HECMs Call For Unique Technology

Even though it’s called a mortgage, reverse loans are a very different product compared to their traditional, or forward, counterparts. That means lenders have unique technology needs that software developers provide to the space.
As interest in reverse mortgages continues to grow, originators, regulators and software companies are looking for better ways to use technology. With the baby-boomer generation on the brink of retirement—and with their investment portfolios still suffering from the economic downturn—reverse mortgages may be a solution used to help seniors make ends meet in retirement.
From the first step of origination, the reverse product has different requirements than forward loans. Certain verifications, like income, employment and credit, aren’t necessary. But unique disclosure requirements are a compliance issue that originators look to technology to help solve.
Most state-specific mortgage disclosures that apply in forward originations also apply to the reverse loans. State regulators, sensitive over any appearance that a lender may be taking advantage of a reverse mortgage borrower, have enacted numerous reverse mortgage-specific disclosures.
In Maryland, Louisiana, Arizona and other states, lenders are required to provide the contact information of as many as five HUD-approved counselors. Some states take it a step further, requiring the borrower to participate in counseling before the loan application proceeds, according to Marsha Williams, a compliance attorney at document and compliance technology firm MRG in Dallas. In Minnesota, there is a seven-day “cooling off” period from the lender’s final loan approval until the reverse mortgage agreement takes effect, when the borrower can back out of the deal.
Those state requirements all have disclosure and compliance documents that must accompany the loan package. In the case of the widely used Home Equity Conversion Mortgage, a Federal Housing Administration-insured product, the loan can’t go to the FHA without those documents.
“You have to treat reverse mortgages as a completely different loan package, just like a home equity line of credit package is different from a forward loan,” Williams said.
Document disclosure software like MRG’s offering use disclosures common to forward mortgages and HELOCs, as well the reverse-specific documents, to provide lenders software to ensure compliance.
The reverse mortgage universe has been widely seen as a niche market in housing finance. Given the myriad differences between forward and reverse loans, originators turned to technology developers that worked exclusively in the reverse mortgage space for their loan origination system and other software needs, explained Brad Thompson, executive vice president of professional services at Denver-based software developer Mortgage Cadence.
But companies like Mortgage Cadence are taking their experiences from building highly customized LOS platforms and modifying them for reverse mortgages.
“The forward mortgage technology is far more advanced and we can now offer the reverse industry the automation and other technological advances that we’ve been offering the forward space for years,” Thompson said.
Mortgage Cadence calls its Orchestrator platform an “enterprise” LOS because of its high level of customization. When properly configured, it can handle any process that clients throw at it, Thompson said, making it one of the few LOS offerings available to originate forward and reverse loans.
Mortgage Cadence began offering the reverse mortgage version of Orchestrator five years ago, and the company targets the nation’s top 20 lenders that handle the majority of reverse originations. There are fewer competitors in the reverse mortgage LOS space than in the forward space. Offering the reverse mortgage LOS gives Mortgage Cadence the opportunity to show its clients how it can react to changes and support lender needs and potentially use that relationship to provide forward mortgage software as well.
In November 2008, Fannie Mae—the biggest purchaser of HECM loans—enacted a new policy, ending the practice of pricing loans with 60-day “static” commitments. Instead, reverse mortgage lenders get loan quotes with “live pricing”—commitments of two to 90 days to lock in loan pricing.
Mortgage Cadence had experience with live pricing from the forward mortgage space and was able to offer reverse lenders commitment-tracking software to meet the new demands.
The next technological evolution for the reverse mortgage industry is just around the corner. The long anticipated update to the digital repository of HECM loans will replace a system that’s been around since 1989, the Insurance Accounting Collection Systems.
The Department of Housing and Urban Development uses the IACS platform to collect the initial mortgage insurance premiums (paid at closing by the originator) and the monthly insurance premiums (paid by the servicer) that fund the HECM program. But the antiquated system doesn’t connect with LOS and servicing platforms the industry currently use. Instead, when a servicer has to record a HECM payment distributed to a borrower, data entry employees have to manually enter the information twice—once in the servicer’s system and once in the IACS.
In October 2009, HUD awarded a $32 million contract to five companies to build the replacement platform—the Home Equity Reverse Mortgage Information Technology, or HERMIT.
HERMIT will eliminate the redundant data entry process. The new Web-based interface will allow lenders and servicers to connect to the HUD database to pay MI premiums. In addition, the platform will have a new feature to automate insurance claim submissions. Currently, servicers manually send paper documents in the mail to file claims.
The companies involved in the project—Houston-based Reverse Mortgage Solutions; Columbia, Md.-based Quality Software Services Inc.; Falls Church, Va.-based Government Technology and Business Services Inc.; Washington-based Walker & Co.; and Tampa, Fla.-based Computer Technologies Inc.—declined to comment publicly on the project, citing nondisclosure agreements with HUD. HUD officials were also reluctant to discuss the project, and did not respond to requests for comment by press time.
But speaking on condition of anonymity, developers say the HERMIT platform is based on RMS’s reverse mortgage servicing platform called Servicing Technology on Reverse Mortgages, or STORM. A customized version of the platform is being created to integrate with HUD systems. Once the development stage is complete, the development team will work with both lenders and servicers in the industry to connect to the platform.
People close to the project estimate that it’s about 80% complete, but behind its scheduled November launch date. But developers say HUD is in no rush to launch the system before it’s ready over concerns that an incomplete system would disrupt the reverse mortgage industry. Quality control and other outstanding testing will push back the launch to late 1Q11 or early 2Q11.
Another issue still up in the air is whether HERMIT will get a new name before it’s formally launched. Some industry firms expressed concern about the name’s acronym being synonymous with a derogatory term used to describe recluse seniors.
“The industry frowned on the name because it’s referring to a project for old people as HERMIT,” one executive said.
Nomenclature aside, the buzz around HERMIT is mounting in the reverse mortgage space. Mortgage Cadence’s Thompson said technology providers are still waiting to hear more about the system specifications before they can adapt their systems. But it’s a closely followed topic of interest and once the new platform is launched, Thompson said his company could build the proper interface into Orchestrator in as few as 30 days.