Immediate needs drive most reverse mortgage lending. Everyone knows that. What everyone may not know is that lending to meet immediate needs could be very risky for seniors and for lenders without good intelligence about seniors’ long-run needs and goals. The newly-mandated Financial Interview Tool (FIT) is about digging a little deeper for better home equity conversion mortgage (HECM) prospect intelligence to inform the lending decision-making. This critical insight persuaded the U.S. Department of Housing & Urban Development (HUD) to impose the National Council on Aging’s (NCOA’s) innovations in the new HECM counseling protocol.
Why should reverse mortgage lenders care about FIT (after all, it is a counseling mandate)? Two words: Intelligence and understanding.
To help seniors make better HECM decisions, lenders need to be better informed about seniors, and FIT provides that extra intelligence.
Since Sept. 11, 2010, every HECM prospect counseled is given a FIT summary printout, which shows “yellow flag” issues (risk factors) raised in counseling and their implications for a borrower to “fully benefit from a reverse mortgage.”
Lenders can use these yellow flag issues as cues for questions and conversation with prospects. Let’s look at a yellow flag: Living alone.
This factor could prompt questions such as:
►How much help do you have with your daily activities, Mrs. Akuna?
►Who can you call when your health changes suddenly?
►How lonely and isolated do you feel?
One implication for a live-alone person is that they may be too dependent on the reverse mortgage cash to pay for services freely available to seniors with spouses, partners, neighbors or relatives.
As NCOA’s Barbara Stucki said, “By themselves, each of these issues may not be a risk, but they can add up.”
Add poor health to living alone, and you have prospects whose financial needs may outrun their expectations, thus hurting their ability to meet borrower obligations such as paying property taxes, buying homeowner’s insurance and maintaining the home.
FIT could also help lenders manage reputation, litigation and financial risks by giving them early warning and opportunities to manage risks upfront. For example, a FIT report might flag poor health; more conversation might uncover mental health issues. If they are matters involving the senior’s decision-making capacity, the lender could (and should) work with counselor to refer the prospect to mental health professionals.
A HECM lender’s failure to spot a co-borrower’s mental health problems caused a New York Supreme Court Judge to void a reverse mortgage in December 2009 (The Doar Matter).
Before you say, “Wait a minute. This is not fair. We are lenders, not psychiatrists!” Here are the judge’s words:
“…the burden of knowledge … must be shifted to the mortgagee [lender] when dealing with a reverse mortgage.”
To carry this burden of knowledge (knowing the reverse mortgage borrower holistically), lenders and their loan officers must understand seniors. Questions, conversation and interactions are more reliable means of knowing customers. No quantitative technology (the idols of lending) can alter this fact.
For 21 years, the industry lived under the delusion that it understands seniors and their needs. Lenders and loan officers told themselves that "All you need to work with seniors successfully is trust." While trust is important in working with seniors or non-seniors, earning someone's trust is not the same thing as understanding them.
For the first time in the industry's 21-year history (thanks to NCOA and to HUD), counselors are being required to make the effort to understand seniors and all their needs. It is a game changer. It is a good thing. Wise lenders will get the message and adopt FIT-like processes to capture more prospect intelligence and make better reverse lending decisions. Others will whine about “over-regulation” and return to business as usual.
Could it be that a scathing U.S. Government Accountability Office (GAO) report to Congress on HECM counseling last June and the Doar decision drove HUD toward FIT and other tighter rules in the new HECM protocol? Lenders ignore these developments at their peril.
Call it Atare’s first law of reverse mortgage lending: Know your borrowers beyond immediate needs. If you do not, courtrooms and newspapers’ pages could be very expensive places to find out.
Atare E. Agbamu is author of Think Reverse! and more than 140 articles on reverse mortgages. Since 2002, he writes the nationally-distributed column, “Forward on Reverse.” A former director of reverse mortgages at Minneapolis-based AdvisorNet Mortgage LLC, Agbamu has years of hands-on experience marketing and originating reverse mortgages. 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]