REQUIRED READING: What could happen to a reverse mortgage portfolio if it was poorly managed by a servicer? You can probably guess the answer! But if you are planning to introduce reverse mortgages into your company's product line-up, you need to be aware of the servicing aspects of this business.
It is worth noting the differences between borrowers and servicers on the traditional forward side of mortgages from those on the reverse side. (For the purposes of this article, ‘servicer’ also applies to ‘subservicer.’) Forward-side mortgages generally signal a course of growth and upward movement of the borrower. From first-time homeownership through the building of ‘dream homes,’ forward-side mortgages are about upward mobility.
Equity earned with each investment leads to the next investment. A reverse mortgage, on the other hand, is about cessation of movement – it is about staying put and ‘aging in place.’ Reverse borrowers, most of whom have invested wisely for a lifetime, are now desirous of declaring permanent residency. Through a reverse mortgage, they access the equity of their investment for any number of reasons: to stay in their home, to travel the world, to pay for unexpected medical costs – the reasons will be as varied and numerous as the borrower population.
The issues facing servicers on the forward side are receipt of timely payments from borrowers, escrow payments for taxes and insurance, and delinquencies and foreclosures, among others. Servicers on the reverse side deal with issues of making timely payments to borrowers, ensuring borrower tax and insurance compliance, and handling foreclosures mainly due to death. Needless to say, there are costly and mostly intangible benefits that define quality servicing of reverse mortgage portfolios.
The past four years of the housing crisis have highlighted that the valuation of a lender's or investor's servicing rights is directly linked to the value the servicer brings to bear on the portfolio. In fact, they fit together like the proverbial ‘hand in glove.’ There are various economic valuation models that determine mortgage servicing rights (MSRs), and they are provided to those that engage in the practice of buying and selling them. But servicing quality is all too often assumed – and we all know what happens when one assumes.Â
There are assumptions about reverse mortgage servicing, and they tend to run along the lines of this: ‘Reverse mortgage servicers have it made! All they do is keep track of accounts and disburse money when borrowers want it.’ Nothing could be further from the truth.
Much has been written about the origination process of reverse mortgages, and appropriately so. Counselors, loan officers, processors, underwriters and closing/title agents are the first point of contact for the borrower. It is the responsibility of these individuals to ensure that everything is timely and properly executed, and that everyone is working hard to ensure that borrowers have a pleasant and informed experience. One important distinction between the origination processes of forward mortgages versus reverse mortgages is that a reverse mortgage can commonly take three to six months to close, and quite often up to a year.
Currently, there is much scrutiny about this front-end process from both state and federal levels, and this is appropriate, too. Those individuals involved in the origination process work directly with the borrowers, the family members, friends and trusted advisers. Additionally, these same individuals will reap the first and largest portion of the revenue from the reverse loan product.
At its 2011 conference, the National Reverse Mortgage Lenders Association (NRMLA) recommended that lenders investigate and implement borrower financial assessment tools. Reverse mortgages can be a virtual godsend for many, but they are not the answer for all financial woes or challenges. The reverse mortgage industry must attract the interest of borrowers with a history of financial responsibility in order to maintain the integrity of its product.
A new understanding
In the lifecycle of a reverse mortgage, as it passes to the servicer, the sales and closing process can take up to six months or longer. When the servicer receives a loan after closing, it is entrusted with a valuable asset that will be in its possession for what used to be an average of seven years.
However, life expectancy has increased from 76 years when the reverse mortgage sector began to 82 years today. Because the average age of a borrower has dropped from 74 to 67, the new average period when a servicer could be entrusted with a reverse mortgage might be closer to nine-plus years. Frontline industry professionals have multiple ‘touch points’ with borrowers in the origination process, but they number far less, and pale in comparison, to the touch points a reverse mortgage servicer will have with borrowers over the life of these loans.
On forward loans, a first call to the new borrower may be as brief as 45 to 60 seconds. In the reverse world, first borrower calls average three to five minutes, and it is not uncommon for calls to go on for more than 30 minutes. The average senior borrower requires more explanation and patience, and those of us who service this product understand and willingly accept this responsibility.
Homeowners ages 62 and older qualify for a reverse mortgage. But the aging Baby Boomer generation, which is increasingly eligible for the reverse mortgage product, is not in the same financial position its parents once were. Retirement accounts and pensions took a severe blow in the 2008 financial crash. Aging parents, who may have outlived their savings, look to their Baby Boomer progeny for assistance – and many Boomers are raising or financially assisting their children and grandchildren.
Considering that many of these people view their home to be their greatest investment, the future for the reverse mortgage industry has never been brighter.Â
But reverse mortgages are not child's play. The Federal Housing Administration's Home Equity Conversion Mortgage is a highly complex mortgage product with fixed processes, and lenders must be sure that their borrowers are in the hands of trusted and respected professionals. Professional servicers in the reverse mortgage space will devote substantial resources on borrower care (e.g., customer service). They also must make sure all of the idiosyncratic and unique U.S. Department of Housing and Urban Development (HUD) guidelines are carefully followed. In some instances, if a deadline is missed by just one day, the HUD insurance for the product may be lost.
There is also another aspect to reverse mortgage servicing that permeates the sector: the death of either the borrower or his or her spouse. This is clearly the most difficult and traumatic situation servicers deal with on a daily basis. Servicers work with grieving family members, who run the gamut of needing gentle and guiding ‘hand holding’ – advising them of their responsibilities regarding the loan – all the way to requiring the servicer to work alongside them for the next year to properly dispose of the property.
The servicing staff managing this process requires the patience of a saint and the sensitivity and compassion of a funeral director to work with the borrower or the borrower's estate on this matter. It is not a job for the insincere or the impatient.
It is tempting to commoditize the reverse mortgage servicing process without understanding the ‘high touch’ aspects of this product. The truest value of servicing extends beyond the cost of processing paperwork. It is another part of a process that helps seniors age respectfully in their homes, honoring a lifetime investment and preserving a lifetime of memories.
John LaRose is CEO of Celink, based in Lansing, Mich. He can be reached at firstname.lastname@example.org.