A mortgage servicing department oversees the life of a loan after closing, managing the account from the disbursement of proceeds until the matured loan is paid in full.
On the forward mortgage side, loan servicers handle tasks like monitor monthly payments, field borrower inquiries, oversee tax and insurance payments, and manage account delinquencies. While some of these tasks are also essential to reverse mortgage servicing, the business of servicing a HECM loan requires a distinct set of processes and presents a unique set of challenges.
As a loan designed for a protected class of borrowers, reverse mortgages require a heightened level of sensitivity and attention when it comes to servicing the loan. Furthermore, today’s HECM servicers are facing unprecedented scrutiny and uncertainty as the CFPB tightens its regulatory authority over the financial services sector and HUD debates pending changes to the HECM program. In this environment, reverse mortgage servicers must continue helping senior borrowers manage their loans post-closing, while artfully navigating the complicated rules surrounding a program in flux.
The Servicing Landscape
While lenders like Financial Freedom, Bank of America and Wells Fargo dominated reverse mortgage servicing in years past, today the market mainly comprises four companies: RMS, Nationstar, Celink and Generation Mortgage Company. Each entity approaches the business of HECM servicing with its own system and corporate philosophy.
RMS’ role as a major player in reverse mortgage servicing was further solidified when the Texas-based company was purchased by Walter Investment Management Corporation last year. RMS is unique because, in addition to being one of the largest HECM retail originators and HECM servicers in the country, it is the nation’s largest issuer of Ginnie Mae securities. According to a recent report by New View Advisors, RMS issued more than 35 percent of all HMBS pools in the first half of 2013, coming in at No. 1 for Ginnie Mae issuance so far this year. According to CEO Mark Helm, the company’s status as an issuer enables it to better manage its operations. “We definitely have an advantage,” Helm says. “Anytime you originate a loan, you put it into a security and have to have a third party take care of it; you’re not in complete control. You’re depending on that third party to handle your business for you. We stay in touch with our loans so we can monitor the quality of the loans we buy from other people and better manage the quality of the loans that we originate.”
Relatively new to the HECM scene is mortgage servicing giant Nationstar. Headquartered in Lewisville, Texas, Nationstar has been a major entity in forward servicing since 1997, only entering the HECM sector recently when it purchased the reverse mortgage servicing rights of Bank of America and MetLife. With those acquisitions in hand, the company created an impressive portfolio that has propelled it to a place among the top reverse servicers in the country. Unlike RMS, Nationstar does not have an origination channel, instead focusing solely on the servicing side. It does, however, have Ginnie Mae approval; the company came in fifth for HMBS issuance in the first half of 2013. According to Nationstar’s first quarter report, its outstanding reverse mortgage interests totaled $978 million as of March 2013, a number that increased by more than $220 million in just three months as the company continued its buy-up in the space.
Celink, on the other hand, does not issue its own securities and focuses solely on reverse mortgage subservicing. Based in Lansing, Michigan, Celink first began as a data processing, support and services company in 1969. It wasn’t until 2005 that the company began servicing reverse mortgages. “We looked at the reverse mortgage space and decided to jump in feet first, into the deep end of the pool,” says Celink CEO John LaRose, adding that the company’s reverse division began with his son Ryan and just two other employees, who managed a portfolio of about 5,000 loans purchased from Wendover Financial. The company has since abandoned other types of loan servicing, dedicating all of its efforts to subservicing reverse mortgage loans for lenders in the space. Today, LaRose says, Celink employs about 190 people who manage the company’s portfolio of more than 200,000 loans.
Like RMS, Generation Mortgage Company is a lender that operates both retail and servicing divisions. Colin Cushman, Generation’s president and CEO, says the fact that the Atlanta-based company services its own loans rather than handing them off to a third party can be an advantage for its borrowers. “The fact that we don’t transfer servicing to a third-party is very comforting to many of our borrowers, and the fact that they will have a single contact for both origination and servicing can limit confusion,” Cushman says, adding that the company’s 48-person department services a portfolio of 33,765 loans. “That said, the few servicers in this space are all experts in servicing reverse mortgage loans and so borrowers are in good hands wherever their loans are serviced.”
Learning to Service HECMs
Servicing HECM loans is a different endeavor than servicing traditional, forward mortgages. While both types manage loans post-closing, a reverse mortgage is a government-insured loan designed for a protected class of citizens, and as such it has unique characteristics that dictate the manner in which the loan should be serviced.
As Generation’s VP of servicing Mary Ann Rutledge points out, one of the major differences is that HECM borrowers do not make payments on their loans like borrowers of a traditional, forward mortgage would, meaning that HECM servicers don’t deal with loan modifications like their counterparts do on the forward side. Because of this, Rutledge says there is little a reverse servicer can do to assist a distressed borrower. “One of the main differences is that we’re not afforded as many options as they are given in the forward world,” Rutledge says. “We only have three things we can work with: We can offer to refinance the home if the value is there; we can offer the borrower HUD counseling to help them work through their issues and get back on track; or we can put them on a repayment plan and then monitor that plan.”
Helm points out another key difference. “In our business, foreclosure is not a dirty word,” he says. “The vast majority of our loans will probably not foreclose because of T&I default; they foreclose because the last remaining borrower died and the state had no interest in the property and had an opportunity to sell it.”
Cushman says this final stage in the life of the loan is what makes the servicing process so complicated. “The complexity of reverse mortgage servicing is primarily with the due and payable process,” he says. “This is a time when heirs are often stressed and the borrowers or their estates don’t fully understand the process.”
LaRose stresses the fact that the product’s complexity demands a high-tech platform to properly manage the loan. “I think many others outside of the industry look at it as a relatively simple task of accounting—keeping track of how much funds the borrower has available, distributing funds when they want them and keeping track of it. Nothing could be further from the truth,” he says. “It is an incredible, highly complex, almost esoteric loan product and it requires the most complicated mortgage servicing platform I’ve seen in 28 years.”
Helm echoes these sentiments. “The servicing of a reverse mortgage is not for the faint of heart,” he says. “If you get into this business in this servicing environment, you’ve got to really, really know what you’re doing.”
Indeed, HECMs are in many ways more complicated than traditional, forward mortgage loans, so servicing a HECM loan requires a special kind of training. For RMS and Generation, this means locating skilled servicers from the forward side and training them to adjust their processes to accommodate the special needs of a HECM loan.
“We hire very educated forward mortgage people and convert them to reverse mortgage people, because a lot of the basics—the way payouts are handled, the way investor accounting is handled, the way the loans are boarded—are the same as in the forward world,” Helm says. Helm does admit that despite some basic similarities, the nuances of a HECM create a learning curve for those who are used to forward mortgage processes. “The program has a lot of bells and whistles. HUD has some very tight timelines and foreclosure processes and things like that.”
Rutledge says Generation also hires servicers from the forward side. “The majority of our staff has a servicing background from the forward world, because there just aren’t that many reverse servicers out there.” To get them up to speed with reverse servicing processes, Rutledge says the company hosts an orientation and then pairs new employees with a mentor for one-on-one training. “We also give them an opportunity to sit and observe other people within the servicing department so they can see how their work fits in with what other people in other areas are doing,” she says. “We try to educate those in our servicing department about the entire picture of the loan, not just the little portion that each person does. We want them to understand how it all fits together to make a puzzle and how they’re an intricate part of it.”
Celink, however, typically trains people without any sort of servicing background. “We pretty much train people without any experience at all,” LaRose says, adding that the company’s Michigan location means there aren’t a lot of trained mortgage servicers in the area. “We do two and half weeks of classroom training and then very close mentoring, monitoring and supervision. There’s also a lot of ongoing training that occurs, particularly when there’s some sort of regulatory change.” LaRose says the company is launching Celink University this fall, which will be a “much more robust and extensive” training program for Celink staffers.
An essential element to training at companies across the board is teaching staff how to engage seniors over the phone. According to Helm, this is especially true because the average call time between a borrower and a reverse servicer is much longer than a typical servicing call in the forward world. Helm says that the average call time for a forward operation can be about 2 minutes 45 seconds, a short call compared with RMS’ average of 4 minutes, 30 seconds.
Helm says part of the reason the calls last so long is because senior borrowers require extra attention. “We spend a lot of time re-educating borrowers, sometimes telling them numerous times how the program works to make sure they understand it,” he says. “These borrowers need a little helping hand to figure it out; this is the nature of the business we’re in,” he says, adding that RMS currently has 114 borrowers who are past age 100.
“We have a lot of seniors who have us on a speed dial and they call us just when they want to talk,” he says. “Sometimes they call us to tell us about their aches and pains, sometimes they call to tell us what their children are doing, and sometimes they actually call us for business reasons.” Helm says a certain amount of sensitivity is required on the part of the servicer to field these calls. “We want really caring, concerned, compassionate people… We want them to treat our customers just like they would their own grandmother or grandfather.”
Cushman agrees that a heightened level of sensitivity is required to properly assist a senior borrower. “We are servicing loans for a protected class of senior citizens who face many unique challenges during this phase of their lives. The time and care needed to service greatly exceeds the general servicing of traditional mortgages across a broader age spectrum,” he says. To stress this point, Generation requires its staffers to take courses designed to teach how to connect with seniors over the phone. “We offer senior-sensitivity training in terms of how to talk to and listen to a senior when you’re on the phone, how not to push the conversation and to give them an opportunity to speak,” Rutledge adds.
Helm notes that in some cases, where the borrower’s age is advanced, servicers field calls from their adult child or an individual who has taken over power of attorney. To handle these situations, servicers must be prepared to deal with family members or other interested parties who know little about the loan or who are unhappy about its existence. “These are people who weren’t really involved in the loan process,” he says. “In some cases, the parents are using the money to help their children… and the children don’t know they are taking the equity out of their home.”
In other cases, as Rutledge points out, servicers have trouble getting in touch with the borrower. “We have a hard time getting to our borrowers, because the phone numbers provided in the application are not always the same ones that the borrowers keep,” Rutledge says. “Oddly enough, a lot of them use disposable phones, and they don’t have land lines like people did years ago. They use cellphones. In some cases their kids give them cellphones and they have a limited amount of time with them.”
Another essential element to any training program on the servicing side is teaching staffers how to spot signs of fraud. Helm says that in one instance, a borrower called to request a significant cash withdrawal because she was told she won a prize from Publishers Clearing House and needed to prepay the taxes on her prize. Helm’s servicing staff quickly intervened. “Our people are very proactive about trying to stop senior fraud,” he says.
Rutledge says her staff is also extravigilant when it comes to requests for cash draws. To ensure that it is actually the borrower requesting the withdrawal and not an imposter, Generation staffers make every attempt to confirm the borrower’s identity and the request for funds. “What we find is that sometimes it’s not the borrower requesting the money; sometimes it’s one of their heirs who has gotten a hold of their paperwork,” she says, adding that confirming the request can often be difficult because of HUD’s stipulation that the funds must be released within five days of the request. “Sometimes our hands are tied. We try to make multiple phone calls in that little window, but if it gets close to the fourth day, we’re going to have to go ahead and release the monies.”
The Challenges of HECM Servicing
Because of the unique qualities of a HECM loan and the stipulations imposed by HUD on those who service them, the companies in this sector face a distinct set of challenges.
One specific development that has been problematic for HECM servicers is the introduction of HUD’s new HERMIT (Home Equity Reverse Mortgage Information Technology) system, a platform designed to monitor and track the life of the loan; an updated and more complex version was released in October of last year.
According to Rutledge, adapting the HERMIT system has been a challenge for her department. “It has slowed down our production with regard to filing the claims, and from my conversations with other servicers, I think they are also seeing the same thing,” she says, adding that an increase in the number of transaction codes, from about 80 to more than 200, made filing claims more laborious.
Helm echoes Rutledge’s comments about the difficulties of transitioning to the new system, but says that he believes the change will be beneficial in the long run. “The other system was very antiquated. There’s no doubt in my mind that this is a much better system,” he says. “It’s the system of the future. It’s got all the bells and whistles you would want.”
Aided by the establishment of the HUD Advisory Committee, reverse servicers are working with HUD, meeting quarterly to discuss some of the issues they face, including problems with the adaptation of the new HERMIT system. “HERMIT has been a challenge,” Rutledge says. “We’ve made some steps in the right direction, which is outstanding, but we still have a little ways to go.”
Another major concern plaguing reverse servicers is the issue of tax and insurance defaults. In the past, when Fannie Mae securitized HECMs, the agency did not enforce foreclosure action against seniors who failed to pay the taxes and insurance on their properties. But when Ginnie Mae took over, some confusion ensued.
“Fannie Mae did not proceed to call loans that were in tax and insurance default due and payable,” LaRose says. “When it exited the business, there was this gap in understanding as to what exactly HUD wanted us to do.”
HUD clarified its position in a 2011 mortgagee letter, directing servicers to proceed with action against properties with tax and insurance defaults by submitting them to HUD for approval to call them due and payable and, in some cases, eventually foreclose on them.
“Since that time that’s been a dramatic change,” LaRose says. “We might have had several people monitoring tax and insurance defaults under Fannie Mae, and we now have about 25 people in that department. So our cost of servicing went up significantly when HUD clarified the rules.”
Of course, one of the greatest issues facing HECM servicers is that the rules are often changing. The recent moratorium on the fixed-rate Standard product, for example, has led to a huge shift toward ARM loans. According to Cushman, adjusting to this shift has been complicated. “Servicing ARM loans is not the same as servicing fixed-rate mortgages due to the requirements around advances and repayments,” he says. “Also, the duration of servicing is extending as we move into an ARM book, which brings challenges.”
Further complicating things are the fact that regulatory bodies have tightened their grip. Prior to the housing meltdown in 2008, reverse servicers were largely exempt from regulatory scrutiny related to servicing and licensing approval in most states, because they were approved by Fannie Mae. But all of that has changed drastically in the last five years. Cushman says complying with current regulatory demands is difficult for servicers. “Meeting the regulatory timelines and restrictions in today’s market is very challenging and at times impossible, given that many of the regulations are antiquated, conflicting and out of date,” he says.
According to LaRose, state examinations have been the most troubling thus far. “State regulatory issues have become a serious challenge for servicers on any level, because they’ve become a lot more aggressive,” he says. “We probably didn’t have an examination by a state until 2008 or 2009, and now we go through probably about eight or 10 a year.”
LaRose says the constant flow of state examinations and audits requires more staff and increases the cost of operations, which can be taxing on any business’ bottom line. “It’s a frustrating time from a regulatory standpoint to be in any business related to mortgages,” he says. “The CFPB, in terms of reverse mortgages, has been rather benign thus far, but they’ll soon turn their attention to us, and we’ll have to adjust to that, just like we’re doing with the states.”
The Future of Reverse Mortgage Servicing
There’s no denying that the reverse mortgage industry has been in a state of flux, and it’s unlikely that things will stabilize to any great degree until HUD finalizes changes to the HECM program, a move set to take place in the coming months. When it comes to servicing the product, this sense of uncertainty has likely prevented the sector from growing, and some have expressed concern about the lack of active participants on the servicing side. But most people, including LaRose, agree that until the program steadies itself, that’s unlikely to
Helm agrees and says the issue extends beyond just servicing. “I think there are probably people who have backed off from making an investment in the industry and making any sort of origination or servicing deal because of the changes happening,” he says. “Even major players in the industry now are not taking the next steps because they want to see how this turns out with HUD and with Congress.”
Although it may feel like the industry has been stuck in this holding pattern forever, HUD’s changes will come eventually. Many seem to think that once the industry adjusts to whatever these changes are, the future for the reverse sector looks bright.
“I think we’ll see positive things happening, assuming positive things come out of HUD and Congress, which I believe they will,” Helm says. “We might not get everything we want, but they’ll keep the product in play, and we’ll go down the road from there.”
LaRose also maintains a positive outlook. “The demographics and the retirement needs of the boomer generation are just too compelling to have such a small level of penetration. There is a tremendous need out there,” he says. “I think the future is exciting.”