The story goes that the very first reverse mortgage was granted in 1961. The loan, intended to help a widow stay in her home, took advantage of the equity she and her husband had amassed over many years. The reverse mortgage product has evolved a great deal over 54 years, but after much experimentation (especially through the 2000s), reverse loans have more or less returned to their original intent of helping aging seniors stay in their homes.
With each changing regulation, originating reverse mortgages becomes more like granting a forward mortgage. Originally, lenders relied exclusively on collateral value, which seems logical, given that reverse mortgages are satisfied with one payment once the underlying property is sold.
Fast-forward to the 2000s, the reverse mortgage industry’s period of greatest experimentation. This is when the HECM fixed-rate product dominated. It provided borrowers with one lump-sum payment, though it did not leave a remainder for future property tax and insurance payments.
Then came the crash following the events of 2007 and 2008. Reverse borrowers were affected, just as their forward-borrowing counterparts were. Seniors had fewer funds (or, in some cases, no funds) remaining to make tax and insurance payments. Estimates are that slightly less than 10 percent of reverse borrowers failed to do so. These failures became foreclosing events, which were poor outcomes for both borrowers and lenders.
Enter Financial Assessment. FHA lenders processing HECM loans must perform an evaluation of all prospective mortgagors on all HECM types. “All types” includes traditional, refinance and purchase.
For reverse mortgage lenders, using the “four Cs” of lending (credit, capacity, character and collateral)—as forward lenders do—may make more sense. The FA requirements raise a number of concerns that can be satisfied by using technologies similar to those used by forward lenders.
Forward mortgage technology can also help reverse lenders in several specific ways. The first is integration with credit providers. Best-in-class platforms pull both credit data and documents into systems and put them to work, including all liability account information and payment histories. Technology does the data input work so teams can concentrate on the analysis. Data integrity increases, and speeding up the process reduces the cost of loan origination.
Credit integration of this type opens the door for broader data capture. Advanced imaging technology, in addition to third-party integration, is another play reverse lenders can take from the forward lender’s book. Verifying and documenting income, liabilities, assets, property charges, extenuating circumstances and other related information is better handled through imaging platforms than through manual processes.
The best systems ingest documents, recognize and categorize them, stack them in pre-assigned orders and trigger workflows based on the documents received. We know that imaging also increases data integrity and file integrity (both in the near and the long term), speeds up the process and reduces the cost of lending.
There is another critical advantage to leveraging technologies used by forward mortgage lenders: The best systems enable transparency, which aids collaboration with borrowers.
Both forward and reverse mortgage processes seem opaque when seen from the borrower’s perspective. Most borrowers will tell you they feel under-informed and powerless throughout the mortgage origination cycle. That feeling was understandable in the days before the Internet and the emergence of modern digital technologies. The best forward lenders keep their borrowers informed through a consumer portal that shows the progress of their loan and lets them view documents and ask questions. This has revolutionized forward borrower satisfaction. It can do the same for reverse lending, and could, in the longer run, increase acceptance and use of the product.
Reverse lending has come a long way in the last half-century. While the FA requirements may seem burdensome, they are also necessary. We have learned a lot as an industry from the financial and housing crises. One of the best lessons may be that the “Four Cs” of forward lending can also be useful in the reverse space.