With HECM endorsement volume down 27 percent from last year, the industry seems to be at a loss for answers to why this is happening. Is it the exit of Wells Fargo, Bank of America and just recently, the exit of MetLife? Is it the economic times and uncertainty about the future? Is it Dodd-Frank, appraisal management companies, appraised values, counseling issues or something else?
With 25 years of mortgage origination experience, 10 of which are in reverse, I have never before observed a time when those people who should be signing up for this program are not. I speak with people every day who would benefit tremendously from this program, but for some reason, they are holding off. There seems to be something keeping a large number of potential clients from moving forward with the process.
I believe the reduction in HECM endorsement numbers is largely due to our present economic state and uncertainty about the future. A recent headline in The Wall Street Journal read, “Economic Reports Fan Fears: Dimmer Jobs Picture and Sluggish Home Sales Cast Doubt on Recovery.” Long gone are the days of preparing an amortization schedule with a 4 percent home value growth rate. Although many of our clients want you to know what their house appraised for four to five years ago or what they were offered for their house at that time, the reality is, that was then and this is now.
The realization that such a large asset, which kept increasing in value for so many years, has now stalled or greatly depreciated is unnerving to a generation of people who thought that their future would be much different than the reality they are now facing.
But the fact is, a lagging economy has ramifications. I have a number of potential and existing clients who live in multigenerational households. In these cases, the seniors’ children have moved back home, often with their own children in tow. Job loss, foreclosure, divorce and illness are just some of the factors that can lead to this less-than-optimal living arrangement.
I currently have one such client, who is living in a multigenerational household and discussing the possibility of a reverse mortgage. He is looking to pay off his existing mortgage to free up monthly cash flow, open up a line of credit and come up with a way to avoid leaving debt for his heirs. Unfortunately, not all of these goals can be accomplished simultaneously. The best thing to do is get all of the involved parties together to discuss the options. Maybe a reverse mortgage is a short-term solution. Maybe it is a long-term solution. Or maybe the answer is to do nothing at the present time to see if the situation changes.
THE HECM SAVER
There is one specific product that might spur endorsement volume: the HECM Saver. The potential market for this program is tremendous. I believe that, as we continue to promote and market this product, more and more seniors will turn to it as a viable option to help them age in place.
Last week, I met with a couple referred to me by a CPA. The couple’s son warned them against a reverse mortgage. They decided that, since their CPA of 25 years told them to at least speak with me, they should give me a few minutes to explain the program. The market value of their home was about $450,000. The mortgage balance was $130,000 and they had $35,000 in credit card debt. The total monthly payments on the mortgage and the credit cards are $2,900, or $34,800 per year.
This couple wanted to stay in their home for two more years. The goal was to get cash-flow relief for those two years and then downsize. With no upfront mortgage insurance, the HECM Saver was the perfect fit. The financed closing costs were $4,000. If the financed closing costs were $4,000 and you could reduce annual cash outflow by $34,800 in the first year of the loan ($69,600 in the first two years of the loan), and have a line of credit of $55,000, wouldn’t you proceed?
They had agreed to give me a few minutes of their time, but I was there for two hours. Eventually, I will write this loan, but first their son must approve.
I firmly believe that when we as an industry get the word out about this program, more and more seniors will turn to the Saver in order to age comfortably in their homes.
As an industry, one of our primary tasks is to manage expectations in regard to the current value of a
It is imperative to your success to do your homework before meeting with a potential client. Nothing is worse than asking the client what the value of his home is, drawing up paperwork at that value and then going through the process, only to find out that had you investigated the three to five most recent comparable sales, you could have managed your client’s expectations right from the beginning. By printing out the comparable sales to show the client what similar houses in their area are selling for, you can make the expected home value in today’s market clear from the outset. I believe it is always better to objectively estimate the value ahead of time rather than deal with a disappointed borrower after the facts become evident.
In fairness, I must admit that there are a lot of knowledgeable appraisal companies and great appraisers out there who know a lot more than I do when it comes to appraising. Still, I believe that the rebuttal process for low appraisal values needs to be dramatically improved.
Case in point: Recently, all of our data reflected that the appraised value of a particular property should come in somewhere between $275,000 and $290,000. This was based on data collected from similar sales that occurred within the last six months.
You know how the rest of story goes. We spent a tremendous amount of time doing additional research after the appraisal had come in much lower than we anticipated. The lower appraised value was not going to give the borrower enough money to pay off his existing loan. We submitted volumes of data in the rebuttal. We waited 48 hours, only to have the appraiser come back and say, through the management company, that he disagreed. If the appraiser uses sales that are more than 6 months old and you can provide newer comparable sales that are closer in proximity, there should be an avenue to challenge these findings other than the system that is currently in place.
I understand the firewall and the reason it has been put in place. But the facts were not diligently reviewed and in the end the loser was the reverse mortgage applicant who was turned down.
I believe that there is still tremendous opportunity in this business. It is more important than ever to adjust the sails to maximize the headwinds we face. Change seems to be the only constant. Do your homework, work smart and keep the faith!