Forward on reverse: Reverse mortgages as risk management tools for forward lendersAtare E. Agbamu, CRMSReverse mortgages
The names and details mentioned in this article have been
changed to preserve anonymity.
Jessica Olstrom was looking for extra cash to pay off mounting
bills. She went to Equity Builder Mortgage to do a refinance. She
got the cash she wanted, but she, her daughter and her
granddaughter now wish that she hadn't taken the traditional
forward mortgage cash-out refinance route.
In June 2004, a loan officer at the Twin Cities-based mortgage
brokerage put Olstrom in first and second liens interest-only
loans. Mortgage banking colossus Jungleside Home Loans table-funded
both loans. In August 2004, Jungleside Financial, the retail
division of Jungleside Home Loans, refinanced the 81-year-old
Jessica Olstrom's second mortgage, increasing her indebtedness.
Let's review some facts in this transaction:
• Olstrom's income after paying her Medicare premium is
$832.
• The loan officer at Equity Builder Mortgage put her in a
stated-income program and stated her income at $4,801. Olstrom
claims she wasn't aware of the stated-income program. She couldn't
believe that there were programs like this.
• The first lien is $163,865 and the second is $62,153 with
interest and penalties.
• As of March 2006, her suburban Twin Cities home was valued
at $256,000.
Unless a miracle happens by the time you read this article,
Jessica Olstrom will have lost the place she has called home for
more than 16 years—a sheriff sale was scheduled for the first
week of April.
A reverse mortgage lender close to me was trying to get
Jungleside Home Loans to halt foreclosure and allow a reverse
mortgage bailout. His argument on Olstrom's behalf is simple:
Jungleside would lose financially if the foreclosure goes through
and its reputation would take a hit if the details of the
transaction hit the front page of the Star Tribune or The New York
Times.
Jessica Olstrom's situation is becoming more common, as
cash-squeezed older adults try to get extra cash from their homes
the old-fashioned way—cash-out refinance. The situation is
compounded by mortgage lenders and brokers who are blissfully
unaware of reverse mortgages as superior cash-out programs for some
older adults.
Let's assume the originating loan officer at Equity Builder
Mortgage wanted to help Ms. Olstrom solve her cash flow problems.
He may not be aware of reverse mortgages. However, if Jungleside's
underwriters had been competent in reverse mortgages, the
underwriters could have been alerted to the potential financial and
regulatory risks and negative publicity inherent in the Olstrom
refinance. They could have suspended the file and referred it to
their reverse mortgage unit (assuming the company has one) for
further analysis. They could have advised the broker on the
suitability of the traditional cash-out refinance for Jessica
Olstrom. They could have advised their retail division not to do
the second refinance.
Yes, some will say that the Equal Credit Opportunity Act (ECOA)
says that mortgage lenders and brokers can't discriminate on the
basis of age and they would seem to have a point. But this is not
about discrimination. It's about risk management! Underwriters are
risk managers for their employers. You don't have to be a very
smart underwriter to see the red flags all over this
transaction!
There are a few steps astute mortgage lenders and brokers can
take today to start mitigating these still unappreciated risks in
residential mortgage lending in the age of reverse mortgages:
• Train all account executives, loan officers, processors
and underwriters in the essentials of reverse mortgage lending.
That way, they can be sensitive to the needs of older adult
borrowers on fixed incomes who need cash without the mortgage
payments.
• Underwriters should scrutinize any stated-income refinance
for a person 62 or older for program suitability.
• Lenders and brokers should disclose to any cash-out
refinance borrower who is 62 or older that reverse mortgages exist,
whether or not their organizations offer the products.
• Make this reverse mortgage availability disclosure standard
application documentation for all cash-out refinances for older
adults.
• Form a reverse mortgage unit to handle these home lending
situations internally (the benefits are huge relative to the
costs). If your loan officer or account executive, upon careful
evaluation, concludes that a borrower would be better served by a
reverse mortgage, the loan officer or account executive refers the
borrower to the in-house reverse mortgage unit.
• Form strategic partnerships with competent reverse mortgage
specialists in your operating locations if you think that an
in-house reverse mortgage unit may not be cost-effective.
• Encourage your network of origination partners to gain
adequate reverse mortgage competency; sponsor reverse mortgage
training for them.
• Keep an eye on what is happening in reverse mortgage
country.
It used to be said that reverse mortgages were niche products
better left to niche players. Well, if that was the correct
conclusion years ago, I believe that it is no longer the case in a
market and a culture dominated by aging consumers. The demographic
realities we face—shrinking younger consumers and expanding
older ones—are structural and irreversible for today and
tomorrow. The smartest and most profitable way to adjust to these
new facts in the marketplace is to add products that serve a
growing market to your residential lending product mix.
IndyMac Bancorp Chairman and CEO Michael W. Perry and his team
recognized these realities when they bought the 800-pound gorilla
in the reverse mortgage jungle more than two years ago.
Tentatively, some lenders and brokers are beginning to recognize
the strategic value of reverse mortgages and they are taking steps
to become what I call "reverse-ready." There should be more!
Finally, secondary market risk managers should begin to pay
attention to the significant financial and regulatory risks and
negative publicity that traditional cash-out refinances to older
adult borrowers (62 or older) pose to their portfolios. We will see
more Jessica Olstroms in the years ahead.
Think reverse. Move forward!
Author's note: Miracles do happen! As we went to press, the
reverse mortgage lender's argument prevailed. Jungleside Home
Loans' bigwigs halted the sheriff sale and ordered an investigation
into the transaction. A reverse mortgage bailout is in
process.
Atare E. Agbamu, CRMS is president of ThinkReverse LLC, a
reverse mortgage training and consulting firm based in the Twin
Cities and is a consultant with Credo Mortgage. Atare is regarded
as an emerging authority on reverse mortgages and is frequently
consulted by financial professionals and families across America.
His reverse mortgage interviews have been Web cast on MortgageMag
Live! He can be reached by phone at (651) 389-1105 or e-mail
[email protected].
