Let’s face it: Nobody is immune to the impact of the current housing crisis. While reverse mortgages offer older Americans a way to tap home equity during retirement, the collapse of the mortgage market in 2008 has led to major changes that impact consumer choices, according to a new report from the AARP Public Policy Institute.
“For homeowners who are ’house-rich, but cash-poor,’ reverse mortgages can be a lifeline that enables older people to remain independent while meeting basic needs,” said the report. “However, declining home values and the resulting collapse of the mortgage markets have had a major impact on all aspects of reverse mortgages.”
The release of additional products like the HECM Saver may bring additional choices to consumers, but it has also made reverse mortgages more complicated, leading to more scrutiny from Congress and regulatory agencies charged with protecting consumers. In recent years, Congress has passed two consumer protection laws in response to unsuitable financial products being sold along with a reverse mortgage.
One concern highlighted in the report is the fact that reverse mortgage borrowers are getting younger in recent years. “The trend toward borrowing at earlier ages raises concerns about the long-term impact of reverse mortgages on financial security.”
With more borrowers taking out lump sums at closing, the report says that “more research is needed on the consequences of reverse mortgages for long-term financial security. Providing safe and affordable reverse mortgage options and improved counseling and disclosures will be crucial in establishing the consumer confidence needed for expansion of this important financial option.” said the report.
Despite the challenges, that doesn’t mean that all has to be gloom and doom by any stretch of the imagination. Success in the reverse world is yours for the taking if you know how to excel. What do I mean? There’s a common statement that talks about the futility of doing the same thing twice and expecting a different outcome. My hope in penning this article is that the reverse mortgage lending professional does not get caught up in this trap. You need to start by looking at what has happened in the world of forward lending.
When the market crashed, what did forward lenders do? Did they innovate? No. Did they think proactively about the future? No. They went into what can best be characterized as survival mode. They chose to do nothing and ride it out. That strategy was far from successful. On the other side of the coin, innovation is rewarded. Now is the time to innovate.
For example, when the Mortgage Disclosure Information Act hit in 2009, many forward lenders opted to implement electronic upfront disclosures as a way to comply. That’s fine, but many did not take this opportunity to look holistically at their technology and all of their point-of-sale procedures. As a result, when changes were mandated on the Good Faith Estimate (GFE) and tolerance levels were enforced between the GFE and the final HUD last year, many lenders had to go back to the drawing board. Innovative forward lenders that revamped their entire point-of-sale initially had a much easier time.
Surely we have some ideas on how you can improve your reverse mortgage operation and position yourself for success, but instead of tooting our own horn, we decided to reach out to the larger players involved in reverse mortgages today and put them on the spot to see what they are seeing and doing to weather this storm.
John Lunde, President of Reverse Mortgage Insight, described the reverse market as turbulent. He said, “Last year volume declined 35 percent while the number of companies originating reverse mortgages declined 35 percent, and BofA recently exited the reverse market. The other side of the story is the introduction of the HECM Saver program—it is a significant piece of the future of reverse lending, but it requires a great deal of changes for reverse originators to tap into its enormous potential.”
Peter Engelken, Business Division President of Genworth Financial Home Equity Access, Inc., pointed out, “This is a dynamic time for the reverse mortgage industry. For the first time in a few years, interest rates are rising and there are new regulations on the horizon that will impact how lenders and loan originators do business. While interest rates remain well below historical levels, since October 2010, bond prices have been falling and interest rates have been rising, with investors selling bonds and buying stocks. This has resulted in significant market volatility and rapid rate increases over the last 60 days. Concurrently, lenders and loan originators are preparing for the implementation of changes in compensation structures under Regulation Z that take effect April 1.
Communication and education are critical during this period to ensure consumers and business partners understand the external factors driving product, pricing and policy decisions,” he continued. “We will be conducting a series of webinars for our business partners focusing on the secondary market, product changes and implications of Regulation Z.”
Jeff Birdsell, 19-year industry veteran and VP of Product Management Reverse Mortgage Services at Mortgage Cadence, added, “To put everything into perspective, we’re in the first non-growth phase that the reverse market has encountered. One of the reasons for this is the amount of money that people can get for their homes in this current market. Low appraisals generate less cash for the borrower to use to cover the first mortgage. One of the biggest challenges, though, continues to be the lack of understanding of this product in the marketplace. We have come a long way in the last 10 to 15 years, but the majority of our senior population, and their advisors, still need to be educated on how reverse mortgages really work.”
We pressed further to get a true snapshot of market conditions today. Are things improving? Are they still gloomy?
Lunde: In the last four months volumes are up 27 percent compared to the same time as last year. We’ll see a 20 percent increase from 2010. HECM Saver will be a big part of the volume growth.
Engelken: In the short run, we expect reverse mortgage growth opportunities to be limited by external market conditions such as lower home values and higher interest rates. However, the consumer need for the product remains strong, especially during these challenging economic times. The changes implemented by HUD in 2010 in terms of product terms and consumer safeguards will serve as foundations for sustainable, long-term growth. We are very excited about the long-term growth potential of the industry.
Birdsell: Whether the current market is up or down relative to the past, there continues to be a tremendous untapped need and market for reverse. The next big thing will certainly be the HECM Saver program.
Engelken: Since its introduction in October 2010, the HECM Saver product, which features lower upfront fees but lower loan limits, has grown significantly. The HECM Saver represents almost 20 percent of our retail volume. We are very excited about the introduction of the HECM Saver product in 2010. It has helped reverse mortgages gain greater media attention and as a result, we are seeing more and more financial publications and research discussing the benefits of reverse mortgages as part of a broader financial planning strategy for seniors in all income segments. Things are not all bad. Many of the 80 million baby boomers have reached 62, the minimum eligible age for HUD reverse mortgages. This demographic is expanding exponentially, with more than 6,500 seniors turning 62 each day. On top of this, life expectancy continues to rise at a time when government entitlement programs including Social Security and Medicare are already dangerously overextended. It is only going to get worse in the years ahead as more baby boomers retire and tap into these programs.
The aging population currently holds billions of dollars’ worth of equity in their homes. These individuals are faced with mounting medical bills and have a strong desire to stay in their homes longer. Adding fuel to this momentum, the federal economic stimulus package, which was passed earlier this year, increased eligible home values for a reverse mortgage from $417,000 to $625,500, opening up more properties and equity that would qualify for reverse mortgages.
As we examine both the pros and cons associated with the current reverse mortgage market, we thought that it was critical to ask our reverse mortgage originators how lenders can get the most out of the positive elements running through the space, and at the same time, turn some of the negative trends into positives. The overriding answer that we got was that it is critical to automate in order to thrive nowadays.
Lunde: The reverse marketplace can benefit greatly from scalable technology that creates great efficiencies through the use workflow automation and the utilization of imaging. These solutions can quickly reduce the cost of originating reverse mortgages. Another potential area where technology matters is when it comes to providing more consumer-facing tools. Engelken: Technology can play a critical role in streamlining the decision process for consumers and in driving process efficiencies for lenders and loan originators. Lenders can use technology to better illustrate the true benefits of reverse mortgages for consumers based on their own personal financial situations and as part of a comprehensive retirement strategy. Today, most consumer-facing tools focus on illustrating the funds available for borrowers under a reverse mortgage.
Birdsell: The best thing that technology can do for reverse mortgages is bring a greater level of efficiency to the overall process. Technology allows for scalability. To go back to an earlier point, there still needs to be a great deal of education to bring about greater awareness. Technology can help us there, too.
Engelken: There may be opportunities in the future to use software tools to illustrate the benefits of incorporating a reverse mortgage to preserve and grow consumer wealth as part of an overall retirement plan. Technology is also critical to driving efficiencies by automating manual processes that may help reduce paperwork and ultimately support shorter turnaround times. Sure, technology can be a huge helper, but what type of technology will get you the most bang for the buck? A fully integrated technology platform can deliver true efficiency, which is vital to profitability for today's reverse lenders. The elements of a fully integrated technology platform include and provide specific benefits when applied correctly.
First, workflow automation consists of business procedures automation or “workflows,” during which documents, information and/or tasks are passed from one participant to another in a way that is governed by rules or procedures. This will eliminate or significantly streamline manual or disparate processes.
Workflow automation improves efficiency. The automation of many business processes results in the elimination of many unnecessary steps, which reduces the overall cost per loan exponentially. It also offers better process control. You get improved management of business processes achieved through the standardization of working methods and the availability of audit trails, which significantly improves compliance.
A byproduct of this approach is improved customer service. It’s important to remember that consistency in the processes leads to greater predictability in customer response levels. In the end, a total technology solution will give you flexibility. Software control over processes enables ease of configuration that is in line with changing business needs and constantly changing rules and regulations. A focus on business processes leads to streamlining and simplification, thereby reducing errors.
Second, the inundation of paper documents resulting in thousands of folders, lost and misplaced documents, cluttered offices, off-site storage, poor data security and compliance issues can break the rhythm of even the most efficient enterprise. A fully integrated electronic document management solution enables lenders to capture, store and manage documents for everyday business operations more efficiently; helping to accelerate the lending process by applying exception-based processing.
Electronic document management and imaging systems provide advanced capture and Optical Character Recognition (OCR) technology to enhance data accuracy and loan quality while increasing operational efficiencies and decreasing costs. Lenders have the ability to capture any document from any data source, view and annotate the document, and then print, fax, email or package for delivery. Documents are stored securely and all activities in the imaging system are audited. Lenders can control access to specific documents and specify who can view them and what actions can be performed on them.?
Lastly, with the current tempo of business, reverse lenders must be able to institute policy and process changes quickly to gain and maintain a competitive advantage. A Business Rules Engine allows the continual molding of technology to provide dynamic data flow to best leverage internal strategies and real-world benefits in the form of time and cost savings, along with increased scalability and profitability.
The solution should include a number of out-of-the-box events and actions to fully accomplish your goals; however, you also should have the added ability to take control, extend the system and configure your own policies and processes. Along the same lines, intelligent forms creation enables lenders to dynamically create initial disclosures and closing packages and deliver them securely to the borrower or settlement agent. The central idea is that accurate and quick document preparation and delivery through a comprehensive platform accelerates the lending process and ultimately increases customer satisfaction while maintaining compliance and reducing costs.
When housing prices stabilize (and even, dare I say, begin to increase) and all of those new baby boomers enter the market, reverse lenders have to be ready for them. Reverse lenders have to use technology to craft a better, more efficient, more compliant process in order to take advantage of a very fluid market. There is no better time to start planning for this and put these solutions in place.