Christine McVie had it right in 1977 when she wrote ‘Don't Stop Thinkin' About Tomorrow’ for the rock group Fleetwood Mac. Lenders have lost so many products over the last two years – most of them unlamented – that the lenders that remain cannot afford to do any less than think about tomorrow.
It wasn't that many yesterdays ago that Federal Housing Administration (FHA) mortgages were all but irrelevant to many major U.S. markets by virtue of the loan limits and the bureaucracy they involved. The government loan market is, of course, as ‘today’ as you can get. Conventional loans are the least relevant alternative to many borrowers these days, as FHA represents tremendous opportunities to lenders and borrowers alike.
Another ‘product of tomorrow’ is also available and has been among the industry's rising stars: the reverse mortgage. More reverse mortgages have been originated in 2009 than any year in history, and the numbers will be increasing exponentially for at least the next 20 years, from all accounts.
Strictly speaking, a reverse mortgage also is an FHA loan, at least in its most popular current incarnation: 90% of the reverse mortgages being made today are home equity conversion mortgages (HECMs). This is good, as anything involving FHA receives instant street credibility. But the reverse mortgage is evolving, and the opportunities for lenders will evolve and grow, as well.
How can today's mortgage banker tap all this FHA potential? It is an obvious question and comes with a not-so-obvious answer: your loan origination software (LOS). But that can be a little tricky sometimes.
It is a bit similar to buying a car without having all the options you want. So you look in after-market catalogues and find the ideal whistle or bell to make the vehicle perfect. After it arrives, you realize that it will probably lack the appearance and the functionality of a factory-equipped item – it works, but perhaps not as well as the original equipment would have.
Reverse mortgages ahead
That's pretty much a fact for reverse mortgages, too. Modules added onto your existing LOS will get you through the basics of reverse mortgage lending, albeit not as smoothly as an engineered-in alternative. The point is to get involved with these loans, as the number of people wanting them has grown dramatically.
Reverse mortgages work on a formula whose most important components are age and equity. The older you are, the more you can receive monthly on the equity you have. While equity is not as easy to find today as a couple of years ago, the age part remains predictable. Baby Boomers are entitled to greater payments as they age, and it is reasonable to expect many of them to start taking advantage of the opportunity around age 65 or so, when they also benefit more from Social Security.
Another factor working to the advantage of the HECM lender is the Baby Boomer mind-set. Famously un-thrifty, members of the ‘Me Generation’ can be expected to use their equity to fund their own retirements, unlike their World War II generation parents, who were more concerned with leaving something behind. With roughly 75 million Baby Boomers on tap, about 10,000 of them are becoming eligible for reverse mortgages every day. Even factoring out those with insufficient equity, it is clear that HECMs possess a salable product for originators.
While FHA loans are tried and true, HECMs are still finding their adherents – and their critics. The noise around reverse mortgages – both positive and negative – is increasing, sometimes from predictable sources and sometimes from surprising ones. Either way, the mainstream media, being an animal that feasts on controversy, is whipping some up, and its end result is concern and confusion on the part of consumers.
AARP, for example, has published articles and letters that warn of the dangers of reverse mortgages, for ‘they consume the equity in your home until it is all gone!’ This is a bit reminiscent of Claude Rains as the corrupt police captain in ‘Casablanca,’ who loudly exclaims in a raid on Rick's, ‘I am shocked, shocked, to find that gambling is going on here!’ – just as he is receiving his winnings.
Of course, reverse mortgages consume equity – that's how they work – but borrowers don't pay back any overages as long as they remain in the home, and the ability to ‘age in place’ is a major part of their appeal in the first place.
Comptroller of the Currency John Dugan, made headlines in June when he said that reverse mortgages displayed many of the same characteristics of subprime lending. He did not necessarily compare the two, of course, but the details on his meaning were less readily conveyed than his headline-worthy comments. He went on to say that his concerns were mainly over the proprietary products, not the FHA ones, whose controls are well-set and widely understood, and account for nine of 10 reverse mortgages
At a LOS
Making FHA and reverse mortgages is easy, but it is also difficult. Some of the more traditional LOS systems out there were caught a bit flat-footed when FHA made its meteoric rise in 2008, and understandably so. In all the pre-meltdown euphoria, who would have thought that FHA would be the go-to strategy in the next several years?
The origination sector was completely unready, as was FHA itself, without the talent and resources in place to deal with demand. The industry has adjusted to it over the last two years, but the delays in obtaining mortgage insurance certificates and the risks of ending up with uninsurable loans remain a problem.
The FHA-ready LOS can help in several ways. Your provider probably has an array of tools that will help you increase your team's expertise and its ability to communicate with FHA effectively. This may come in the form of add-on modules to the existing system, a completely updated version to install or other enhancements, but you should check out all the options.
The system may also include workflow components, and these can be critical to your FHA effort. The workflow features can be of great assistance in training your origination team on mission-critical tasks and required forms that the loans demand, shortening the learning curve by weeks or months.
The downside to not getting it right with FHA is considerable: You can literally end up with a low downpayment, low FICO loan that is pretty much unsalable these days, and your already-skittish warehouse lender will not let it remain on the line very long. Leverage the features of your LOS to get the team trained properly and thoroughly.
Reverse-ready LOS systems are a bit more problematic. Even though reverse mortgages have been in existence since the 1970s, they didn't show up on most radar screens until earlier this decade. Now that reverse mortgages are starting to take off, expect more LOS providers to start updating with reverse mortgage modules.
It is not that reverses are difficult to make – they are not. They require no income verification, no particular underwriting and very little paperwork. What they do require is a deft hand, a soft touch – especially when dealing with the current crop of seniors who, having been raised during the Great Depression, fundamentally dislike debt. You will not close the deal on a reverse mortgage on the first conversation or the second, and probably not even on the third.
In addition to the borrower, you deal with their children, many of whom don't like the idea of having a reverse mortgage burning up their inheritance. With reverse mortgages, patient explanations go a long, long way.
Before a loan application can be formally taken, a counseling session is mandated by FHA, using a Department of Housing and Urban Development (HUD)-approved independent counselor. These are complicated transactions that are difficult for many people to get their extremities around, and FHA insists that the senior borrowers understand how the programs work. While this comprehension is good for both the borrower and the lender, it also adds to the time needed to get a reverse mortgage closed.
The origination technology can help coordinate all this, as well as provide carefully crafted scripts that make the explanations easier for everyone. The LOS can also provide economic modeling that shows the advantages and disadvantages of various reverse mortgage options in a side-by-side comparison. These can be explained, viewed in hard copy produced by the LOS or in a Web portal that can be accessed by multiple viewers.
As a lender, ‘Thinkin' about tomorrow’ will involve FHA and reverse mortgages of many varieties – the first of which we are seeing now in the HUD programs. After all, as the Fleetwood Mac song says, ‘Yesterday's gone'’
Jeff Osheka is president of LendingSpace, based in Fulton, Md. He can be reached at josheka@lendingspace.com.
