Bringing HECMs Forward: the Best Way to Serve Senior Borrowers
By Wendy Peel
June 24, 2019
Wendy Peel is vice president of sales and marketing for ReverseVision, San Diego, a reverse-mortgage software provider. She joined ReverseVision in 2015. MBA Insights recognized Peel as one of its 2018 Tech All-Stars; she has also been honored by HousingWire and Mortgage Professional America.
Over the past three years, more than 2,000 lenders and brokers have added the Home Equity Conversion Mortgage to their product mix--yet HECM volume remains a tiny sliver of overall loan production.
There's no shortage of eligible HECM borrowers. Every day, more than 10,000 Americans turn 62, the age of HECM eligibility. This group holds more than half of the estimated $12 trillion in U.S. home equity.
My observation is that qualified borrowers that could benefit from a HECM are not presented with the loan as an option, simply because traditional loan officers have neither been trained on the product nor do they have access to product selection and pricing engines that compare the merits of the HECM against borrowers' other options. Most senior borrowers will be presented with every other type of mortgage option by loan officers but will likely only be shown a HECM if they independently seek out a reverse mortgage specialist. By virtue of its absence in the comparative decision process, the HECM product is underrepresented and senior borrowers are underserved.
If you need proof, look no further than data shared by the STRATMOR Group at the 2018 ReverseVision User Conference. Analyzing its MortgageSAT survey data against overall lending production data, STRATMOR observed that approximately 1.3 million borrowers age 65 and older took out a home loan in 2017. Although many may have been qualified to be shown a HECM, the vast majority were likely not given the opportunity to see the unique aspects of this product.
The fact is nearly all seniors who purchase a new home or leverage their home equity will walk through the doors of a bank or traditional independent mortgage bank or broker and never speak to a reverse mortgage specialist. Most senior borrowers do not know to ask about HECM and reverse loan options because they assume that their loan officer will present them with the best products for their financial needs. These borrowers are unware that even if a HECM or reverse loan is the best financial product for achieving their retirement and financial goals, a traditional loan officer will almost never present them with this option.
A House Divided
Lenders have long siloed their HECM operations by setting up separate business divisions for HECM origination, or even by creating new, reverse-only corporate entities before entering the HECM market.
At one time, this approach made sense. Following the housing market crash in 2008, lenders of all stripes were worried about reputational risk. The HECM of that era was a different product than the program offered today, and it was not without its flaws. Though insured by HUD, early HECMs had fewer consumer protections than today's loans, so they carried reputational risk.
Additionally, HECM and reverse products are designed to serve borrowers with different financial objectives than the typical forward loan candidate, and must be processed differently than traditional mortgages. Understandably, these "differences" caused firms to create "different" entities to focus on them. Taken in combination with the fact that early reverse mortgage origination technology was unable to "speak" to lenders' core loan origination systems, the decision to silo becomes easy to understand.
Unfortunately, isolating HECM operations has had unintended negative side effects on both lenders and the consumers they serve.
First, treating HECM origination as a separate business feeds the myth that the HECM is a complicated product difficult for the average, "non-specialty" lender to understand--and therefore, "non-specialty" originators can't be expected to offer the product, even to qualified customers. In truth, claims that HECMs are difficult to originate are overblown. Because the HECM is so versatile, it has a lot of uses, some of which are complex--but the core concept and execution is actually pretty simple. The mortgage world already handles loan products that are different and complex in a seamless way. Consider construction, renovation, state bond down payment, relocation, bridge, medical professional and agricultural loans, just to name a few. HECMs could be included alongside these specialty options using a similar process.
Second, sequestering HECMs prevents sharing of resources and sales leads between a lender's forward and reverse teams, making HECM lending less efficient and profitable than it should be. The highest-cost element of loan origination is not technology, fulfillment or overhead--it's sales and marketing. Sales and marketing expenses are the primary limitations of the HECM product--not applicability, acceptance or fulfillment. Separating forward and reverse loan operations means doubling up on costly lead acquisition activities.
Third, segregating HECMs often leads to technology decisions being made in a vacuum. Instead of engaging their IT, operations and compliance functions to go through a formal vendor selection process, many lenders give their reverse mortgage division leaders carte blanche to negotiate contracts for enterprise-grade HECM origination software. This is troubling from a risk management perspective and can introduce inefficiency if the chosen reverse mortgage technology can't "speak" to the lender's forward LOS.
It's an expensive, self-limiting approach--and one that is no longer effective. That's because it undercuts lenders' ability to deliver tailored loan offerings and reinforces the notion that a HECM is a last resort "special offer" rather than a normal loan program, which in turn contributes to consumer discomfort with the HECM product. Worse yet, once doubling down on marketing costs proves unsustainable, HECM sales efforts are the first to go. As a result, many consumers who could benefit from a HECM never hear about the benefits of leveraging one.
Which brings us to our final and most important point: running HECM operations as a separate business is bad for consumers. This is a hard truth that can be uncomfortable for dedicated HECM only originators, many of whom chose their line of work especially because of their interest in helping senior borrowers. Unfortunately, the research is clear. Most borrowers 62 and older are never presented the HECM as a loan option. Specialized HECM operations likely do a great job of serving the customers they reach, but they don't reach enough customers.
‘But I Have a Referral Program'
Lenders that expect referral programs to bridge the divide between disparate origination teams should think again. No amount of money is sufficient to incent loan officers, who've built their entire books of business on relationships, to hand their customers over to another LO. Nor do borrowers wish to be switched mid-stream to another loan officer when they have spent years building trust in their primary LO.
A Better Way
So, how should lenders who are interested in adding HECMs introduce the product? By using the same, disciplined approach they would apply to any other loan product.
Just as most lenders have experts on staff for specialized products like non-QM and rehab loans, it's perfectly appropriate to identify reverse mortgage specialists that can act as HECM concierges and assist the broader team with questions. Instead of isolating these experts in a separate division and treating them like referral partners, lenders should position them as trusted resources that enable every LO in the company to feel confident offering HECM loans.
At the California Mortgage Bankers Association's Western Secondary conference in July 2018, a panel of five private investors emphasized the importance of training LOs and setting them up to succeed with non-agency originations. That means not only teaching LOs the nuances and applications of these products, but also compensating those who apply their training. The HECM can be a surprisingly rewarding product for both lenders and LOs when managed this way.
Lenders should engage their forward IT and operations resources--not simply their HECM specialists--in selecting and implementing reverse mortgage software. IT teams have the knowledge and resources to ensure reverse mortgage technology is implemented properly and leverages all products to the fullest capacity, from initial qualification and education tools within the CRM all the way through to data collection and reporting.
By applying a consistent, centralized approach to assigning and managing HECM software licenses, IT can significantly reduce licensing costs and third-party risk. They'll also enjoy superior data management, which comes with a host of benefits ranging from more efficient reporting and management to more transparent LO compensation. Centralized tech management makes lead management easier and reduces acquisition costs, yielding higher marketing ROI. Further, by engaging IT, lenders can make HECM software support available through the standard help desk.
Now is the Time for Change
Compared head-to-head against other loan products, HECMs are often the more financially savvy choice for consumers--a fact not reflected by current HECM production. A HECM offers unique flexibility for seniors looking to age in place during retirement, much as first-time homebuyer programs help younger consumers with flexible qualifications and down-payment options. In 2017, the National Council on Aging led a research study showing that consumers clearly prefer HECMs over HELOCs in a blind comparison. With more than 10,000 Americans turning 62 every day, the potential for HECMs should be limitless.
But the numbers don't lie. The current, siloed approach is not the best way to serve the senior borrower whose circumstances it was designed to help. We are simply not reaching the majority of the borrowers that the product can serve.
The call for change is clear. While technology continues its evolution toward offering the HECM alongside more traditional loans, lenders must train loan officers on HECMs just as they do their other non-QM offerings. Integrating HECM processing and underwriting into existing teams will further normalize the product, and marketing HECMs alongside other offerings will save lenders money while improving the credibility of both the company and its HECM offering. All of these adjustments will provide a better experience for the consumer.
With regulatory changes that have made HECMs increasingly like traditional loans, and a market ripe with opportunity for growth, now is the time for lenders to gain a competitive edge by embracing HECMs as they would any other non-traditional loan product.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)