In the beginning, there were 50 lenders chosen by lottery in a pilot program. The U.S. Department of Housing & Urban Development (HUD) authorized each lender to make just 50 Home Equity Conversion Mortgages (HECMs), a novel home equity loan without monthly repayment obligations.
HECM presented unique challenges. One of them was servicing. How do you service a mortgage loan where the lender is required to make payments to the borrower? How do you manage a mortgage loan where, if the lender fails to make payments to the borrower on time, the lender must pay a penalty to the borrower? How do you administer a mortgage loan with different investor accounting and reporting rules? Servicing HECMs was foreign territory.
But where others saw challenges, the leader of a large forward mortgage servicing company saw opportunity. He assembled a team, studied the servicing requirements of the new mortgage beast, built a servicing platform, and sold his servicing solution to the 50 pilot HECM lenders. He did not stop there.
The infant industry built around a product authorized by Congress and designed in Washington, D.C. lacked a voice in our nation’s capital. The traditional lenders at the Mortgage Bankers Association (MBA) were too busy doing what they have always done to fully appreciate the start-up issues a small but passionate band of reverse lenders were grappling with. Issues such as consumer and public education to create awareness of (and combat misconceptions about) reverse mortgages, commitment authority to fund more loans beyond the experimental cap at 2,500 HECM loans, inefficient county-by-county loan limits that complicated marketing, decent origination income to fund marketing and operations, exclusion of cooperatives from the HECM programs, and others.
So, the leader gathered his handful of reverse tribesmen and women and told them they needed to take care of themselves, they needed a presence in D.C. In a 2004 conversation with me, he said:
“I felt that as a group of lenders, it was time to get together to create a code of ethics and best practices because my message to them was: ‘If you don’t do it [self-regulate], somebody else will regulate us. And so, you’ve got to come together as an industry and adopt a set of best practices.’”
Thus, the National Reverse Mortgage Lenders Association (NRMLA) was born in 1997 to lead consumer, public, and lawmakers education that was (and is) essential to the industry. The leader hired Dwobell Inc., an association management company, and its owner, Peter Bell, to run the new trade group.
By the year 2000, through NRMLA, the industry’s concerns were receiving attention from HUD and Congress. In a piece of housing legislation sponsored by Rep. Rick Lazio of New York, HUD agreed to study three NRMLA issues at that time: Single national HECM loan limit, a reduction in mortgage insurance premiums for seniors who purchase LTC (this is a taboo subject today), and evaluation of cooperatives for inclusion in the HECM program. Much of the improvement in the HECM product and in the industry since 1997 can be traced to NRMLA-led initiatives. In short, NRMLA put reverse mortgages on the map in America.
After founding NRMLA and serving as its chairman for two terms (he’s still on the board as founding chairman), the leader retired. Unknown to him, a second chapter of his work in reverse mortgages was about to begin.
In November of 1998, Wells Fargo Home Mortgage hired him as a consultant. And on Jan. 1, 2000, Wells Fargo lured him out of retirement to lead its senior products group.
Jeffrey S. Taylor, CMB is that leader. His innovation in sub-servicing HECMs and leadership in creating NRMLA were crucial additions to the industry’s architecture.
Although he was a pioneer in wholesale and correspondent reverse mortgage lending at Wendover Funding, during his decade-long tenure at Wells Fargo, Taylor focused on a retail origination strategy and made Wells Fargo into the nation’s largest retail reverse mortgage lender, a ranking Wells Fargo continues to maintain.
Following his August 2009 retirement from Wells Fargo, a third chapter of Jeff Taylor’s reverse-mortgage life began as chairman of Reverse Market Insight, a California-based advisory and data provider. The following is Jeff Taylor’s reflection on the first 20 years of the industry he helped to build.
What attracted you to reverse mortgages, and why did you commit to the business?
Back in 1989, I read of a pilot program by HUD that was going to provide home equity loans to seniors without requiring monthly payments, letting them use a portion of the equity in their house. At that time, only 50 lenders were being selected in a lottery administered by HUD. The 50 lenders could make only 50 loans, a total of 2,500 loans.
Being in the loan-servicing business, I knew it was going to be difficult for only 50 lenders to design and build a servicing system to actually build this product. Secondly, I felt that this could be a new frontier in mortgage lending because in the past the regular mortgage business that I had been in for the previous 20 years was doing well, and the new market that everyone was focusing on was the first-time homebuyers and new immigrants moving into the United States.
But the demographics for seniors both then and today would suggest that this is a new frontier that needs to be served. We needed to understand the product.
At that time, I was the president and chief executive officer of Wendover Funding, which was a large servicing organization, and we designed a servicing system and offered to sub-service those loans for those original pilot lenders which, essentially, got us into the business.
And why did you commit to the business?
I could see that there were adult children like myself who are always looking for options for mom and dad or grandparents. And the whole idea was that without a reverse mortgage option, many adult children were using their own money, their after-tax dollars to help support them. As always happened in the past, they then waited for the property to be sold to be paid back.
In my own case, my mother got a reverse mortgage. It allowed her to continue her independence and her financial dignity, and it just changed her life. When I saw that I felt that this business had a future.
And 20 years after, do you still feel that way?
Oh yes, I do. It’s been stated that we’ve had more growth in the last four years than we had in the previous 16, and we are yet to reach more than two percent of eligible homeowners in the demographics of 65-plus. So, I think that over the past 20 years, the first 16 years were education. The next four were fueled by falling portfolio values, the financial crisis and a number of other things. Another thing that helped was changing the lending limits, which, not much over a year ago, 80 percent of the counties in the United States had a maximum lending limit of $209,160.
The problem was that if a senior had a $300,000 home value, and they were in the lower lending limit, they only could get the amount available based on their age and a maximum value of $209,160. Today, we have $625,500 as the ceiling which has resulted in many more seniors taking advantage of the HECM program because of their ability to get more access to their equity. Moving into next fiscal year, it could be extended. So, we have been able to help a broad range of senior households based on different home values.
How has the industry changed since you came in?
First and foremost, within the last couple of years, we’ve been in the spotlight, in other words, many are taking notice of the program, lenders advocacy groups and federal and state regulators. I remember attending several meetings I put together with large banks back in the early 1990s. There was a lot of hesitation by the banks because, essentially, they did not want to even consider the fact they were ever going to foreclose on a widow or a senior. And I think after the first 15 or 16 years, the press started writing a lot of positive articles about how reverse mortgages changed the lives of seniors. The industry, including the Mortgage Bankers Association, and our trade association, NRMLA, realized that more lenders, banks and other financial services companies will need to offer this product to the coming age and demographic changes this product is going to change lives for many seniors and help keep them financially independent.
In the early days of marketing the HECM program, some lenders or brokers tried to offer other products in conjunction with the reverse mortgage which was not viewed as favorable for many seniors. Regulators and legislators began hearing of possible abuses and began changing laws to stop this kind of activity. I remember saying at the NRMLA meeting in San Diego about two years ago that: “If you think the line is long of people waiting to get into our business, the line will be twice as long of those waiting to regulate us.” That is where we are today.
And then, of course, no one could have foretold where home values have gone over the last two years. This product has a tendency to rise to the top. It makes me cringe when I hear people say this is the next sub-prime crisis. First of all, the sub-prime loans never had any insurance. There is a lot more thought and design in this product than there has ever been in the sub-prime, as well as increased emphasis on the many consumer protections outlined for the seniors in the HECM program, counseling etc.
What are some lessons you have learned about seniors, the market, and the business? Let’s start with seniors.
When dealing with seniors, basically, it’s all about trust. They have to trust you and trust your organization or they are just not going to do business with you, period. And so I think it comes down to trust, understanding that you have trained loan officers, that you have a very compliant organization, and that you follow all the rules to the letter of the law. That, in itself, will continue to garner more and more trust because, at the end of the day, are we still doing reverse mortgages in spite of the articles? We certainly are, and it is because, I believe, the senior, first and foremost, trusts who they are doing business with. That is invaluable. And if you lose that trust, you need to exit the business.
I don’t profess to be an expert on seniors as a market itself, but I know that everything we read comes down to the trust factor. The market is there. The public sector is looking to the private sector for a solution to their epidemic of runaway Medicaid expenses and states’ financial crises. They were looking primarily at reverse mortgages as potential solution to alleviate some of the funding shortfalls to keep people in their homes and out of nursing homes. That holds true today.
How about the business? What are some lessons you have learned about the business?
Well, we all know capital is king. In this business, because the product is still so young even though it is 20-years-old, we are indebted as an industry to Fannie Mae. For the past 20 years until about 18 months ago, Fannie Mae was the primary investor in this product. It pioneered the secondary market and enabled many lenders to get in the business to help more than 500,000 seniors since 1989.
What I learned about the business is that what Fannie Mae did in the previous 20 years was assume the rewards, as well as the risks, that go with the product. No one in the business ever assumed that some seniors will not pay their taxes and insurance. There appears to be a systemic problem which is driving an increasing number of seniors to default on paying their taxes and insurance. And that is problematic for the program.
Do you have a theory on what is causing the tax and insurance defaults?
Well, I think you can look at a couple of drivers. First of all, if you have a senior who is already in trouble and is facing foreclosure, and they take all the proceeds of the loan to pay off back taxes or to pay off the lender, there is a high probability that in year two, they may have difficulty paying taxes and insurance.
Looking at the program’s structure, years ago, when proprietary products were introduced, the comparison was the FHA [Federal Housing Administration] product gives you so much more principal limit. The difference was that the costs were financed, and you had to get more principal limit to cover the closing costs. In other words, if it was a $300,000 property value up to the maximum claim amount, and the closing costs were say $14,000, you would have to have at least $14,000 more on your principal limit because that was your initial balance.
From the proprietary side, many of them began saying if I am going to make a loan on a $3 million property, I had better check to see if there had been a prior history of tax delinquency because the property taxes on a $3 million home is huge. So, where is this all going? I have seen suggestions that we eliminate the servicing fee set aside and put taxes and insurance set aside as well. No matter how you get there, you will have to reduce the principal limit and hold some money back. In the event the senior does not pay their taxes and insurance, there is money there to do it. That is the future.
Let me talk about the servicing fee set aside. When I was involved in the primary design of this product, one of the difficulties was comparing the reverse mortgage and the way it is structured with origination costs, servicing costs, compared to the forward side of the business. In a forward mortgage, the servicing fee is built into the interest rate. But we couldn’t because the only product available was an adjustable loan product, and it has a line of credit feature. We never knew what the balance would be, and we didn’t want lenders to have an incentive. So, we created a fixed dollar amount that would be added to the borrower’s balance, regardless of the loan balance. That’s how we got $30, $360 a year. Now, that’s all a lender can get for servicing the loan. However, that is a consistent revenue stream, and in the forward mortgage business, your income goes down as the loan balance goes down because it is a function of the interest rate.
But I believe now, if you look at the fixed-rate product that is available, most of those loans are eventually going into securities. And I think you can do away with the servicing fee set aside because you already know what the balance is. You can make the servicing fee as part of the interest rate and put in a tax and insurance set aside for emergencies. Those are concepts that have been talked about that I think have legs.
What are the prospects and some challenges for the industry?
There is a significant group of seniors that still have home equity that will have a need for this product. The current challenges are convincing both federal and state regulators that a) the product is sound; and b) that there are significant controls to protect the consumer. The counseling component is huge. Over the years, it hasn’t been funded. A couple of years ago, counseling agencies were asking lenders for money. That was the only way we were going to get any loans closed. Now, that’s all been shut off. And the customer is paying for counseling.
It will come to ongoing scrutiny of individual mortgage company, either non-bank or bank-owned, as to playing by the rules and total transparency. The days of what I am going to call “the mortgage cowboy” are gone. They are gone because they never had any capital to start with and, essentially, after they closed the loan, they were selling it to whoever the highest bidder was. And they were using different margins because they could get a different SRP, depending on how they can convince the senior to take product “A” over “B.” That’s exactly where we were. Unfortunately, the forward mortgage business has been around a lot longer than 20 years.
Talking about the future, with the continuing cloud of yield spread premiums now under scrutiny at the state level, I think eventually they will be gone. So, that takes one leg of the three legs of the three-legged stool away, brokers relying on the yield spread premium. That comes down to origination income and selling your loans servicing-released and servicing income. I think it is going to be more of a restricted playing field. At the end of the day, any lender who wants to play by the rules can do so and do so nicely provided they have capital and a line of credit, and they have the trust of the senior consumer.
What is your favorite reverse mortgage story?
My favorite reverse mortgage story is the one that is most close and personal to me. And that was actually seeing my mother use it.
My father died in 1990. We didn’t realize that my father had taken a second mortgage out on the property so that he could buy a car. And when we discovered that my mother (then 70) was not eligible for enough, under the maximum lending limit of those times, to pay off both her first and second mortgage, she had to continue to use her own capital to pay off the second.
Five years later, she was eligible for more money because she was five years older. Meanwhile, her home in Denver had gone up in value. She was able to pay off her first mortgage with the reverse mortgage and put about $360 a month back in her pocket. And a year later, she called and said I need a new furnace. And I said, “Mom, good for you. Here is the phone. Call, use your line of credit.”
She got the money and put a new furnace in. About four years later, she sold her property in Denver. It had gone up significantly in value. She paid off her reverse mortgage and put money in the bank, and moved to Maryland to be with my sister. That’s the perfect story.
And that’s the way the program was designed to work. That is the way it did work. And that is the way it can work for many. She had the components: Need and some challenges, and she had the ability to tap her line of credit when she had an emergency. Her home went up in value. And when she paid off the mortgage, she had money left over.
Author and columnist, 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 130 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.