The names and details mentioned in this article have been changed to preserve anonymity.
Jessica Olstrom was looking for extra cash to pay off mounting bills. She went to Equity Builder Mortgage to do a refinance. She got the cash she wanted, but she, her daughter and her granddaughter now wish that she hadn't taken the traditional forward mortgage cash-out refinance route.
In June 2004, a loan officer at the Twin Cities-based mortgage brokerage put Olstrom in first and second liens interest-only loans. Mortgage banking colossus Jungleside Home Loans table-funded both loans. In August 2004, Jungleside Financial, the retail division of Jungleside Home Loans, refinanced the 81-year-old Jessica Olstrom's second mortgage, increasing her indebtedness. Let's review some facts in this transaction:
• Olstrom's income after paying her Medicare premium is
• The loan officer at Equity Builder Mortgage put her in a stated-income program and stated her income at $4,801. Olstrom claims she wasn't aware of the stated-income program. She couldn't believe that there were programs like this.
• The first lien is $163,865 and the second is $62,153 with interest and penalties.
• As of March 2006, her suburban Twin Cities home was valued at $256,000.
Unless a miracle happens by the time you read this article, Jessica Olstrom will have lost the place she has called home for more than 16 years—a sheriff sale was scheduled for the first week of April.
A reverse mortgage lender close to me was trying to get Jungleside Home Loans to halt foreclosure and allow a reverse mortgage bailout. His argument on Olstrom's behalf is simple: Jungleside would lose financially if the foreclosure goes through and its reputation would take a hit if the details of the transaction hit the front page of the Star Tribune or The New York Times.
Jessica Olstrom's situation is becoming more common, as cash-squeezed older adults try to get extra cash from their homes the old-fashioned way—cash-out refinance. The situation is compounded by mortgage lenders and brokers who are blissfully unaware of reverse mortgages as superior cash-out programs for some older adults.
Let's assume the originating loan officer at Equity Builder Mortgage wanted to help Ms. Olstrom solve her cash flow problems. He may not be aware of reverse mortgages. However, if Jungleside's underwriters had been competent in reverse mortgages, the underwriters could have been alerted to the potential financial and regulatory risks and negative publicity inherent in the Olstrom refinance. They could have suspended the file and referred it to their reverse mortgage unit (assuming the company has one) for further analysis. They could have advised the broker on the suitability of the traditional cash-out refinance for Jessica Olstrom. They could have advised their retail division not to do the second refinance.
Yes, some will say that the Equal Credit Opportunity Act (ECOA) says that mortgage lenders and brokers can't discriminate on the basis of age and they would seem to have a point. But this is not about discrimination. It's about risk management! Underwriters are risk managers for their employers. You don't have to be a very smart underwriter to see the red flags all over this transaction!
There are a few steps astute mortgage lenders and brokers can take today to start mitigating these still unappreciated risks in residential mortgage lending in the age of reverse mortgages:
• Train all account executives, loan officers, processors
and underwriters in the essentials of reverse mortgage lending.
That way, they can be sensitive to the needs of older adult
borrowers on fixed incomes who need cash without the mortgage
• Underwriters should scrutinize any stated-income refinance for a person 62 or older for program suitability.
• Lenders and brokers should disclose to any cash-out refinance borrower who is 62 or older that reverse mortgages exist, whether or not their organizations offer the products.
• Make this reverse mortgage availability disclosure standard application documentation for all cash-out refinances for older adults.
• Form a reverse mortgage unit to handle these home lending situations internally (the benefits are huge relative to the costs). If your loan officer or account executive, upon careful evaluation, concludes that a borrower would be better served by a reverse mortgage, the loan officer or account executive refers the borrower to the in-house reverse mortgage unit.
• Form strategic partnerships with competent reverse mortgage specialists in your operating locations if you think that an in-house reverse mortgage unit may not be cost-effective.
• Encourage your network of origination partners to gain adequate reverse mortgage competency; sponsor reverse mortgage training for them.
• Keep an eye on what is happening in reverse mortgage country.
It used to be said that reverse mortgages were niche products better left to niche players. Well, if that was the correct conclusion years ago, I believe that it is no longer the case in a market and a culture dominated by aging consumers. The demographic realities we face—shrinking younger consumers and expanding older ones—are structural and irreversible for today and tomorrow. The smartest and most profitable way to adjust to these new facts in the marketplace is to add products that serve a growing market to your residential lending product mix.
IndyMac Bancorp Chairman and CEO Michael W. Perry and his team recognized these realities when they bought the 800-pound gorilla in the reverse mortgage jungle more than two years ago. Tentatively, some lenders and brokers are beginning to recognize the strategic value of reverse mortgages and they are taking steps to become what I call "reverse-ready." There should be more!
Finally, secondary market risk managers should begin to pay attention to the significant financial and regulatory risks and negative publicity that traditional cash-out refinances to older adult borrowers (62 or older) pose to their portfolios. We will see more Jessica Olstroms in the years ahead.
Think reverse. Move forward!
Author's note: Miracles do happen! As we went to press, the reverse mortgage lender's argument prevailed. Jungleside Home Loans' bigwigs halted the sheriff sale and ordered an investigation into the transaction. A reverse mortgage bailout is in process.
Atare E. Agbamu, CRMS is president of ThinkReverse LLC, a reverse mortgage training and consulting firm based in the Twin Cities and is a consultant with Credo Mortgage. Atare is regarded as an emerging authority on reverse mortgages and is frequently consulted by financial professionals and families across America. His reverse mortgage interviews have been Web cast on MortgageMag Live! He can be reached by phone at (651) 389-1105 or e-mail [email protected].