The Home Equity Conversion Mortgages that currently dominate the reverse market have been evolving and are under scrutiny in the wake of the downturn and default-related concerns that have hurt the Federal Housing Administration’s finances, but some think
“Change is always worrisome [to go through], but what is coming is going to be good,” said Atare Agbamu, president/CEO of consultancy ThinkReverse LLC, noting that if the industry were to manage its default risk he thinks larger players would return.
However, regulatory change has its challenges, said attorney James Milano, when asked about some ideas floated by the FHA that had not as of the time of this writing been formally proposed, such as set-asides for tax and insurance payments, financial assessment tools, and draw limits.
“The difficult part is, it is hard to come up with a black-and-white rule that makes sense for everyone,” said Milano, a member of law firm Weiner Brodsky Kider PC, noting that the draw limit, in particular, could run into “freedom of contract concerns” and reverse mortgage needs can be very individualized.
“Every senior situation is different, and most people can handle their own affairs,” said Milano, who also is co-general counsel of the National Reverse Mortgage Lenders Association.
The main theme in the evolution of reverse mortgages that there is some agreement on is the ongoing need for a more informational approach. “It’s really about financial information and education, it’s less about selling a product,” Milano said, noting that an originator must provide a disclosure to the senior consumers involved that directs them to consult a trusted advisor on the decision.
Agbamu said initially the industry’s focus was on the “cross-over risk” that the value of the loan would exceed the value of the property, while other borrower risks such as the ability to pay taxes and insurance and continue to live in the home were not getting enough attention. But that is changing.
“We need to help solve life-stage risk, the messy, soft side of this business that you cannot quantify,” he said. “There is no substitute for getting to know your borrower in the true sense of the word.”
As much as “ability to pay” has become a key phrase for traditional mortgages, concerns like “ability to stay” should be key phrases for HECMs, he said.
Unlike ability to pay, there is no “ability to stay” rule, per se. But Agbamu believes the concept of whether or not a borrower has the ability to stay in his or her home as she or he ages is central when it comes to borrowers’ HECM decisions and sometimes did not get enough emphasis in the past.
He said factors key to that decision are largely contained in required, separate counseling mandated by the Department of Housing and Urban Development but originators should focus on it as well.
Milano agrees that the ability to stay in the home is a key point when it comes to reverse mortgages and information helping borrowers make decisions about it are part of the separate counseling by independent, HUD-approved counselors that is required during the origination process.
“If you’re absent from the property for more than 12 months, the loan matures,” he noted.
HECMs do not always require the ability to stay in the home, Milano added, noting that there also is an “underutilized” HECM for purchase product that can help some seniors and some do choose to downsize rather to age in place.
Amy Ford, director of the National Council on Aging’s Reverse Mortgage Counseling Services Network, said the counseling protocol implemented in 2010 not only helps highlight risks like budget shortfalls and resources that might help like public benefits but also risks that come from “life factors” like possible declines in health and home safety. There is a counseling fee borrowers pay but this recently was reduced by NCOA and for some consumers with financial hardship may have it waived.
“It’s a very lengthy process,” she said of the required counseling, noting that there is an emphasis on highlighting pertinent information and letting consumers use it to make decisions. Whether a senior wants to get information about public benefits, for example, is voluntary unless they live extremely far below the poverty level. In no way should the originator approach the reverse mortgage as a quick sale, stressed Milano.
HECMs, he said, have “a very long origination timeline” where a consumer might start considering and researching them at age 63 and not decide to get one until age 68.
And while demographics have always looked particular promising for HECMs, Milano emphasizes that the usage rate among the qualified senior population has been very low. “Very few (qualified borrowers) take out a reverse mortgage,” he said.
