefore, without substan�ve visionary product innova�on, the market size will con�nue to be about 1%. As boomers become eligible, the 1% will mean more transac�ons, but why would we think they are going to be any more a�racted to the HECM than their parents? The RM market is innova�on starved. Second, an important sta�s�c is not “how many eligible homeowners” exist. “Millions and millions” is plenty. The sta�s�c that merits scru�ny is “the market size of the niche that other lenders are ignoring.” The challenge is to find a niche where there are few compe�tors. Or be�er s�ll, where you are the only player. Why focus on the same space as all your compe�tors? Why not think about who is eligible, but underserved? Find some brand space that is unique. Find a delivery system that can differen�ate. There are reasons the mul�tudes have yet to respond. They’re not ready to buy. The RM solu�on doesn’t fit. This is harder to explain than we thought.

April 2008

A�er si�ng with seniors for the past 20 years, I must say, “Nothing could be further from the truth.” There is no “one size fits all” with the Mature Market. The reality is that the MM is every bit as sophis�cated as any other market segment. One should not simply use age or SES as the segmenta�on lens in this space. Gerontographic and ethnographic research lead to a deeper and broader understanding of the Mature Market. The converse Correct Assump�on #2: Senior Space requires Astute Interac�on. For some “the numbers have to work in their favor.” They understand the no�on of leveraging. “It’s free money,” was the comment one borrower made to me. He was using his RM proceeds (home value $6 million) to join with 3 partners in order to purchase an office building. Another wants to leave a legacy and endow a charity. It’s not about them. Before some prospects can give you the “green light” to proceed, they must give themselves permission. They must overcome the embedded sense of conserva�sm that is present in their genera�on due to the tough �mes of the Great Depression. The Mature Market is not averse to “self sacrifice.” In fact, they take pride in their ability to “do without.” They are survivors, and survivors know how to wait. Their budget is their lifestyle. Therefore, you must affirm both their right to “do without” and the reality that being sensible doesn’t equal extravagance. That is to say, “Comple�ng the necessary repairs to make your home safe and the environment healthy is reasonable and not extravagant. Obtaining the money to a�end your grandson’s gradua�on is not self serving, but cements the family bond.” And lastly, some have grown numb to their circumstance. They don’t realize “how bad it is.” The slow but constant deteriora�on has taken its toll, but gone unno�ced. Their ability to see and smell has eroded, and thus, they simply don’t know. It is in this situa�on that “the client commi�ee” convenes and you must lead a disparate group with a variety of interests

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and ap�tudes through the inves�gatory process, and obtain “commi�ee” agreement. This requires uncommon interac�on exper�se. Wrong Assump�on #1: It’s the loan business. The assump�on, that this is a mortgage like all other mortgages and that persons in the mature market will embrace and react to informa�on in the same manner as all persons obtaining a mortgage, is dangerous. The reality is that while “forward” and “reverse” are residen�al mortgage products and share some things in common, the audience they serve defines them from a different emo�onal perspec�ve. In “boomer and below” space, the forward mortgage product and process is viewed as transac�onal, a commodity, “rate & term”, features and benefits, with the house being an asset. In senior space, the reverse mortgage product and process is viewed as a rela�onal issue. It is a “loaded” customer experience that fundamentally affects their quality of life, with the house being their home. In other words, there is an emo�onal charged dimension to the reverse mortgage transac�on that is �ed to the senior’s concept of “home.” To ignore this reality will diminish one’s effec�veness with this segment. People with stories to tell. People who have accomplished something incredible. People who need to be counseled honestly and graciously when discussing their op�ons. Connect with Heart. Prac�ce gracious, authen�c inquiry. Offer your customer the ul�mate demonstra�on of respect. Listen intently to their story. Seek to understand. Remember, to them house means home. Your sales conversa�on (no ma�er what the delivery method may be) involves their most precious possession. Inspire Hope. You bring to light a way out of debt, a means to live out a dream, the prospect of a good night’s sleep. “Things will improve. Re�rement will get be�er. Don’t worry about the unexpected expense any longer. The pressure will subside as soon as we get this deal done.” Hope gets all of us through the tough �mes. Don’t let your customer down.

hope is no hope at all. It’s cruel to promise and not deliver. Fund their loan as expedi�ously as possible. Be pa�ent with them. Keep your tone in check when they frustrate you. Be the expert on their behalf. Solve the problem. Make it happen. Help them celebrate. Deliver the goods. Monte Rose has helped hundreds of seniors obtain a reverse mortgage during the past 17 years. He is an accomplished speaker and widely quoted industry expert, appearing in financial publica�ons and na�onally syndicated media. He was head of na�onal retail sales for Financial Freedom Senior Funding Corpora�on. Monte is a Cer�fied Senior Advisor and a Cer�fied Strengths Coach with Gallup University. For more informa�on, call 800-516-0545 or email info@monterose.biz

Deliver Help. Though Hope is real, Help is tangible. Don’t disappoint them. They’ve placed their trust in you. False

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The “ABC’s” of Reverse Mortgage Lending by David J. Cesario

Lenders across the country are hearing about reverse mortgage loans and beginning to examine if this is a product their organiza�ons should oﬀer. In order to make an educated decision, we believe you should know the basics of how reverse mortgage loans work and the requirements you will need to be aware of to be successful. There are 5 important aspects you should know about reverse mortgage loans: 1. The Customer: Reverse mortgage customers are individuals who own a residen�al primary residence or second home with most current reverse mortgage programs requiring all borrowers to be at least 62 years of age in order to qualify. Reverse mortgage customers are typically very cau�ous and conserva�ve in nature. The biggest challenge these borrowers face is the concept that reverse mortgage loans “sound too good to be true”. And as the rest of the saying goes, “if it sounds too good to be true, it probably isn’t true”. This is one challenge you will need to be prepared to address. Also, heads up! You will probably be dealing with other people on the transac�on besides the borrowers. Don’t be surprised if you are asked to include the children, trusted advisors and/or other rela�ves who are spheres of reference and inﬂuence for reverse mortgage borrowers. 2. The Programs: A variety of reverse mortgage programs are now available, including the FHA insured Home Equity Conversion Mortgage (HECM), the Fannie Mae HomeKeeper along with Proprietary & Jumbo products. The vast majority of reverse mortgage loans currently on the books are HECM’s, with current es�mates projec�ng 90% or more of all reverse mortgage loans as HECM’s.

April 2008

The HECM version of a reverse mortgage loan is available as a Fixed Rate, a Monthly ARM or Annual ARM using either CMT or Libor indices. Fannie Mae’s HomeKeeper has been around for a number of years, but typically does not provide the same level of financial benefit as the FHA insured HECM. The HomeKeeper is only available as an Annual Adjustable. Hopefully, Fannie Mae will make enhancements to the HomeKeeper in order to make it more useful in more situa�ons for borrowers. With the launch of Proprietary & Jumbo versions of reverse mortgage loans within the last 2 years, exci�ng and new opportuni�es are becoming available to borrowers. Currently, Proprietary and Jumbo reverse mortgage programs are available as fixed rates or variable rates that can directly finance home purchases and refinance second homes! 3. The Program Features: Most reverse mortgage loan programs share similar features, which include: • No Required Monthly Mortgage Payments • No Income Required to Qualify • No Credit Scores Required to Qualify • No Restric�ons on How Borrowers May U�lize Their Proceeds • Non-Recourse Mortgages HECM programs offer borrowers a variety of ways they can access the proceeds from their reverse mortgage loan, including:

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• Lump-sum draw of available proceeds (either par�al or in full) • Monthly Tenure Payouts (payouts for life) • Monthly Term Payouts (payouts for a specific period) • Line of Credit • OR a Combina�on of the Above Op�ons The Fannie Mae HomeKeeper also offers various payout methodologies while Proprietary & Jumbo programs may have limited payout op�ons, depending on the selected program. 4. Qualifica�on Requirements: Reverse mortgage loans have very similar qualifica�on requirements, including: • All borrowers must be at least 62 years of age • Proper�es must meet minimum lender requirements for condi�on, safety and soundness • Reverse mortgage consumer counseling is required • Mul�ple property types may be acceptable (dependent on program), including: 1. Single Family Dwellings 2. 2-4 Unit Owner Occupied Proper�es 3. Condominiums 4. PUD’s 5. Manufactured Homes 6. Modular Homes • Second Homes are eligible under Proprietary & Jumbo Programs • Direct home purchases are currently eligible under Proprietary & Jumbo Programs, the Fannie Mae HomeKeeper and are projected to be available under HECM products in the near future (pending finaliza�on of legisla�on) 5. What to Expect: While many believe that “a loan is a loan”, this is not true in the reverse mortgage lending world. Yes, a reverse mortgage is just a mortgage, but you should be prepared to deal with a variety of different issues than you typically experience in forward mortgage lending. If you have not heard of the term “forward mortgage” before, let me briefly and succinctly describe the term:

• • • •

Property valua�on and condi�on issues Title and ves�ng considera�ons Competency issues & adult learning considera�ons Marke�ng methods that need to be customized for this borrower group • And an overall different mindset compared to forward mortgage mentali�es Reverse mortgage loan programs con�nue to evolve as new features consistently are offered. While reverse mortgage lending is different in many ways from forward mortgage lending, it is not rocket science. Take the �me to learn the intricacies of the programs and you will be well on your way to being a successful reverse mortgage lender! About David Cesario: David Cesario is the Execu�ve Vice President of 1st Reverse Financial Services, LLC, (www.1stReverse.com) a na�onal reverse mortgage wholesale lender that works with both FHA approved and non-FHA approved lenders. David regularly par�cipates in educa�onal and training sessions for numerous mortgage industry organiza�ons and is a na�onally designated instructor for reverse mortgage loans.

The biggest challenge these borrowers face is the concept that reverse mortgage loans “sound too good to be true”. And as the rest of the saying goes, “if it sounds too good to be true, it probably isn’t true”.

Like what you have read? Share your thoughts with the editor!

“Any loan that is not a reverse mortgage loan or a loan that requires the borrower to make monthly installments or payments.” You should be prepared to address the following items: • Need for signiﬁcant staﬀ educa�on of reverse mortgage programs features, criteria and guidelines. • Need to educate borrowers • Poten�ally lengthy decision-making processes for poten�al borrowers

April 2008

email us at editors@reversereview.com

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THEREVERSE

review

Interest Rates: How Today’s Environment Can Impact Your Client by Jerry Wagner

The first Home Equity Conversion Mortgage (HECM) loan was closed in the Fall of 1989 by James B. Nu�er & Company of Kansas City. Since then 400,000 HECM’s have been originated. The current origina�on rate is 10,000 per month – about 6.0% of these are HECM to HECM refi’s. HECM History Un�l mid-1995 the only available HECM had rates that adjusted annually and had a margin of 1.60%. Annualadjus�ng HECM’s have a 2/5 rate cap structure. An annual change cannot be more than plus or minus 2.0% and the life�me cap is 5.0% over the ini�al loan rate. In 1995, monthly-adjus�ng HECM’s were introduced with a 1.05% margin and a 10.0% life�me cap. Both plans used the oneyear Constant Maturity Treasury (CMT) as their index. Fannie Mae was virtually the only HECM investor un�l recently. The investor sets the margins. Because of the caps, investors set high margins on annual-adjus�ng HECM’s. This materially lowers their LTV factors so few are originated. In 2007, HUD added three new HECM rate op�ons. A one-month CMT index and a monthly or annual-adjus�ng LIBOR product. More recently fixed-rate HECM’s have appeared. HECM Pricing Depends on the Expected Rate

Table 1 Note Expected Rate Index Rate Index one-month CMT 10 - year CMT one-year CMT 10 - year CMT one-year CMT 10 - year CMT one- month LIBOR 10 - year Swap one-year LIBOR 10 - year Swap

Rate Adjusts Monthly Monthly Annual Monthly Annual

has a Note Rate and an Expected Rate that are an index plus the loan’s margin. The table below shows the five combina�ons of indexes that are used today. One-twel�h of the Note Rate plus one-twel�h of 0.5% for MIP (Mortgage Insurance Premium) accrues onto the loan balance each month. As opposed to the Note Rate, the HECM Expected Rate is based on a long-term index and does not change throughout the life of the loan. It is used to find the ini�al LTV ra�o, the Service Fee Set-Aside (SFSA) and the HECM payment plans. For a borrower of a given age, the lower the Expected Rate, the higher the LTV. In April of 2004, HUD imposed a 5.50% floor on the rate that is used to look up LTV factors. However, there is NO floor on the Expected Rate itself. Today rates are historically low, and the floor is in force. A monthly-adjus�ng HECM one-year CMT with a margin of 1.50% gives a 73-year old borrower a LTV of 71.5% -- without the lookup floor, the LTV would have been 77.5% -- that’s an $18,000 difference on a $300,000 home! When the floor is in force, and rates go down, the LTV does not change. The SFSA is the present value of the loan’s monthly service fee to when the borrower turns age 100 discounted at the Expected Rate plus 0.50% MIP. Because lower rates give higher discounted present values, the benefits to a borrower can actually fall as rates fall! Most loan officers find it difficult to explain this effect to their clients. Adjus�ng rate HECM’s have a 120-day rate lock feature. In many cases, the client is be�er off using the higher rate! Table 2 shows a Treasury HECM example for a 73-year old in a $300,000 home with a $30 monthly service fee. Even though rates fell nearly half a point between the client’s first proposal and their second presented three weeks later, the borrower’s benefit fell by $234. That’s because the present value of the monthly servicing fee went up by that amount.

The ﬁve current HECM programs are shown in Table 1. Each

April 2008

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“Forward Thinking in Reverse”

Table 2 Proposals

March 3

March 25

10 - Year CMT

3.85 %

3.39%

Plus Lender’s Margin

1.50%

5.35%

4.89%

0.50%

Discount Rate

5.85%

5.39%

Ini�al Loan Limit

$214,500

Less Loan Fees

-6,000

Less Ini�al MIP

-6,000

Less Closing Costs

-2,000

Available A�er Costs

$200,500

-4,905

-5,139

$195,595

$195,361

Expected Rate Plus Ongoing MIP

Less SFSA Available Beneﬁt

LIBOR versus Treasury HECM’s With LIBOR HECM’s the Expected Rate is the 10-year LIBOR Swap Rate plus a margin. With Treasury HECM’s it is the 10-year CMT rate plus a margin. Over the last six months, the Swap Rate has averaged 4.69% and the CMT 4.04% -- this implies that in order to have the same LTV as a Treasury HECM, a LIBOR HECM must have a margin that is 0.65% lower. We haven’t seen this in the marketplace because rates are so low that the LTV lookup floor distorts the calcula�ons – for example, in the week of March 25th all HECM’s with a margin of 1.56% or lower have exactly the same LTV. Some lenders are taking advantage of this and offering LIBOR HECM’s with a 1.50% margin. This brings up an interes�ng point – in this same week, the ini�al Note Rate on a LIBOR 150 (that’s the way lenders refer to margins) would be 4.11% and on a Treasury 150, it would be only 2.60%. Yet the LIBOR HECM offers several hundred dollars higher benefits than the Treasury HECM. Why? Because the LIBOR Expected Rate is 5.50% and the Treasury’s is 4.89% -- remember that there is no floor on Expected Rates. The higher LIBOR rate gives the same LTV and a lower Service Fee Set-Aside. With each loan having the same LTV, the LIBOR benefit is higher because of the smaller SFSA. But, the benefit is only a few hundred dollars higher, and certainly not worth the borrower paying many thousands of dollars more in accrued interest. Past, Present and Future

shows the Past ﬁve years – the 10-year LIBOR Swap Rate has consistently been about half a point higher than the 10-year Treasury.

In the Future, when rates rise to more normal levels, the LTC lookup floor will no longer be a constraint. Then, in order to be a compe��ve product, the rate margins on LIBOR HECM’s will likely be about half a point lower than the margins on Treasury HECM’s. The Fixed-Rate HECM This new product has a rate that is generally keyed to the 5-year LIBOR Swap Rate plus a margin. Because investors want to immediately arbitrage interest rate risk, fixed-rate HECM’s require that borrowers withdraw all of the proceeds at closing – no lines-of-credit or payment plans are allowed. The actual rate is not set un�l just before closing – these fixed-rate loans do not have the 120-day rate lock feature used with adjus�ng rate HECM’s. Without a rate lock, if rates rise between applica�on and closing, the borrower’s benefits may fall materially. Because of this, some lenders show a comparison at applica�on �me that compares an adjus�ng rate HECM and the fixed-rate HECM using current rates plus a third column that shows the fixed-rate HECM with a rate half a point higher (this is a copyrighted feature of Ibis so�ware). About Jerry Wagner: Jerry Wagner is President and Ashok Shinde is CTO of Ibis so�ware based in San Francisco. Ibis has been the Standard of reverse mortgage industry since 1995. Wagner graduated from Harvard Business School and has a Ph.D. in Economics from Harvard. But he’s s�ll a fun guy and can be reached at 800-566-5077 or wagner@ourtoolbox.com. To learn about Ibis so�ware, see www.reversemortgagehomepage.com

As we have seen, the Present is a strange situa�on because of the LTV lookup ﬂoor of 5.50%. The chart below

April 2008

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