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
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