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The technology mindset: How to embrace change

National Mortgage Professional
Mar 06, 2008

Forward on reverse: Choice, value and HECM renewal: A conversation with BNY Mortgage Company LLC's Sarah HulbertAtare E. Agbamu, CRMSfixed-rate HECM, reverse mortgage, NRMLA Part II What a difference a price cut can make in an industry! America's reverse mortgage business got a kick in the pants in January from BNY Mortgage Company LLC. By slashing investor profit on the monthly adjusting Home Equity Conversion Mortgage (HECM) by 50 basis points, the EverBank-owned company dragged HECM and the industry into the 21st century. The major originators--Financial Freedom, Wells Fargo and Reverse Mortgage of America--have since introduced their versions of BNY Mortgage Company's HECM 100, as well as other margin-adjusted programs, giving customers unprecedented choice and value in HECM products. In March, BNY Mortgage Company launched an industry first--a fixed-rate HECM. Others will do the same soon. It is spring in reverse country. To put these developments in perspective, I spoke with Sarah Hulbert, senior vice president at BNY Mortgage Company and former four-term National Reserve Mortgage Lenders Association (NRMLA) board co-chair. NRMLA President Peter Bell has described Sarah Hulbert as an "essential leader for the industry." An industry veteran who has been in the business since 1992, Hulbert has experience in almost every aspect of the business. From 2000 to August 2006, Hulbert was senior vice president/national director at Reverse Mortgage of America, where she was part of a team which propelled the Seattle Mortgage Company division from a few loans a month to one of three major reverse mortgage lenders and servicers in America. The following is a transcript of our conversation: Atare E. Agbamu: Now, what do you say to those who say you [BNY Mortgage Company] have not really tackled the high closing-costs factor in HECM--that all you've done is merely cut margin in a tight-margin business? Sarah Hulbert: Well, as far as tackling the closing costs issue, that is the real issue, and that is something we, as an industry, are working on--to look for ways to reduce those upfront costs to the borrowers. Where that is going to come into play is with some other products, similar to the proprietary jumbo products you see out there today that have the higher margins and have no upfront closing costs. We are going to be looking at ways to do that with the HECM. Now, with the HECM 100 product, I agree; we have not addressed the upfront closing costs issue. But we have addressed the cost issue. And that is a critical issue, and it is one we as originators and lenders come up against frequently when working with the advisors of our borrowers, because they look at an amortization schedule, and they see this is a negative amortizing loan that reduces the equity in the borrower's home. And what we have done with the HECM 100 is, again, with our lower interest rate, we are consuming that equity at a much slower rate. So the cost of the loan at the time the loan is paid off, in the 74-year-old borrower example, is going to be about $28,000 less in accrued interest. That's a huge number! That's an important number! Furthermore, when we are meeting with our borrowers and we are going through the calculation worksheets, we are all required to have the borrower sign a total annual loan cost (TALC) disclosure. That TALC disclosure clearly indicates that the total cost over the life of the loan is significantly reduced. So again, yes, it has not reduced the upfront closing costs, but those upfront loan costs that are financed into the loan become part of the loan balance, hence, part of the final payoff at loan repayment. AA: Well, in a sense, you've indirectly reduced the upfront costs by reducing the margin for the long-term HECM 100 consumer. It's like killing two birds with one stone--more cash and lower overall costs. SH: Exactly! Exactly! And it is only going to get better from here, because we are going to have more options available in the future. AA: Now, how attractive will a low-margin HECM be to secondary market investors? Because that is where the cash that supports the origination business comes from. SH: It will continue to be an attractive product, but it is a different product from the HECM 150 [original monthly adjusting HECM], just as it will be a different product from--and I'm guessing, looking out into the future--an HECM 250 or an HECM 350. All those little pieces come into play when determining the value of a loan, and the lower the margin, the less value the secondary marketplace will put on a loan--the higher the margin, the more value. And that is going to come into play down the road when we develop these other products with reduced or zero upfront closing costs. AA: So, as it is right now, HECM 150 will fetch premium pricing in the secondary market over the HECM 100; consequently, lenders who want to raise money to invest in marketing and operations are more likely to offer HECM 150. That will not be the right thing to do, but they will be tempted to do that, they would argue, to stay in business. SH: That's it. Yes, the lenders in this industry are not non-profit lenders. We are in this business to earn money, but that is not the primary reason why we are in this business. We need to turn a profit, but we also need to continue our commitment to providing valuable financial services to senior homeowners. And we need to continue our commitment to looking for ways to develop new products or make adjustments to existing products to be able to provide greater accessibility to reverse mortgage products for the senior community. AA: You are definitely an evangelist for this thing--a rev-angelist, as I called ardent reverse--niks in my book. SH: Well, yes. I am a representative of BNY Mortgage, but I am also very involved at the industry level. I've been in the business since 1992 and have personally originated and closed over 500 HECMs over my career. Reverse mortgages have played a very important role in my life and my profession. AA: That's impressive. SH: In order to really be successful in this industry, I think it is important that you have the passion for the product and the passion for the people the product is targeted towards. AA: Amen! Those who come here thinking it is another mortgage product that will make them a quick buck will be disappointed. SH: Absolutely. Reverse mortgages are truly a labor of love. They are not a means to make a quick buck. And again, our job is to come up with these products. If I remember my statistics correctly, seniors who are 65-plus have over $3 trillion dollars in home equity out there in the United States. AA: I think that is even very conservative. SH: It's probably more now. That number, I think, is a couple of years old. We've got over $3 trillion in equity in homes owned by people who are 65-plus, and the question that is constantly asked is: "Why aren't more people doing reverse mortgages?" AA: There are more reasons to it. If you read my conversation with long-term care reform guru Steve Moses, who is in your neck of the woods in Seattle, some of the factors that are really affecting demand are way out of our industry's hands. In this economy, everything is interconnected. Until we have real long-term care reform--until senior homeowners with substantial home equity feel a strong push to spend down their home equity assets--they may not want to take out reverse mortgages in sufficient numbers to unlock the more than $3 trillion in home equity. According to Moses, once they wake up to the enormous risks long-term care costs pose to their homes and their well-being, they would be more inclined to buy long-term care insurance. And the demand for long-term care insurance will significantly influence demand for reverse mortgages. Moses believes the reverse mortgage and the long-term care insurance industries should be working together to educate the American people and seniors (and pre-seniors, in particular) about the risks long-term care costs represent to their homes and their well-being. SH: To encourage seniors to look at the assets they have--assets that were previously illiquid--that is when the product design does come into play, because like you said, they are not motivated to tap into the equity to pay for long-term care. However, if there are products out there that address some of the misperceptions and some of the negative aspects of reverse mortgages, we are going to only improve the awareness and acceptance of the product, as well as increase the accessibility to the product, which ultimately will encourage more seniors--maybe not as many more as we'd like right now, but it will play a role in encouraging these seniors to look at reverse mortgages as viable options to help fund their in-home care, retirement or aging-in-place goals. Atare E. Agbamu, CRMS formed ThinkReverse LLC, a Twin Cities-based training/consulting firm, to help originators address demographic change via reverse mortgages. A specialist with Credo Mortgage, Atare is the first to propose reverse mortgages as risk-management tools for forward originators. Besides marketing, originating and researching reverse mortgages since 2001, Atare has authored more than 80 articles and a book on reverse mortgages. He may be reached at (612) 203-9434 or e-mail [email protected]
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Mar 06, 2008
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