For some seniors who take out reverse mortgages, potential financial problems are often rooted in “non-financial” matters. Slowly, financial problems ooze out of everyday issues. “Soft” issues that financial people may not always appreciate, such as losing a spouse, living alone, staying far away from relatives, having difficulty getting up from bed or getting dressed, taking a lump sum reverse mortgage advance, relying on reverse mortgage funds for too many needs, having frequent falls and being in poor health, and lacking information about private and public benefits programs for which they may qualify, among others. Before long, these issues mushroom into an inability to meet borrower obligations. Yes, they become “financial problems.”
Built around traditional budget analysis and information about reverse mortgage alternatives and disclosures of obvious borrowers’ risks, the best conventional Home Equity Conversion Mortgage (HECM) counseling often miss these existential issues and their financial implications, let alone address them. That is about to change, thanks to two evolving forensic reverse mortgage counseling tools developed by the National Council on Aging (NCOA): The Financial Interview Tool (FIT) and BenefitsCheckUp (BCU).
Any day now, Federal Housing Administration (FHA) Commissioner David H. Stevens could issue a Mortgagee Letter mandating their use in HECM counseling. To understand these vital and emerging front-end HECM-borrower risk management tools and to share that understanding with you, I spoke with Dr. Barbara Stucki, vice president of home equity initiative at NCOA. NCOA is one of four U.S. Department of Housing & Urban Development (HUD) HECM Counseling Intermediary organizations, and Dr. Stucki runs the national reverse mortgage counseling network for NCOA.
A former researcher for the American Council of Life Insurers and AARP, Dr. Stucki directed NCOA’s highly-regarded 2005 study on aging-in-place via reverse mortgages, “Using Your Home to stay at Home.” She has testified before Congress and the Federal Reserve Board, and her research has been quoted in The New York Times, Wall Street Journal, USA Today, BusinessWeek, Fortune Magazine, Bloomberg News, The Washington Post, Money Magazine, Kiplinger’s Personal Finance Magazine and on National Public Radio, among other media.
What are FIT and BCU, and what are their purposes?
“FIT” is an acronym for Financial Interview Tool. It is a series of additional questions that reverse mortgage counselors will ask their clients in discussion about immediate financial shortfalls, as well as their ability to stay at home over time. These questions help to inform the decision older homeowners make about the appropriateness of a reverse mortgage for their situation and the loan features that might meet their needs.
“BCU” stands for BenefitsCheckUp. It is the nation’s most comprehensive Web-based service to screen for benefits programs for seniors with limited income and resources. Using a simplified version specifically designed for reverse mortgage counseling, counselors can quickly screen more than 1,800 public and private benefits programs from all 50 states and the District of Columbia. For seniors with limited incomes, benefits from existing federal, state, and local programs could be an important alternative or supplement to a reverse mortgage.
Are FIT and BCU creations of the National Council on Aging?
That’s right. We developed and started using the original questions for FIT when we began as a HECM Counseling Intermediary in 2007. Our national reverse mortgage counseling network is distinctive because it consists of agencies that primarily serve seniors. From the beginning, we felt that reverse mortgage counselors should discuss this loan using a holistic perspective that looks at factors that could affect a senior’s stay in the home and their level of dependence on the loan funds.
BenefitsCheckUp was developed and is maintained by NCOA. Since 2001, more than 2.4 million people have used this online tool to find benefits programs that help them pay for prescription drugs, health care, rent, utilities, and other needs.
We streamlined both FIT and BCU so they do not overwhelm our clients and help them look at the big picture. Seniors who have received counseling through NCOA have all gone through this process. Many have told us how much they appreciate the additional discussion. We have never received any complaint on this approach from lenders.
Why is FIT an improvement on existing HECM counseling model?
For people in dire financial straits, a traditional budget analysis can be important to solve their immediate problems. HUD also recognizes the long-term consequences of taking a reverse mortgage, and FIT will help counselors engage their clients in this deeper conversation. It is a tool to promote discussion, not just a checklist. It is a way of getting people, whose judgment may be clouded by immediate needs, to think long-term about how they plan on staying at home so they can get the full value of this loan.
FIT has counselors ask seniors a series of questions relating to risk factors that may not be considered a normal part of the discussion in taking out a loan. For example, is the person living alone? Have they had a recent fall? Do they live in a house with stairs or other barriers?
By themselves, each of these issues may not be a risk, but they can add up. For example, seniors who live alone may have few other resources so they may be overly dependent on a reverse mortgage. If they are also in poor health and their financial needs exceed their expectations, they may soon find themselves unable to fulfill their borrower obligations, such as paying property taxes, homeowners’ insurance and home maintenance. These types of risks, which we call “yellow flags,” are important and should be added to the overall assessment of a person’s needs and goals.
BenefitsCheckUp produces a customized report which describes federal, state and some local programs for which a client may be eligible; it also provides contact information to help them apply for these benefits. For many middle-income families, the types of public programs they can get may be modest. But getting help with programs, such as weatherization, home repairs or with Meals-on-Wheels, can make the difference between being able to stay at home, and not.
Is HUD going to make FIT and BCU mandatory tools for counselors?
That is our understanding. HUD is partnering with NCOA and the Administration on Aging (AoA) to provide the FIT and BCU as budget tools for reverse mortgage counseling. Counselors will be required to complete a budget with every client during the counseling session based on information obtained from the client using these tools. As part of FIT, counselors will review their clients’ monthly budget shortfalls, including extra cash needed for everyday expenses, health needs, family support and property taxes. They will also review their need for a lump sum amount to pay off existing debt, make home modifications, and to meet other financial goals.
What are the benefits of these tools for reverse mortgage lenders?
FIT can be a valuable risk-management tool for lenders. Seniors who go through counseling will receive a customized FIT summary printout, showing the types “yellow flag” issues raised and the implications these issues may have for their ability to fully benefit from a reverse mortgage. Lenders can use this report as tool to further conversation, understand the risks their clients may face, and for gaining insight into the suitability of the loan for different senior homeowners. Having this discussion upfront could help lenders manage reputation, litigation, and financial risks.
Through FIT, NCOA also collects data on counseling clients to better understand the potential needs and risks of this group of seniors. These data could help to inform product design, develop seniors-sensitivity training for lenders, and provide a better handle on the nature and magnitude of the potential vulnerabilities of reverse mortgage borrowers beyond anecdotes.
Now, I can see some lenders saying, “Hey, seniors go through trained counselors … that’s enough for me. Why do I have to duplicate the process by putting them through these touchy-feely questions again?” How would you respond to people who might say that?
Taking out a reverse mortgage is a decision that has long-term consequences and carries significant costs, so people who make these decisions about these loans should be as informed as possible. That is just good business. It is due diligence and making sure the loan is suitable for the borrower. For example, borrowers in poor health and on marginal income may find themselves at some point needing public assistance to stay at home. If they select a loan that requires a lump sum advance, they will probably not qualify for that kind of assistance. This could make it hard for them to meet their borrower obligations.
For certain borrowers, the combination of public benefits with a reverse mortgages can make this whole package work. So, there are a lot of ways lenders can benefit from this approach that looks at the bigger picture. That is part of what we are trying to do here, to think more holistically about seniors and reverse mortgages.
How should lenders use FIT?
Along with the counseling certificate, counselors will send each client a FIT review report which includes two things—an FIT number and list of advice that is based on the client’s responses. The FIT number summarizes the total number of “yellow flag” issues raised during the counseling session. For example, if a person is in poor health and recently had a fall, FIT will count two yellow flags. FIT numbers range from a high of five (no “yellow flag” issues) to a low of one (10 or more “yellow flag” issues).
The more yellow flags, the more issues a senior is facing, and the more pressure may be put on the reverse mortgage as a solution. Lenders should encourage clients to share the FIT summary, to ensure that the choices borrowers make in taking out a loan meet their needs. It will also be important to take yellow flag issues into consideration to ensure that clients select appropriate loan types and loan features.
How would a FIT number of three affect the selection of specific loan features?
The FIT number reflects the intensity of needs that a person might have. Someone with a FIT number of three would have mentioned between four to six “yellow flag” issues during counseling. As a result, these older homeowners may be trying to solve several different problems, which can make decisions about a reverse mortgage more challenging. For example, if a borrower lives alone, is in poor health, has recently had a fall, and owns a house that has stairs, they will likely need some home modifications to live there safely. Unless they have other funds to pay for these renovations, they could benefit from a line of credit or some kind of lump sum payment.
It is often a combination of problems that needs to be solved, and there may be trade-offs. Some of these needs can be conflicting. For example, the borrower may also want to have a high monthly income to enhance their quality of life.
I like the description of FIT number as an indication of the “intensity of need.” How should loan officers use this review?
To the extent borrowers continue to meet their obligations, there are no risks to lenders. But if borrowers expect to use a reverse mortgage to meet a lot of needs, then their money could be depleted very quickly. If they don’t have additional resources, such as help from family or other financial assets, they could find themselves in a difficult situation. Putting those two factors together gives loan officers a better sense of the risk. To the extent that lenders keep track of a person’s FIT number, they may be able to evaluate the impact of these potential risks over time, in terms of who decides to take out a loan and whether they are likely to face foreclosure.
Again, you said earlier that this is a conversation tool. Somebody might have a FIT number of one or two and that might indicate a high level of risk. If a lender turns somebody like that down on the basis of a FIT number, that lender might be violating some lending rules, such as Equal Credit Opportunity Act (ECOA). If the person is in dire financial need, the lender might be doing a disservice. What should a lender do if a borrower has a FIT number of one or two?
As I mentioned, the FIT number is a measure of the level and range of need, and those needs do present financial risks to borrowers. A low FIT number does not mean a person should not get a reverse mortgage. It means that they are dealing with many issues, which will require a lot of thoughtful discussion, and perhaps some honesty about how long this person is going to be able to stay at home. For some, reverse mortgages may be exactly the tool that will address these diverse set of needs. One of the great strengths of a reverse mortgage is that it can be used for any purpose.
Similarly, if a person has a high FIT number of five, they may not be facing any imminent risks or cash needs. For these older homeowners, the question may be “Why are they taking out a reverse mortgage?” Is it really appropriate for somebody who may not have much need for these types of loans to incur those costs? Perhaps they should wait until there is a more immediate need. On the other hand, they may want to liquidate some of their home equity so that they can prepare for emergencies. The FIT number itself does not give the answer, but it opens up a more fruitful and broad-based discussion about the various issues people are trying to solve by taking out a reverse mortgage.
Why are you excited about FIT and BCU for counselors and lenders?
Counseling on reverse mortgages offers an important “teachable moment” because it occurs when people are making important decisions that could affect the rest of their lives. It is also an opportunity to reach out to middle-income families, who may not have the luxury of working with a financial planner or who may not easily qualify for public benefits. Enhancing this counseling through FIT and BCU helps to strengthen financial planning and the financial education continuum.
Are FIT and BCU essentially HECM counseling enhancement tools?
Absolutely! That is the way we’ve always looked at it. People need to know about the loan basics, but we believe it is not just the life of the loan, but the life of the borrower that needs to be considered in making these types of decisions.
Atare E. Agbamu, CRMS is author of Think Reverse! and more than 130 articles on reverse mortgages. Since 2002, he writes the nationally distributed column, Forward on Reverse. Through his advisory, ThinkReverse LLC, Agbamu advises financial professionals, institutions, and regulators across the country. In a 2007 national report on reverse mortgages, AARP cited Agbamu’s work. He can be reached by phone at (612) 203-9434 and e-mail at [email protected]