By Michael Detwiler
The industry is only beginning to see the potential of reverse-mortgage lending. What will it take to jump into the space in a big way?
Ask the average real estate professional what a mortgage is, and you'll get a predictable answer. But there is a growing American demographic—growing by about 6,500 people each day—that defines this financial instrument in a whole new way. Older homeowners have found a new way to take equity out of their homes to pay for increasing expenses without taking on the burden of monthly loan repayments.
While senior citizens over the age of 62 may refer to reverse mortgages as a new loan product, the truth is these loans have been available for about 20 years. The most common, the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration (FHA), enjoyed a resurgence in the early years of this decade and has been showing signs of strong growth as aging boomers cross the 62-year-old threshold and become eligible in growing numbers.
Much has been written about reverse-mortgage lending, and by now most lenders are well aware of its potential. Some experienced lending executives have abandoned traditional forward-mortgage lending and are now exclusively marketing reverse products to seniors. David Peskin, chief executive officer
of Senior Lending Network, a program of World Alliance Financial Corporation, Melville, New York, is one of them.
"We're talking about a marketplace that continues to grow every year," Peskin says. "While we have 6,500 seniors who turn 62 every day, this market has less than 2 percent penetration. There is a tremendous need for this product. We think this is going to become a several-trillion-dollar space within the next seven to 10 years."
A different kind of mortgage
There are many differences between traditional mortgage loans and reverse mortgages, all of which have been explained quite often in this publication and others over the past few years. But there are some critical differences that deserve a more in-depth discussion. One has to do with the borrowers and the other has to do with the technology the lender employs to serve them.
According to information published by the Department of Housing and Urban Development's (HUD's) Office of Policy Development and Research in 2007, the average age of the reverse-mortgage borrower is 74. These homeowners typically receive a reverse mortgage with an average maximum principal limit of $159,000 against a home valued at $289,000.
This borrower does not compare with the average traditional mortgage borrower, and has traits that are light years away from the typical first-time mortgage loan customer. As Peskin puts it, "You're not dealing with any income or credit requirements with these borrowers. It comes down to the value of the home and clear title."
Despite the fact that half of the traditional loan origination process is not relevant with these reverse-mortgage products, Peskin says they are not necessarily easier to originate.
The work that goes away on the consumer-credit side of the underwriting process is replaced on the front end by more demanding lead-generation and product-sales functions. Because the differences are significant, Peskin advises any company interested in moving into the space to make a commitment to it.
"If you're a company that's looking to get into the space, your business model should be built around reverse mortgages," Peskin says. "It's tough to do both, because the process of originating these loans is very different from that of traditional mortgages."
While it's true that there are significant differences that must be considered in order for a company to be effective at reverse-mortgage lending, some have found that with the right technology and the right focus on the customer, lenders can supplement forward-mortgage lending volume with the addition of reverse mortgages. But above all else, enhanced attention to the customers' needs is critical.
"Customers must be treated as individuals," says Barton Johnson, president and chief executive officer of Life Stages Financial Inc., Melville, New York. "Companies must invest the time to understand the customer's personal circumstances. We in the industry refer to it as suitability," he says.
Johnson is no stranger to reverse-mortgage lending. From 2003 to 2007, he was chief operating officer and president of Financial Freedom, Irvine, California, a company that was originally owned by Lehman Brothers, New York, and later sold to Indymac Bank, Pasadena, California, which is now under the control of the Federal Deposit Insurance Corporation (FDIC). He took that company from 7,000 loans a year to almost 50,000, increasing loan volume from $415 million to $5 billion in the process.
Johnson is co-chairman of the National Reverse Mortgage Lenders Association (NRMLA), Washington, D.C. Today, he says, his reverse-mortgage lending firm is evolving into what he calls "a [baby] boomer-oriented financial institution serving those over [the age of] 50."
Putting the customer first
For Johnson, reverse-mortgage lending is similar to forward lending in that the needs of the customer are of primary importance.
"We have to make sure we're selling the right product to the customer and that we're carefully monitoring and controlling the cross-sell of other products, related or not related," he says.
"The biggest risk that seniors face is not fully understanding the terms related to the money they borrow, or how to appropriately spend [and preserve] that money," Johnson says.
That risk involves a senior—usually a widow, finding herself alone and without sufficient income to deal with the high expenses that often come with old age. Because seniors have so much equity tied up in their homes, it seems reasonable that these homeowners will have fewer short-term financial concerns as they tap into that equity with reverse lending. But it's an area where lenders must tread carefully.
Seniors, as a group, have a tremendous number of advocates looking out for them. The best approach for lenders is to provide a lot of information to reverse-mortgage customers and prospects.
"We've always believed that education is the right way to market these loans to consumers," says Peskin. "The more educated they are, the more likely they are to work with you. Also, you have to market the fact that you've got a trained and experienced sales team. Seniors are really looking for guidance, and you want to make sure that the team you have is well-trained."
But some of the same rules apply
While much is different with these products, when it comes time to close deals, lenders are still concerned with some of the same basic things. Among them are the ability to scale their operations efficiently and affordably, the ability to move deals swiftly from the point of sale to the closing table and the ability to effectively manage their pipeline from lead through to secondary market.
While reverse-mortgage lending may look like a niche market now, all signs indicate that the growth in this segment will be extreme. Any lender working in this space will need an infrastructure that will allow it to scale easily. Consequently, lenders working here will be as interested as their forward-lending counterparts are in effective loan origination and servicing technology.
"While the customer and the product are totally different, the process is similar in many ways," says Johnson. "You have to find a customer; take an application, process it; underwrite; close; fund; insure; ship; manage the pipeline; and put the loan into the servicing portfolio."
"Unfortunately, the vast majority of technology tools that are in use today for traditional mortgage lending are not sufficient in the reverse-mortgage arena because they are not built around the core functionality that makes it simple to administer reverse-mortgage workflow via business rules. Having said that, there are significant differences as well," says Johnson. "For example, we [reverse-mortgage lenders] make monthly payments to customers; we don't collect them. In our servicing shop, we're into the disbursement side much more than the collection side."
Regardless of the tools lenders use to automate their processes, streamlining that process will be critically important, just as it is for all mortgage lending. While the workflow is different here, using business rules to move the deal through the system efficiently is important.
Perhaps equally important is having easy access to compliant documentation—another similarity for both forward- and reverse-mortgage lending. However, the disclosure-related requirements in reverse lending are quite different, and there are many consumer-advocacy groups ready to take up the fight should any lender make a mistake.
Finally, reverse-mortgage lenders are just as concerned with pipeline management as their forward-lending cousins are. As Peskin points out, "It's very important to make sure that you have a system that allows you to manage your pipeline effectively so that loans close quickly. Every dollar spent getting the loan to the closing table operationally is a dollar that comes out of profits."
Peskin advocates using technology to drive those costs down, but points out that it should provide a technology infrastructure suited for reverse-mortgage lending.
The challenge for reverse-mortgage IT executives
This constitutes the real challenge for information technology (IT) executives working for reverse-mortgage lenders. Much of the work involved in this business seems very familiar, but most of the technology in use by traditional lenders will not allow reverse-mortgage lenders to succeed.
"When you look at what is out there, from a technology standpoint there are really only a few real choices," says Peskin. "When a lender makes a decision on technology, it is important that it allows for growth in the business—and does so efficiently. You don't want to buy something that you're going to outgrow, because it will cost you a fortune to put it into place and then [you will] outgrow it in a short period of time. That's just not where you want to be," he says.
Because mortgage executives on the origination side of the business often become attached to loan origination systems (LOSes) that have served their needs in the past, it is common to see companies attempt to adapt existing forward-mortgage LOS technology for reverse-mortgage lending. This is rarely a successful approach, unless the LOS company you leverage has both forward and reverse functionality built into its existing technology. If the reverse functionality is not present within the application, it will force the lender to move through a painful learning curve as the software and workflow are adjusted. At worst, it could inhibit the company from growing due to scalability issues that will arise as the adapted technology is pushed to the limits.
In general, origination and servicing technology developed for forward-mortgage lending will not be effective for reverse-mortgage lending. However, there is a class of technology that has been adapted successfully. Enterprise-level technology that is built on a service-oriented architecture (SOA) around a core business rules system will allow lender IT staff and mortgage technologists to create effective workflows for both forward- and reverse-mortgage loan origination.
"You need a comprehensive enterprise solution for reverse-mortgage lending," says Johnson. "The key is having a fully integrated solution, because reverse mortgages have a fairly long sales and processing cycle."
Johnson points out that in contrast to the traditional market, where deals move very quickly through the system, particularly in the refinance business, reverse-mortgage lending takes a lot longer. HUD's principal-limit protection (similar to traditional rate locks) runs for 120 days from the time the case number has been filed. This puts additional burdens on IT and technology.
Lead data are stored longer. The origination process takes longer due to legal requirements, often working with the FHA, and because the customer just moves through the process more slowly. Finally, when the deal closes, all of the data have to be handed off seamlessly to the reverse servicing system.
"The reverse-mortgage sales cycle is quite different," Johnson says. "People will get a letter, put it under a magnet on the refrigerator and leave it there for two years before deciding to call us. Since it's an FHA product, it can take 45 to 60 days or more to process. Essentially, it's a more difficult loan to do because the customer doesn't want to be rushed. Seniors just want to be cautious and make sure this is the right thing to do."
Technology will be called upon to move these leads through the long process of turning the homeowner into a reverse-mortgage customer. Through that process, business rules management can keep the deal moving forward. According to Johnson, process automation is the key, and getting documents imaged on the front end into the system effectively is very important.
"It's important to take the application electronically. Even if the senior is uncomfortable with the computer, a loan officer must submit it to a portal," Johnson says.
"Once you have that electronic application in the system, you have numerous processes that can automatically begin. In the old world, somebody would have had to pick up the paper file to see what to do. In the new world, as soon as that appraisal is scanned it triggers electronic workflow activities and workflow queues that put each task on the desk of the person who needs to work on it," he says.
Johnson says the technology his firm is heading toward will provide that kind of automated pipeline management, from the point of sale all the way through to post-closing—all customized for the reverse-mortgage lending business, but also with the added advantage of being able to successfully handle forward mortgages. Through multiple successful implementations on both the forward and reverse side of lending, Mortgage Cadence has found that technology can reduce origination and processing costs by as much as 30 percent.
These savings depend, in large part, upon having a documentation solution fully integrated into the loan origination system. Stopping the process to search for appropriate documents will eliminate the advantages that good automation can deliver. Both Peskin and Johnson agree that having the document engine built in is a superior alternative.
Success stories in reverse-mortgage lending
According to the National Reverse Mortgage Lenders Association, the industry closed 112,100 Home Equity Conversion Mortgages (HECMs) during fiscal year 2008, which ended Sept. 30, 2008—surpassing the record loan volume for fiscal year 2007, according to HUD data. Due to this growth, there are a number of companies poised to become very successful as this market develops. In every case, the executives in these firms have carefully considered the similarities and differences between reverse and traditional lending, and have adopted technologies specifically designed to streamline reverse-mortgage lending processes.
"There are two distinctly different ways to judge how technology can impact your business," Johnson says. "The traditional way is to look at operating efficiencies and productivity, and the cost savings they create. But when you have a rapidly growing and underserved market, I see technology as the way to reach that market—a way to drive volume. There is a good margin in the reverse product, and the scale is what drives value. If you put the right technology in place with the right process, you can do 10 times as much business."
Additionally, successful lenders are good at leveraging the expertise of their technology vendor partners. If the technologists the lender relies on for automation really understand the reverse-mortgage business and have made an investment in that business, and if the platform is built to accommodate changes based on business rules, the lender should have little problem building a reverse-mortgage lending business at the same time the company continues to succeed with traditional mortgage lending.
Elements of a Successful Platform
Data-driven workflow automation
A major differentiator of enterprise lending solutions (ELS) versus traditional loan origination systems (LOSes) is having one centralized location for maintaining rules, security, products and workflow. This eliminates problems of synchronizing multiple systems, thus reducing the time required to add products, change processes and adapt to the competitive landscape. It also provides the ability to quickly and easily access data required by your customers. Offering sophisticated data-driven workflow automation, powered by a rules engine, is key.
Internal documentation engine
An ELS needs to support document preparation for first mortgages, second mortgages, home-equity lines of credit (HELOCs) and reverse mortgages. Handling both initial disclosures and closing packages, this solution should include an extensive forms library, including Fannie Mae, Freddie Mac, Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) programs, federal and state disclosures, and a wide variety of private-investor products along with the ability to create custom forms. The library needs to be continually updated to accommodate changes in agency guidelines (federal or state) and compliance rules and regulations.
Commitment by vendor
Vendors that have been successful offering both forward- and reverse-lending solutions have made a significant investment in hiring the right staff that fully understand the nuances, similarities and differences between forward and reverse lending. The vendor should have a platform that can truly handle both types of lending and should continue to commit resources to both forward and reverse. The vendor should also have a proven track record of successful installations in both forward and reverse lending, and should have the references to back up its claims.