HUD requires every prospective reverse mortgage borrower to complete a reverse mortgage counseling session. We should all be in agreement that counseling is critical to the success of the Home Equity Conversion Mortgage (HECM) program. Unfortunately, some loan officers have not invested the time to understand the role of the counselor, and believe the counseling requirement slows the mortgage process and even discourages seniors from obtaining a reverse mortgage.
As usual, I look for the silver lining. And what I have discovered is this: if you understand how HECM counseling works and are able to properly guide your borrower through the process, you can increase loan production and boost referrals.
While doing research for this article, I had the pleasure of speaking with several counselors. I must admit that with all of my reverse mortgage experience, I thought I knew everything about counseling. However, my conversations yielded information that cleared up several misconceptions and filled in knowledge gaps about the counseling process. Now I’m better informed, and soon you will be as well.
HECM counseling underwent significant changes with the implementation of a new HUD protocol in 2009. These changes resulted from the study conducted by the Government Accountability Office (GAO), which is the Congressional investigative arm.
One item that stood out in the GAO report was that few counselors covered all required reverse mortgage topics, and fewer still covered the topic adequately. The GAO presented its critical findings to HUD, which then revamped the HECM counseling process.
One example of the changes that were made is the arduous counselor exam that is now mandatory for all counselors. This extensive test has over a 90 percent failure rate for first-time takers, leading many counselors to drop out of the program, but resulting in a more beneficial experience for senior borrowers. Understanding the Counseling Process is Key
There is an urban legend floating around that loan officers are prohibited from “knowing” the counseling protocol. That is false. In fact, the more you know about it, the better. The counselors I spoke to were more than happy to discuss the challenges of HECM counseling and offered insights to make all of our lives easier.
The new face of HECM counseling is now rooted in education and suitability. As with many things in life, you get out what you put in, meaning that preparing your clients for the counseling session can go a long way in creating efficiencies and preparing seniors for what they will experience.
For instance, a counselor is unable to provide a certificate to those that do not understand the product, or are confused as to the specifics of the product in which they are interested. To ensure people understand the commitment and provisions of a reverse mortgage, counselors are required to “pepper” qualifying questions throughout the counseling session. These questions range from “Who owns your home after a reverse mortgage?” to “Are you required to make monthly payments to your lender?”
If the participant answers more than five of these questions incorrectly, a counselor is unable to provide a counseling certificate. Therefore, it is important that we do the best job in explaining the intricacies of reverse mortgage prior to the counseling session.
My conversations also brought up several points that would greatly enhance a borrower’s experience, and make for a smoother counseling session. Not only would the adoption of these practices better prepare your borrower, but the care you take in cultivating an understanding of the reverse mortgage product and process could lead to referrals.
Have the Numbers!
By far, the number one challenge faced by both the counselor and loan officers is reviewing loan estimates. Loan officers get frustrated when counselors use different HECM programs with different rates, costs and fees. This can lead to the feeling that the counselor is suggesting that the borrower shop elsewhere or should attempt to negotiate fees. Counselors, on the other hand, get frustrated when they don’t have the figures the loan officer used to explain the various programs. The counselor is then forced to use generic HECM scenarios, which results in confusion for the borrower and diminishes the impact of the counseling session. The good news is that these problems can be easily avoided.
The key to solving the numbers challenge is for the loan officer to invest the time to properly explain the pros and cons of a reverse mortgage so seniors can make an educated decision before the counseling session. Once the senior has selected a counseling agency, I forward the HECM scenarios we presented to the borrower to the counselor. Though this is part of the new HECM protocol; not all lenders are doing so. This results in additional work and less accuracy on the part of the counselor.
Technology can help lenders and HECM counselors share the exact loan scenarios. Web based systems such as Reverse Vision’s SmartClient® or Ibis’ Sandbox® programs generate client specific file numbers that permit a counselor to see the lender’s figures.
Be the One to Explain the Process
Counseling sessions last an average of 90 minutes. Throughout the session the counselor is educating the participant and gauging product suitability. Your borrower will be asked pointed questions about their finances, needs and the loan products you have presented for consideration.
The counselors I spoke with emphasized that loan officers should prepare their borrowers for how long the average session takes. Let them know that many questions will be asked, suggestions will be given, and that they might feel the counselor is prying just a bit too personally into their lives. I always explain to my clients that the counselor is doing his/her best job to educate and protect them.
You should explain the details of the loan specifics and how (and why) the counseling process works to every borrower. I share that, “I hope the counseling session is the most boring conversation you’ve ever had. If it is, then I’ve done a wonderful job explaining everything.”
If counseling is an eye opening event, then I’ve done a poor job explaining or there is a misunderstanding that we need to talk through. The loan officer has the opportunity—even the responsibility!—to thoroughly explain the counseling session. By doing so, your closing percentage will improve. I’ve found that, as long as I explain the counseling process up front, I get a “second chance” with the borrower if the counseling does not go well for any reason.
Here is an actual example. I recently followed up with a borrower to see how her counseling session went. The woman said, “Not so well.” She was upset that I had not explained how she had the option of a very large line of credit or monthly check. I had not done so because the hoped for appraised value would barely cover her current mortgage balance, leaving the other options remote at best.
The saving grace was the fact that I had built some goodwill with her and she agreed to a conference call with the counselor. The problem arose when the counselor asked my client if she had any “liens” on the property and she said “no.” This led the counselor to explain to my borrower that she had the options of a large line of credit or monthly check.
Once I explained that there was a large first mortgage, the counselor agreed with me that the only likely option was a lump sum distribution. Several lessons here: explain uncommon terms in different ways (lien, mortgage, equity line, second mortgage, owe any money if you sell); invest the time up front to educate your client so that you’ll get a second chance if something goes off track; and call the counselor if confused. Disclose the Counseling Fee
This should be obvious. But the counselors I spoke with say they are often the first to tell the senior that there is a fee for counseling. All loan officers should fully disclose any and all upfront fees as well as the overall cost of a HECM. The fees are the fees, and by not properly disclosing or discussing them, you can only hurt your legitimacy and reputation. Although some agencies are able to offer HECM counseling at no cost, the recently passed 2011 federal budget eliminated over $88 million of funding to housing counseling agencies. As a result, it will be more common for seniors to be charged for counseling services.
Include the Family Some loan officers hate it when other family members get involved. My attitude is the more the merrier! Every borrower has a “trusted advisor circle” and none is closer or more trusted than kin. Invite everyone to take part in counseling. I always ask the borrower if there are any other people they will be talking with about their decision and let them know that I’d be happy to meet with them as well.
Nothing is more frustrating than to have a long lost relative (a “silent assassin” when it comes to a reverse mortgage) arrive the day of closing and say they “heard” reverse mortgages are “terrible.” I’m very proactive about meeting as many family members as possible and welcoming their comments about any other financing options.
Inviting the family often prompts the discussion about “will anything be left to the kids,” which is a common question asked of the counselor. Believe it or not, getting the family involved also generates new referral sources! Tell Them Everything
I was surprised that counselors mentioned that some seniors don’t realize they must continue to pay real estate taxes and hazard insurance. It’s imperative to the future of the HECM program that the loan officer discloses as much information about how a reverse mortgage works as possible. You can’t assume that the borrower knows all the details that you know. Make it a point to “over inform” the borrower so that there are no surprises. Handling Curve Balls
Power-of-attorney, guardian, non-borrowing spouse, trusts, death of a spouse during processing, incompetence, deaf, illiterate, physical limitations, under the influence, life estate, occupancy status, etc., etc. These are just some of the “special situations” that may crop up during the HECM counseling session.
I always suggest to the senior that they share their particular situation with the counselor, no matter how trivial it may seem or how overwhelming it may appear. In some cases it may be appropriate (even advisable) to have an attorney or accountant involved. The key is not to give advice outside of your expertise.
I’ve had examples where a borrower repeatedly asked my name every 15 minutes; was not aware a senior was drinking straight vodka until her speech became slurred; had to call an ambulance due to a diabetic seizure; and had a borrower admit he could not read after he signed all the forms. I’ve even had one very amorous 85-year old woman who was very disappointed to learn I was married! (In good conscious, I felt it necessary to warn the unmarried counselor once she had scheduled her in-person session.)
These are examples where a borrower could have faked their way through a counseling call. However, it’s incumbent upon all loan officers to take the appropriate steps of reaching out to family members if one feels a senior does not fully comprehend the HECM explanation. No Guarantees
It is important to acknowledge that a HECM is not a magic cure all. When used properly, a reverse mortgage is a fantastic financial tool to improve the retirement security of seniors. However, counselors shared that some seniors are told by loan officers that they will be “all set” or will be able to live in their homes “for free” or with “no payments” ever.
The fact that taxes and insurance must be paid; the home must be maintained; in some situations the borrower may out live a line of credit or lump sum distribution; and the fact that there might not be enough money for the senior’s next chapter of life must be discussed with the senior at the time of application.
A more fully informed senior leads to a more meaningful counseling session, and will afford the senior the best opportunity to make an educated decision on whether or not a reverse mortgage is the best solution for them. Though my company’s mission statement is to “improve the quality of life through responsible financing,” I use a custom loan disclosure that ends with the statement that I can’t guarantee their future happiness.
Why More Business For You?
My business approach is to become the “trusted advisor to the trusted advisors.” By investing the additional time to explain to prospective HECM borrowers about the nuances of a reverse mortgage and the required counseling session, the client becomes better informed and will be able to make a decision in a shorter period of time. The senior will have a smoother counseling experience and will become an advocate for your service. Referral sources will have more trust and confidence in you. And, just like underwriters recognizing the quality of your files and moving them along, HECM counselors will recognize your name the next time a senior calls, and will appreciate that you took the time to properly educate them.
Special thank you for contributing information from Cambridge Credit Counseling Corp. (Thomas Fox, Justin Lally, Steve Wiellett).