Archive for August, 2010

FIT for Reverse Mortgage Lenders, part 4

Wednesday, August 25th, 2010

Talking About Funds Usage

 

“Not all that can be counted counts” wrote the physicist Albert Einstein, “and not all that counts can be counted.”

In assessing whether a senior can live at home and benefit from loan funds over time, reverse mortgage funds-usage counts.

The first “yellow flag” in the FIT process addresses funds-usage. HECM counselors must ask whether seniors plan to buy financial or insurance products. Then, they are to bring up reality-testing issues, including double costs, risk of running out of cash to pay steep premiums for older folks, risk of depleting cash to live well, and risk of losing their home should they fail to meet home maintenance, taxes, and insurance obligations.  

To do their own funds-usage risk assessment, lenders must find ways to discuss this issue with seniors. How they do this without inviting nasty none-of-your-business looks and alienating seniors will test their people’s skills.

It comes down to one strong question to begin the conversation. Typical yes-no questions about annuities and insurance in loan-application disclosures will not cut it.  They are too narrow, too close-ended, and too cold-blooded.

Originators need artfully framed questions to spark a warm conversation, get the information and insights they need without offending their customers and starting their relationships on the wrong footing.

How to frame the questions will depend on originators’ question-asking skills and the dynamics of their interaction with seniors during the loan interview. For illustration, I suggest the following:

“Mrs. Akuna, if your loan application goes through and you get all the cash you need and more, what other financial, investment, or insurance products would you like to have?*

Then, listen. Listen and ask “Why?” Then, listen more.

Let’s say she says, “I’d like to have an annuity. My daughter, the teacher, says they are good.”

Using a technique called “mirroring,” you might respond by  restating her words: “You like annuities because your daughter, the teacher, says there are good?” Before long, you have a conversation on annuities (assuming you know what you are talking about), their advantages and disadvantages, and other funds-usage issues.

The budget-analysis piece aside, FIT is about asking questions and talking with seniors to understand their near and long-run needs.  As NCOA’s Barbara Stucki puts it:

“FIT 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 that they can get the full value of this loan.”

In lending’s numbers-ruled world, asking more questions and talking a little longer with customers to better understand their needs may not be “efficient.” It may not even be as neat as calculating maximum claim amounts and principal limits, but it counts because lenders will know seniors better and make more prudent lending decisions.

 *Note: Please give me your feedback on the strengths and weaknesses of this question as well as your suggestions for improvement. You may post your comments or send me an email: atare@thinkreverse.com. Thanks,  Atare

Copyright © 2010, ThinkReverse LLC.  All Rights Reserved.

 

 

FIT for Reverse Mortgage Lenders, part 3

Monday, August 16th, 2010

 

Why Lenders Must Be FIT Smart

 

Needs. Immediate needs drive most reverse mortgage lending. Everyone knows that.

What everyone may not know is that lending to meet immediate needs could be very risky for seniors and for lenders in the absence of good intelligence about seniors’ long-run needs and goals.

FIT is about digging deeper for better HECM prospect intelligence to inform the lending decision-making. This is the critical insight that persuaded HUD to impose NCOA’s innovations in the new HECM counseling protocol.

What is in FIT for reverse mortgage lenders (a reader asked in response to part two)? This post will show why lenders should be FIT savvy.

To help seniors make better HECM decisions, lenders need to be better informed about seniors, and FIT gives them that extra intelligence they do not have now.

Every HECM prospect counseled after September 11, 2010 will be given a FIT summary printout, which will show “yellow flag” issues (risk factors) raised in counseling and their implications for a borrower to “fully benefit from a reverse mortgage.”

Lenders can use “yellow flag” issues as cues for questions and conversation with prospects. Let’s look at a “yellow flag”: living alone.

This factor could prompt questions such as: How much help do you have with your daily activities, Mrs. Akuna? Who can you call when your health changes suddenly? Do you feel lonely and isolated? One implication for a live-alone is that they may be too dependent on the reverse mortgage cash.

As NCOA’s Barbara Stucki said, “By themselves, each of these issues may not be a risk, but they can add up.”

Add poor health to living alone, and you have prospects whose financial needs may outrun their expectations, hurting their ability to meet borrower obligations such as paying property taxes and homeowner’s insurance.

FIT could also help lenders manage reputation, litigation, and financial risks by giving them early warning and opportunities to deal with risks upfront. A FIT report might flag health issues; further conversation might uncover mental health issues. If they are issues involving the senior’s decision-making capacity, lender could work with counselor to refer prospect to mental health professionals.

A HECM lender’s failure to spot a co-borrower’s mental health problems caused a New York Supreme Court Judge to void a reverse mortgage in December 2009 (The Doar Matter).

Before you say, “This is not fair. We are lenders, not psychiatrists!” Here is the judge:

“…the burden of knowledge … must be shifted to the mortgagee [lender] when dealing with a reverse mortgage.”

It is possible a scathing GAO report to Congress on HECM counseling last June, the Doar decision, and its own insurance exposure pushed HUD toward FIT and other tighter rules in the new HECM protocol. Lenders ignore these developments at their peril.

Call it Atare’s first law of reverse mortgage lending: Know your borrowers beyond immediate needs. If you do not, courtrooms and newspapers’ pages could be very expensive places to find out.

Copyright © 2010, ThinkReverse LLC.  All Rights Reserved.

FIT for Reverse Mortgage Lenders, part 2

Monday, August 9th, 2010

The Fuss over FIT

 

 Lord HUD’s new FIT mandate for HECM counselors is giving some originators a fit.

So what is the fuss over FIT?  We look at seven fusses and counter-fusses before moving on to the FIT questions and risk factors in part three and other posts in the series. As FIT designer, the counter-fusses are NCOA’s responses to the fuss over FIT.

Fuss # 1: FIT is addressing a demography that no longer exists (field data says average HECM borrower age is now 63).

Counter-Fuss: Younger borrowers are taking out fixed-rate HECMs. As other products are developed, the demographic profile of borrowers may change again. FIT  reminds seniors that their life circumstances may change rapidly because of an accident, illness, or the loss of a spouse. 

Fuss #2: FIT is too invasive. Seniors might refuse to answer the questions if a third person (family or an advisor) is present.

Counter-Fuss: Seniors can decide who will participate in the counseling session. Family members and advisors often find it difficult to discuss sensitive issues such as declining health with a senior. The FIT review may be a good opportunity to begin to address these issues and their implications for the senior’s well-being. 

Fuss #3: FIT is static; it does not anticipate changes.

Counter-Fuss:  As with many budgeting tools, FIT focuses on a client’s current financial situation. We may add questions about post-retirement income changes.

Fuss #4: FIT could add to counseling time.

Counter-Fuss: Absolutely! A good counseling session should last at least an hour.

Fuss # 5: FIT is borderline “financial planning,” but HECM counselors are not trained and certified financial planners.

Counter-Fuss: At one point, HUD was considering having counselors conduct a very detailed budget analysis to determine the suitability of a reverse mortgage for their client. FIT brings a more holistic perspective to a client’s financial situation. It helps them understand their risks and options in taking out a reverse mortgage. 

Fuss #6: FIT takes away the HECM counselor’s discretion.

Counter-Fuss:  FIT helps to standardize counseling, a concern of the lending community for years. The goal of the FIT review is to stimulate discussion about issues that may affect the senior. In addition, FIT collects data about the characteristics of potential borrowers, which can help both lenders and policymakers to better understand the needs and vulnerabilities of older homeowners.

Fuss #7: Prospects’ failure to answer FIT questions could cost them their HECM Counseling Certificates, thus the ability to get HECMs.

Counter-Fuss: FIT questions have no right or wrong answers. It will be impossible for counselors to conduct a budget analysis as required by HUD if seniors refuse to answer FIT questions. Seniors can provide approximate income if this is a problem for them. Besides, there is no relationship between the FIT questions and the five comprehension questions (out of ten) HECM prospects are required to answer to be issued a certificate.

Copyright © 2010, ThinkReverse LLC.  All Rights Reserved.