What is your prospect’s burn-through risk? Knowing a prospect's burn-through risk could help both lender and prospect make better reverse mortgage lending decision. In traditional forward mortgage thinking, a borrower lacking adequate capital (or cushion, one of the “5 Cs of Credit or Banking”) carries a higher risk of default if cash flow disruption occurs through unemployment, disability or other adverse events.
Similarly, in assessing a senior’s ability to stay at home and benefit from a reverse mortgage over time (the goal of the Financial Interview Tool or FIT), a lack of steady help with daily living activities can expose seniors to higher burn-through risk. Just what is burn-through risk in reverse mortgages?
Burn-through risk is the chance that seniors will use up their reverse capacity faster than usual and put in doubt their ability to stay at home and meet essential borrower obligations—taxes, homeowner’s insurance and home maintenance.
What kinds of help are we talking about?
Help with fixing leaky faucets, fighting weeds and mowing lawns, gathering information, shopping, domestic assistance, social support, personal care, case management, healthcare services, home maintenance and advocacy. The presence of steady help could ensure the timely payment of bills. It could also help with spotting a potential cognitive decline earlier and putting plans in place for care, power of attorney, healthcare directive and other life-planning tools.
The death of a spouse or a partner, late-life divorce or separation, and distance from neighbors and relatives could affect the availability of steady help. Without steady help, seniors may be forced to use scarce reverse funds to pay for routine help ordinarily available to those with spouses, partners, neighbors and relatives.
If your prospect’s FIT summary indicates risk factor number five, you can assume they face burn-through risk, among other risks. How should you start the discussion at the loan interview? Let’s try this question:
Mrs. Moja, your ability to live in your home over time and fully benefit from your reverse mortgage is very important to us at FreeFloat Bank. So, who can you call on regularly if you need help with things around the house or outside?
The question’s goal is to spark discussion about issues seniors and lenders may not be thinking about, issues that could impact a senior’s ability to stay at home and benefit from the loan.
Since burning through their reverse cash and defaulting on borrower obligations is neither in the lender’s nor the senior’s interest, the issue of steady help for seniors is relevant to the lender’s due diligence in reverse mortgage lending.
As a defense against burn-through risk, steady help is to reverse mortgage lending what capital (or cushion) is to forward mortgages. Its absence is a risk factor, its presence is a risk mitigator.
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]