BLOG VIEW: Every month, we field questions from mortgage lenders who are considering including the Home Equity Conversion Mortgage (HECM) in their product mix, but are concerned that it is too different, or risky, to be worth the cost to incorporate.
In our view, extending this unique product to existing borrowers as they age is a fantastic way to retain them for life while growing one’s business.
At our firm, we call this mutually beneficial relationship “generational lending,” which we feel is a great term to describe products that fit well with borrowers at the later stage of life.
When lenders are contemplating entering the HECM lending space, they commonly cite a few perceived barriers to entry. Often, these barriers spring from misconceptions – outdated information that predates the regulatory reforms that have radically improved the program – or they are simply not as difficult to overcome as most lenders think.
One such misconception is that lending documents for these loans are complicated. Although it is true that there are some distinctions between HECM docs and traditional mortgage docs, this should not deter a lender from adding this product to its offerings. What follows are some of the key differences between HECM products and traditional forward mortgages.
Before prospective borrowers apply for a HECM, the U.S. Department of Housing and Urban Development (HUD) requires that they attend independent reverse mortgage counseling. Counselors must have their own specialized training and must be HUD-approved to educate borrowers about HECMs.
One of the basic disclosures required under this rule is a list of HECM counselors who are available either by phone or within a reasonable distance from the borrower’s property for face-to-face counseling.
Far from a deterrent, this process instead ensures the borrower understands their loan.
As with any mortgage, the number and type of disclosure varies by state, but generally, HECMs tend to be excepted from many states’ disclosure requirements. Documents that are frequently issued for traditional mortgages are either not needed or inapplicable.
Although this can make a lender’s compliance team nervous (“Are you sure that HECM loans are deemed to conform to Sections 280 and 280-a of the New York Real Property Law and are expressly exempt from the documentation requirements under those provisions?”), it’s primarily a matter of adjustment.
Conversely, there are some unique disclosure requirements for the HECM, but many states post model forms on their regulatory agency websites – and mortgage compliance resources tend to denote disclosures required specifically for reverse mortgages.
Many lenders build-out HECM disclosure matrices for their state(s) in order to make tracking disclosure differences a snap. Like any loan program, familiarity with the product and knowing where to look for answers and updates begets confidence when it comes to compliance.
Non-Borrowing Spouse Protections
In 2014, HUD significantly improved its HECM program when it issued new guidance for non-borrowing spouses of HECM borrowers. The provisions allow non-borrowing spouses to remain in the home after the death of the borrower for a specified deferral period. Not only do these these “safeguard” provisions bring additional peace of mind to non-borrowing spouses, they have also helped change public perception of the reverse mortgage. Read more here.
HECM application and closing documents now include special disclosures for the non-borrowing spouses. The process is easy and, again, another assurance for the borrower and lender.
New requirements to assess a HECM borrower’s risk of default, collectively referred to as financial assessment, were implemented in 2015. These measures are business-as-usual for most mortgage professionals, who have been gathering similar income, expense, asset and liability information for years. The goal of financial assessment is to decrease risk of HECM default by conducting a more thorough investigation of the borrower’s financial fitness and ability to meet ongoing loan obligations such as property taxes and insurance.
Financial assessment has resulted in further alignment of the HECM with traditional mortgage products and an increase in the product’s credibility. According to the National Reverse Mortgage Lenders Association (quoting 2017 data from New View Advisors), in just two years financial assessment has reduced tax- and insurance-related defaults by nearly 75% and serious defaults by almost two-thirds.
Document requirements did not change much due to financial assessment, which mostly just changes the borrower qualification process. HUD publishes a financial assessment worksheet that allows lenders to report financial data for borrowers – and loan origination systems with integrated document generation simplify matters even further by auto-populating the worksheet.
When it’s time to apply for a HECM, the borrower won’t complete the Fannie Mae Uniform Residential Loan Application (URLA form 1003). Rather, HECM lenders use the Residential Loan Application for Reverse Mortgages (Fannie Mae form 1009).
Unlike the URLA, the FM 1009 form has not changed in several years – a plus for those responsible for training staff on the proper completion of these documents.
HUD Model Forms
HUD publishes model documents for reverse mortgages that are different from its model forward documents. For the Federal Housing Administration-insured HECM, there are two sets of securitizing documents: two notes and two mortgages (or deeds of trust, depending on state). The first note, mortgage or deed grants a security interest to the lender; the second grants a security interest to HUD.
Happily, these model documents include instructions and tend to vary less than their forward counterparts. You can make a direct comparison here. Right away, you’ll notice that the HECM list is brief.
The Impact of TILA-RESPA Integrated Disclosures (TRID)
Remember when TRID wasn’t on the horizon at all – and the Good Faith Estimate and HUD-1 Closing Statement ruled the day? In reverse mortgage land, that statement still holds true – for now, anyway. The GFE is still a mandatory document for the HECM. There is no Loan Estimate or Closing Disclosure.
The good news is that these documents are still familiar to lenders – and the better news is there’s a strong possibility that TRID will eventually apply to the reverse mortgage, bringing this document requirement into alignment with other loan programs.
E-Signatures and Origination Technology
One final concern for everyone in the industry is how to help borrowers have the best possible experience while managing compliance. Technology should be leveraged wherever possible, for all types of loans, to ensure that positive experience.
Historically, e-sign technology has not been utilized in the reverse space, but that is rapidly changing. Today, e-sign is readily available for HECM proposals and applications. This is key for borrowers who may have arthritis or medical conditions that make wet-signing a lengthy application a significant hurdle.
The benefits of HECM loans to both a lender’s book of business and to its borrowers are worth the time it takes to bring them into the fold. Even though the product is distinct, both reverse mortgages and forward mortgages are more similar than they are different, in terms of requirements.
When it comes to lending documents in particular, lenders should not be afraid of the HECM. With a bit of support and experienced partners, a lender’s team will easily absorb the small differences in the loan docs.
Today’s HECM has come a long way. Regulatory changes have aided in normalizing the product. Lenders who embrace a “generational lending” approach and add HECM loans to their product mix often find that they meet the needs of underserved borrowers better – while at the same time growing production volume, even in a flat purchase market.
Lenders that are not yet offering HECMs could be at risk for losing long-time clients to competitors that are willing to offer them what could be their last loan.
Rachel L. Smith, J.D., is compliance analyst for ReverseVision, a provider of reverse mortgage origination technology.