History matters. As HECM (Home Equity Conversion Mortgage), and the multi-billion-dollar reverse mortgage industry it has spun, turn 20 this year, it is fitting that we take a moment to reflect on the industry’s first two decades through the eyes and work of those who were not only present at its creation, but also made significant contribution to its growth.
Nelson Hayes of Deering Savings & Loan made the first reverse mortgage in U. S. history to Nellie Young of Portland, Maine in 1961, but it would be 28 years before a product and an industry would emerge. Substantial and sustained research and development (R&D) activities began in the late 1970s due to the work of a visionary non-commercial entrepreneur: Ken Scholen, the father of the HECM program and of reverse mortgage industry in the U.S. Ken Scholen directed the first three federally-funded reverse mortgage research and development projects, organized the first three national conferences on reverse mortgages, and authored the first three books on reverse mortgages. Also, Scholen led efforts to pass the HECM program into law and developed the TALC (Total Annual Loan Cost) process in use to this day.
For his pace-setting work in HECM and reverse mortgages, Scholen received the Federal Housing Administration (FHA) Commissioner’s Award in 1995. As a consultant to AARP in the 1990s and as director of the AARP Foundation’s Reverse Mortgage Education Project from 1998 to 2007, Ken Scholen led more than 200 HECM counselor training and consumer education sessions in 47 states and coordinated the creation of the national HECM counselor examination and the prototype for the U.S. Department of Housing & Urban Development’s (HUD’s) HECM counseling protocol. He also collaborated in developing three software programs for analyzing and comparing reverse mortgages. After almost two years of trying, I recently had the opportunity to catch up with Ken Scholen.
The following are his preliminary reflections on the program and the industry his vision and work have created.
What attracted you to reverse mortgages, and why did you commit to the business?
While working for the Wisconsin Board on Aging in the mid-1970s, I met homeowners who needed a way to convert their home equity into cash without having to sell or make monthly loan repayments. Some quick research uncovered a few largely theoretical ways of doing this, but the concept was sufficiently promising that I left the Board to run a series of government-sponsored R&D efforts over the next few years. So my initial goal was to spur the development of programs and products to meet this need. The most important outcome of the R&D work was the initial HECM program proposal, but AARP was the only national organization that actively supported it. HUD issued a report opposing it and it took six years to gain Congressional approval. After the HECM legislation was enacted, my emphasis switched to helping get the program off the ground and providing consumer information and education about reverse mortgages. When the market started to grow, and it became apparent that the HECM counseling program was not ready to meet this need, my focus changed to expanding and improving the counseling program. It took a lot longer than expected, but now there appears to be broad support for a more detailed counseling protocol and individual counselor standards, including an exam and continuing education requirements, and a strong program of individual counselor performance evaluation (a.k.a. “secret shopping”).
How has the industry changed since you came in?
The reverse mortgage industry did not exist when I got started, so everything that’s happened since then has been a change. Broad major developments have been the enactment of the HECM program, the development of a secondary market, the creation of the National Reverse Mortgage Lenders Association (NRMLA), improvements in the counseling program, the encroachment of financial predators into this market, the Great Recession’s credit implosion, which has stalled product development, and the collapse of house prices, which may lead to HECM principal limit factor reductions for FY 2010.
What are some lessons you have learned about seniors, the market, and the business?
It’s not enough to assert that the predators only operate on the fringes of the market or that the loan product per se is not the problem. The reality is that the predators wield an enormous influence over the public image of the product and the market and, therefore, the health of the industry. And the existence of the product is, in fact, the necessary precondition for the financial abuse that is perpetrated on reverse mortgage borrowers. So the health of the industry is directly tied to the safety of the consumer, and halfway measures to restrain the predators will only result in halfway protection for consumers and the industry. A strong HECM counseling program can be a major factor in protecting consumers and the industry. But all the efforts to strengthen the program will mean little unless an independent source of reliable and adequate funding can be created to support it. Loan costs are a serious barrier to market growth. Consumers who would be willing to accept lesser loan benefits of various types in exchange for much lower costs are the major untapped segment of the reverse mortgage market.
What are the prospects and some challenges for the reverse mortgage industry, and why?
The credit implosion is the most serious immediate problem, and there’s no way of knowing how long its effects will be felt. But, until credit conditions improve, it will be difficult to create the much lower-cost products that have the most potential for meeting a broader array of needs and expanding the market. Other important goals include eradicating the predators who have harmed the market’s public image and fully funding the counselors whose work is so vital to safeguarding consumers and the industry. The HECM program has some long-festering problems that need to be resolved. The structure of Ginnie Mae’s securitization program and the re-emergence of other secondary sales venues will increase the likelihood of borrowers losing their homes via HECM-related property tax delinquencies.
How many news stories about such cases would it take for the public to begin associating reverse mortgages with “losing your home?”
On another front, will more stories about negative creditline growth generate a class action before this long-term problem is finally resolved? And thanks to you, Atare, the problems created by the “clarification” of the non-recourse limit have become more widely recognized. We also need to learn why borrowers have been voluntarily ending their HECM loans so much sooner than anyone had expected and to seriously consider adjusting reverse mortgage benefit structures and risk premiums accordingly. Skewing any such changes toward lower loan costs would be one way to address the cost barrier.
What is your favorite reverse mortgage story?
There are too many unique borrower stories to select just one, so here’s a tidbit from the political realm. At the HUD press conference announcing the original launch of the HECM demonstration, one of the program’s Congressional sponsors was asked what would happen at the end of a HECM’s loan term: Would the borrower be forced to sell the home to repay the loan, or would the lender take on the risk of extending the term? Apparently unaware that HECMs would have an open-ended term and the prime purpose of the program was to insure against the related risk, he answered that it was a very good question and he would ask his staff to look into it!
Atare E. Agbamu, CRMS is director of reverse mortgages at Minneapolis-based AdvisorNet Mortgage LLC. A member of the BusinessWeek Market Advisory Board, Agbamu is author of Think Reverse! and more than 100 articles on reverse mortgages. Through his advisory firm, ThinkReverse LLC, Agbamu advises financial professionals, institutions and regulators across the country. In a 2007 national report on reverse mortgages, the AARP cited Agbamu’s work. He can be reached by phone at (612) 436-3711 or (612) 203-9434.