Atare Agbamu's Think Reverse! Blog

On Tuesday, March 8, 2011, AARP sued The U S Department of Housing and Urban Development (HUD) over reverse mortgage foreclosures enabled by Mortgagee Letter 2008-38. In a series of articles beginning in February 2009: “Grandma Rita’s Heirs and the 20-year ‘Mistake’”(The Reverse Review), “Revoke Mortgagee Letter 2008-38″ (Origination News), “An Assault on Fairness: Quash Mortgagee Letter 2008-38, parts 1 and 2 (My Blog and National Mortgage Professional Magazine), I challenged HUD’s revised HECM non-recourse policy in ML2008-38 and urged HUD to rescind it. HUD did not listen. The suit AARP filed today vindicates my position, and I applaud AARP for taking on HUD on behalf America’s voiceless seniors who are using HECM to supplement their retirement income. Let justice be done for America’s seniors!

– Atare E. Agbamu 

A version of this article was first published in Origination News, March 18, 2009. Please read on:

Federal Housing Administration (FHA) Mortgagee Letter 2008-38 is twenty years late. It imposes new problematic disclosure requirements, casts doubt on HUD’s reverse mortgage non-recourse policy, and complicates consumer education. It should be quashed.

For 20 years HECM non-recourse policy was clearly stated in chapter 1, paragraph 3C (1-3C) of the HUD Handbook 4235.1 Rev-1, thus:

 The HECM is a “non-recourse” loan.  This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.

 Yet in ML08-38, HUD artfully tried to turn clarity into confusion by blaming “some program participants” for misreading paragraph 1-3C.  What can be clearer than the language of paragraph 1-3C above? Please, read it again.

 Among “some program participants” misguided by paragraph 1-3C’s language over the last 20 years are legions of trained HECM counselors, originators, HUD reverse mortgage experts, bank and mortgage regulators, and others across industries and around the country. People like you and me.

 So clear is the language of paragraph 1-3C that a recent regulatory manual on reverse mortgages for state bank supervisors and mortgage regulators, in explaining the 2-percent mortgage insurance premium (MIP) borrowers must pay to HUD to get HECM, declared:

 “The MIP guarantees that if the company managing the account – commonly called the loan “servicer” – goes out of business, the government will step in and make sure the homeowner has continued access to the loan funds.  Furthermore, the MIP guarantees that the homeowner will never owe more than the value of the home when the HECM must be repaid.”

 So, it was not just “some program participants” who for 20 years relied on HUD’s HECM non-recourse policy as stated in paragraph 1-3C. Even regulators did.

 Let’s assume that HUD’s clarification in ML08-38 is the “pure” definition of non-recourse, and some experts say it is. Why did HUD wait 20 years before issuing a “clarification”?  Why did HUD allow industry and non-industry participants to misinform seniors, their families, and the public for 20 years?

 Besides the policy clarification, the Mortgagee Letter decreed new arms-length transaction requirements when selling HECM collateral at loan termination. Do we really need HUD’s arms-length rules in intimate family inheritance and estate matters?

 Unquestionably, the potential for abuses exist in the pre-ML08-38 definition in paragraph 1-3C.  Actual abuses may have occurred. And ML08-38 may have been issued to check future abuses. HUD deserves praise for looking out for taxpayers. But how does the potential for some abuse outweigh damage to the credibility of the industry’s signature program from ML-08-38?

 As the state regulators’ explanation suggests, hasn’t the MIP covered that risk? In a sense, HECM borrowers have paid for the expanded definition of non-recourse in paragraph 1-3C.  Some could see ML08-38 as a high-handed attempt to deny seniors and their heirs/estates one of the benefits of their expensive HECM MIP. Given the monopolistic hold HECM has on the industry, thanks to sovereign mortgage insurance, it is a logical conclusion to come to.

 Non-recourse remains a cardinal feature of the HECM program. Without it, it may be difficult to suggest reverse mortgages to seniors, their advisers, and their families. Without it, seniors and their families may shy away from a revolutionary mortgage financing program that has brought (and will continue to bring) much hope, dignity, and security to seniors across America in the recreative years of their lives. Without it, HECM consumer education has become even more taxing.

 Mortgagee Letter 2008-38 poses at least four new challenges for HECM counselors and originators:

• New Non-recourse Disclosure – Counselors and originators must now tell seniors and the public that HECM’s non-recourse is conditional: if they or their heirs/estates decide to keep the property, they must pay the full loan balance even if it is above the property value. If they or their heirs/estates choose to sell the property, they will owe nothing more.
• Arms-Length Disclosure/Warning – Conceivably, another new disclosure along these lines is now called for: “Mrs. Obamka, if you take an HECM reverse mortgage, I am required, by federal regulation, to tell you that, upon your death, your children or heirs may not be allowed (by federal arms-length rules) to sell or buy your home because the federal government, in its sole wisdom, believes they are too close to you, to your property, or to your estate. Therefore, before you die, you may consider disinheriting your heirs (check with your attorney) and make sure you select committees of non-relatives, non- friends, or non-acquaintances to sell or buy your home [The Arms- Length Committees for HECM Collateral Disposition].”  Just imagine these consumer-soothing phrases rolling off the tongues of HECM counselors and originators across the country. 
• Doubt – Telling seniors and the public that industry understanding of non-recourse was “mistaken” for 20 years raises serious doubt about HUD’s and industry participants’ veracity. “Hey, what else are they mistaken about?”
• Consumer Education Complications – Strongly supported by 1-3C language, “your heirs/estate will never owe more than your home’s market value” has become an industry marketing mantra for 20 years. For a complex (and still novel) financing idea with a host of conceptual and historical baggage, the consumer reassurance afforded by that mantra is gone. Left in its place is doubt. It complicates consumer education.

 As the industry (and the reverse-mortgage consuming public) appreciates the disturbing implications of Mortgagee Letter 2008-38, other “clarification” challenges will come up. Meanwhile, for the sake of America’s seniors and their heirs/estates, the credibility of HECM and the reverse mortgage industry, HUD should rescind Mortgagee Letter 2008-38.

 Copyright © 2011, ThinkReverse LLC.  All Rights Reserved

 Long-term Care Costs Risk

 Seniors who struggle with basic activities of living daily (BALD) may have to use reverse mortgage funds to pay for help to stay at home long enough to benefit from the loan.

And these long-term care (LTC) costs could burn-through their reverse mortgage funds, inviting defaults on essential borrower obligations and defeating the long-term age-in-place purpose of reverse mortgages.

What are the basic activities of living daily? Why will many seniors have difficulties with them? What do these serious, life-stage financial risks mean for seniors, lenders, and HUD?

Basic activities of living daily include eating, toileting, bathing, dressing, and moving in and out of a chair or a bed. While we may not even recognize the performance of these activities when we are young and vigorous, as we age and physical frailty becomes our companion, they can become a challenge.

Many seniors struggle with BALD because of chronic health conditions normally associated with aging. Among these health conditions are arthritis, diabetes, heart disease, falls and injuries, osteoporosis, and obesity.

A National Governors Association report says more than 80 percent of seniors aged 65 and older has at least one chronic health condition, calling them the “leading causes of disability among seniors.” [1]

Researchers at the University of Michigan Health Systems found that 50 percent of seniors have a “moderate to severe” form of “geriatric conditions” such as cognitive impairment, falls, incontinence, low body mass index, dizziness, and vision and hearing impairments. [2]

Significantly for our purpose here, they also found a link between the existence of these geriatric conditions and dependence on others for help with BALD. Among seniors without geriatric headaches, only 2.6 percent were dependent on others for help with BALD. For those with one condition, the percentage climbed to 8.1; with two conditions, it soared to 19.4 percent, and it zoomed to 45 percent for those with three or more conditions.

Overall, the study says 39 percent of seniors aged 65 to 69 have one or more the geriatric conditions. So what does this mean for lenders?

It means originators should take time to discuss FIT “yellow flags” 8 and 9 with customers if they show up in customers’ FIT summaries from counseling. For seniors struggling with BALD or with a history of falls and injuries, here are some potential implications for their reverse mortgage funds they should be aware of:

• They may find it hard to stay at home and benefit from their reverse mortgage funds without help;
• They may struggle to do home repairs, pay taxes, insurance, and other bills;
• They may have to pay for help to remain at home;
• Payment for help can rapidly consume reverse mortgage funds;
• They run risk of defaulting on essential borrower obligations as funds are used to pay for home help.

And for lenders and HUD, implications of seniors struggling with BALD could include:

• Escalation in tax and insurance defaults in the years ahead as many frail boomers get reverse mortgages;
• Diversion of cash to fund tax and insurance defaults by lender/issuers;
• Pressure on the HECM insurance fund and threat to the HECM program’s existence, among others.

Managing tax and insurance default risks and serving seniors’ long-term financial interests require discussion of these issues at the loan interview. To spark the conversation, consider this question:

“Mr. Burns, at FreeFloat Bank, we believe in helping our customers think through critical financial decisions such as taking a reverse mortgage. Sometimes, that means discussing some rather personal situations such as difficulty with basic activities of living daily. May we discuss how your situation could affect your ability to age-in-place, using reverse mortgage funds, both today and in the future?”* 

If Mr. Burns says okay, then proceed; if he says no, hold your peace and document it. The important thing is to make a good-faith effort to address these serious life-stage financial risks that some lenders would rather not be bothered with because they too “invasive.” Responsible reverse mortgage lending is invasive.

Notes:

[1] National Governors Association, “Healthy Aging and States: Making Wellness the Rule, Not the Exception”

[2] Annals of Internal Medicine, August 2007, vol. 147, pages 156-164. “Geriatric Conditions and Disability: The Health and Retirement Study”

*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 © 2011, ThinkReverse LLC.  All Rights Reserved.

Medical Mobility Risk

Hospital or nursing home re-admissions are serious financial risks for older Americans, especially those without strong family or social support.

So what do reverse mortgages and hospital and nursing home re-admissions have in common? Three words: Medical Mobility Risk. And what is medical mobility risk in reverse mortgage lending?

It is the chance that a chronic illness or poor post-discharge planning could compel seniors to shuttle between their homes and the hospital or nursing home, hurting their ability to stay at home long enough to benefit from their loan funds and limiting their capacity (in case of heavy out-of-pocket health expenses) to meet critical borrower obligations, such as residing in the home, paying taxes and homeowner’s insurance, and maintaining the home.

In gauging a senior’s ability to stay at home and profit from a reverse mortgage over time, why is it important for lenders and counselors to pay attention to medical mobility risk?

Hospital and nursing home re-admissions is a major headache in our acute-care, hospital-dependent healthcare delivery system. Re-admissions costs Medicare about $12 billion annually. MedPAC, the research arm of Medicare, says 17.6 percent of all hospital admissions in America are actually re-admissions. One in five Medicare beneficiaries who is discharged from a hospital re-enters a hospital within a month. As boomers age in droves in the years ahead, we can expect these numbers to climb if current trends hold.

This is the socio-medical context for “yellow flag” seven in the FIT process. As thoughtful and prudent reverse-mortgage lending professionals, you should find ways to discuss this risk if it comes up in the FIT summary.

Although how you bring it up and how you discuss it will depend on the dynamics of the loan interview and your skill in framing questions, it is important that you discuss it during the loan-application interview. For illustration, let’s try this question:

“Mr. Jones, at FreeFloat Bank, we pride ourselves on helping our customers think-through complex financial decisions for two reasons: Our customers deserve our best thinking, and it is good business practice. During counseling, you mentioned health issues that required hospitalization and re-hospitalization. I believe we should talk about what it may mean for you down the road, shall we?”*

It may not be an easy conversation. While some seniors consider a reverse mortgage to pay for health expenses, others may be reluctant to talk about such personal issues. For this reason, some fine commentators in reverse-mortgage blogosphere have suggested that the FIT questions and process are too invasive and too time-consuming.

Like surgery, prudent mortgage lending is inherently invasive. That is why in forward-mortgage lending we ask for divorce decrees, bankruptcy papers, child-support papers, financial statements, and other very personal documents that could have bearing on the mortgage lending decision. Only fools lend other people’s money without asking relevant personal questions. In the wake of our recent mortgage-lending-led national and global financial meltdown, normal invasiveness in service of sound lending for all parties is a good thing.

On the time-consuming assertion, an extra 20 or 30 minutes conversation to get it right at the critical primary-market level is a bargain if it helps senior and lender make a better decision for all parties in the reverse-mortgage asset-chain. To paraphrase the great Indian Independence leader Mahatma Gandhi, there is more to reverse mortgage lending than speed.

*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.

Out-of-pocket Burn-through Risk

Everyone knows there is no medical underwriting in reverse mortgage lending. So there are no health-related risks in reverse mortgages for seniors and investors, right?

Wrong! For seniors with self-reported “poor health,” there are risks. However, we address just one financial risk in this post: Out-of-pocket health care costs burn-through risk.

In part seven, we defined burn-through risk in reverse mortgages. Let’s review our definition:

Burn-through risk is the chance that seniors will use up their reverse capacity faster than usual and put in doubt their ability to stay at home over time and meet borrower obligations — taxes, homeowner’s insurance, and home maintenance.

Now the out-of-pocket part: Out-of-pocket health care costs are costs not covered by insurance that seniors must pay from their own funds. They may include insurance premiums, co-pays, deductibles, and other gaps in any benefit package.

A February, 2010 study by the Urban Institute (“Will Health Care Costs Bankrupt Aging Boomers?”) says we can expect these out-of-pocket health care costs to rise, especially for lower-income seniors and for seniors without retiree health benefits.

And why are out-of-pocket health care costs expected to rise? Here are some reasons from the study:

• Rising federal and state governments debts are already resulting in cuts to entitlement programs such as Medicaid, which help low-income seniors with serious health problems to stay at home;
• Runaway health care costs over the last 35 years could continue, which would further increase premiums and co-pays for Medicare;
• Possible Social Security reform could further reduce or limit retirement income;
• Tax increases could cut take-home pay and reduce cash for out-of-pocket expenses;
• Health care and retirement costs risk-shifting trend from employers and governments to workers continues;
• Slowing to declining income growth among seniors (no recent cost of living increases to Social Security benefits).

What did the study say about out-of-pocket health care costs for boomers? Some highlights follow:

• Between 2010 and 2040, out-of-pocket health care costs will more than double from $3,300 to $7,800;
• For people 65 and older, share of household income spent on health care will jump from 10 percent in 2010 to 19 percent in 2040;
• People 65 and older who spend more than one-fifth of their income just on health care will increase from 18 percent in 2010 to 35 percent in 2030 and 45 percent in 2040;
• If employers eliminate retiree health benefits, the number of seniors with rising out-of-pocket health care costs will leap to 52 percent by 2040;
• For seniors at the bottom fifth of the income scale, health care costs will jump from 21 to 39 percent of their income between 2010 and 2040.

“With out-of-pocket health care costs increasing more rapidly than incomes,” the study says, “the financial burden of health care will increase for older adults over the next few decades.”

This is why out-of-pocket health care costs for reverse mortgage prospects with self-reported “poor health” are risk factors. It is “yellow flag” number six in the FIT process. Originators should discuss it at the loan interview.  How should you begin this delicate yet necessary conversation? Let’s try this question:

Mrs. Akuna, at FreeFloat Bank, helping you think through financial issues is a priority. The FIT paper from counseling says out-of-pocket health care expenses will eat up your cash. How about looking into ways to stretch cash from your reverse mortgage so that you can stay at home longer?*

This question could get a reality-testing conversation going and give the prospect and the loan officer opportunity to revisit how out-of-pocket health care costs could burn-through her cash as well as solutions to the out-of-pocket problem.

Let’s say the prospect came to the loan interview leaning toward a fixed-rate product for its promise of interest-rate stability. The conversation could help both prospect and loan officer to look at the growing-creditline/variable-rate HECM option, where the growth feature might act as a cost-inflation hedge.

While health or ill-health is not a factor in reverse mortgage underwriting, there are ill-health-related financial risks that seniors and lenders should be aware of. Out-of-pocket health care costs burn-through risk is one of them.

*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.

 Burn-through Risk

What is your customer’s reverse funds burn-through risk? Knowing the burn-through risk could help both lender and customer make smarter reverse mortgage lending decision.

In traditional forward mortgage thinking, a borrower lacking adequate capital (or cushion, one of the 5 Cs of Credit or Banking) carries a higher risk of default if cash-flow disruption occurs through unemployment, disability, or other adverse personal events.

Similarly, in assessing a senior’s ability to stay at home and profit from a reverse mortgage over time (the goal of FIT), lack of steady help with daily living activities can expose seniors to higher burn-through risk.

Burn-through risk is the chance that seniors will use up their reverse capacity faster than usual and put in doubt their ability to stay at home and meet borrower obligations — taxes, homeowner’s insurance, and home maintenance. What kinds of help are we talking about?

Help with fixing leaky faucets, fighting weeds and mowing lawns, gathering information, shopping, domestic assistance, social support, personal care, case management, access-to-healthcare services assistance, home maintenance, and advocacy.  The presence of steady help could ensure timely bills payment. It could also help with spotting cognitive decline earlier and putting plans in place for power of attorney, healthcare directive, and other life-planning tools.

The death of a spouse or partner, late-life divorce or separation, distance from neighbors and relatives could affect the availability of steady help. Without steady help seniors may be forced to use scarce reverse-mortgage funds to pay for routine help ordinarily available to those with spouses, partners, neighbors, and relatives.

If your customer’s FIT summary indicates risk-factor number five, the assumption is that, among others, she faces burn-through risk. How should you start the discussion at the loan interview?  Let’s try this question:

Mrs. Moja, your ability to live in your home over time and fully benefit from your reverse mortgage is very important to us at FreeFloat Bank; so, who can you call on regularly if you need help with things around the house or outside?*

 The question’s goal is to spark discussion about issues seniors and lenders may not be thinking about, issues that could affect the senior’s ability to stay at home and profit from the loan.

Since burning through their reverse cash and defaulting on borrower obligations is neither in the lender’s nor senior’s interest, the question of steady help for seniors is relevant to lender’s due diligence in reverse mortgage lending.

As a defense against default risk, steady help is to reverse mortgage lending what capital (or cushion) is to forward mortgages. Its absence is a risk factor, its presence a risk mitigator.

*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.

Marital Transitions

Among the Urhobos of Nigeria’s turbulent Niger Delta, “How are you?” is often followed by a peculiar question-cum-greeting: “Is it well at home?”

The home, in Urhobo understanding, is the center of the family and the person. Harmony at home is well-being, disharmony the reverse. If you care about a person, the thinking goes, you inquire about the state of their home.

In assessing whether a senior can stay at home long enough to reap the benefits of a reverse mortgage, “Is it well at home?” is a good question for originators to keep in mind. Marital transitions — widowhood or widower-hood, divorce, separation – are pregnant with risks for seniors and lenders. Let’s go back to Lake Matata, Minnesota and to Paul Pumata.*

Pumata, 76, lost his wife of 54 years six months ago. Ever warm, always kind and gracious, Sandy Pumata was Paul’s center, the rock of their home for 54 years.

Two months after Sandy Pumata’s death, their financial advisor, Peter Puta, delivered another blow: Monthly income from his bond portfolio will have to be cut by 50 percent to preserve capital. Puta suggested looking into reverse mortgages for cash to cover the shortfall until the portfolio rebounds.

Meanwhile, Pumata’s only daughter in Tempe, Arizona, Jennifer Zama, has been asking her dad to relocate to warm Tempe so that she could look after him now that her mom was gone. The relocation idea is persuasive because Pumata is very fond of his three grandchildren. His immediate need though is cash, and reverse mortgage is the best option, but he is uncertain about his residency in Lake Matata.

During counseling, the counselor spotted his residential uncertainty, they discussed it briefly, and the FIT summary reflected it as “yellow flag” number three. How should Pumata’s loan officer bring up the issue for discussion at the loan interview? Here is a suggestion:

“Because reverse mortgages are cheaper the longer you stay in your home, for me to know the best product to recommend for you, how long do you plan on staying in your home, Mr. Pumata?”**

This question could help Pumata and his loan officer, Randy Zeros, discuss his residency and its implications for the loan. It could help Zeros recommend the new HECM Saver, a perfect product for seniors in transitions, uncertain of their residency. But without the FIT signal and the discussion, Zeros and Pumata could have decided on HECM Standard, a decision that Pumata could come to regret, a decision that may even bring the thought of litigation to Pumata and his daughter when they learn later that there was a cheaper reverse mortgage for short term use.

Other marital transitional situations involve divorce and separation. Besides living-aloneness, the absence of a spouse or partner through divorce or separation could bring isolation and trigger depression in some seniors. Without support for daily living activities, isolation and depression could impair their health, calling into question their ability to benefit from the loan over time.

As you go about putting seniors into the right reverse mortgage, keep the Urhobo greeting-cum-question in mind: “Is it well at home?”                                                                    

*Names of people and places are fictional.

**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.

Holes in the Safety Net

Senator Fred Thompson’s commercial touting the benefits of government-insured reverse mortgages did it for Tom and Bertha Akuna of Lake Matata, Minnesota.*

Tom Akuna, 69, retired two years ago because of chronic back problems from decades of back-breaking odd jobs. Bertha Akuna, 63, is a dedicated home-maker from the old school. The couple has no children and no pets.

During pre-lending counseling, the counselor, Sonia Hudloom, uncovered two gaping holes in the Akunas’ safety net: no life insurance policy and no pension benefits for a surviving spouse.

Although Tom Akuna gets about $900 from Social Security (which covers their basic monthly living expenses) and their home is paid for, the absence of life insurance policies (which the Akunas’ religion forbids) and pension benefits for a surviving spouse means the Akunas need to manage their home equity wisely to support the surviving spouse.

The new FIT process classifies “no life insurance policy and no pension benefits for a surviving spouse” as the second risk factor. Along with other risk factors discovered in counseling, it will appear on the FIT summary the Akunas will take to their loan application interview, and their loan officer should find a way to bring up the issue. For illustration, let’s try this question:

“Mr. and Mrs. Akuna, the paper from your loan counselor says your home equity is the largest support you both have for retirement, how would you keep it for whoever survives the other?”**  

This question should achieve the FIT objective of getting the Akunas and their loan officer to think and to talk about the Akunas’ long-run financial survival. It may help them and their loan officer to come up with the right mix of loan-advance options (a.k.a. payment plans) to conserve their equity while giving them the means to meet any monthly budgetary shortfall they may have, a need that resonated when they watched the Law & Order actor and former U.S. Senator pitching reverse mortgages on TV.

Suppose the Akunas had come to the loan interview with the intention of requesting a lump sum, thinking they can “invest” it for maximum return or use it to buy some insurance product they had some vague notion of. The above question and the ensuing conversation should give the loan officer an opportunity to ask a number of follow-up reality-testing questions with the aim of getting the Akunas to be more careful with their home equity usage.

It bears repeating that one or two FIT risk factors or “yellow flags” may not be a problem, but a number of them could be a red flag.

A Fred Thompson commercial may have motivated the Akunas to consider reverse mortgage, but a FIT question could help them and their loan officer think and talk about the holes in their retirement safety net.

*Tom and Bertha Akuna, as well as Lake Matata, Minnesota, are fictional.

**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.

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.

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.

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.