PERSON OF THE WEEK: John Button is president and CEO of ReverseVision, a provider of origination technology to the reverse mortgage industry. He is also a veteran of the U.S. Navy, where he served as a systems engineer, as well as a motorcycle enthusiast who enjoys going on rides in Baja, Mexico, and the U.S. as often as possible. MortgageOrb recently interviewed Button to learn more about the potential growth of the reverse mortgage industry in the years to come, as well as what the industry is doing to counter mainstream reports casting aspersions on reverse mortgage products.
Q: The Consumer Financial Protection Bureau (CFPB) recently issued a report on the number and type of complaints it has received regarding reverse mortgages. Altogether, the bureau has received about 1,200 complaints about reverse mortgages since 2011. About how many reverse mortgages were originated during that time period, and do you think this is a high number of complaints in comparison?
Button: From 2011 through 2014, approximately 260,000 home equity conversion mortgage (HECM) loans were made and endorsed by the U.S. Department of Housing and Urban Development (HUD). With 1,200 complaints, that's something like 0.5%, based on the number of the loans that were done. In 2013, about 2.5% of all forward mortgages completed had a complaint. Therefore, just on a relative basis, it doesn't seem particularly high – yet I think the more important question isn't necessarily the absolute value of the complaint number but more the fact that a complaint is an opportunity to improve.
The critical thing for the reverse mortgage industry is to understand the details of those complaints and act to improve where we can. My guess would be reverses are a loan product that's not as well understood as a traditional forward mortgage, and a lot of these complaints could have been resolved by educating the borrower better before they engaged in the loan.
Q: One of the complaints the CFPB has received centers on the inability to add new borrowers to an existing loan: Reverse mortgages prohibit spouses, heirs and dependents from taking over the loan. This is because loan amounts are, in part, calculated using a borrower's age and the loan repayment is triggered when the last borrower moves out or dies. This can be a problem for surviving spouses and children. Family members complained to the CFPB about not being added to the loan so they could keep the home. Is this a valid complaint, and what is the solution?
Button: My view would be any complaint is valid. I don't want to invalidate somebody's complaints if they have an issue there. That said, you might not be able to always come to a solution that is agreeable to everyone.
Of course, there have been very important role changes about non-borrowing spouses in the reverse mortgage world over the past year. Now, a non-borrowing spouse can be considered as part of the loan – so at least for that category of folks, the issue is partially dealt with. Yet reverse mortgage lenders still need to educate potential borrowers on the rights of non-borrowing spouses.
In addition, the other family members should be informed prior to the loan being put in place, especially if it is important to the family that they keep the home. This is where working with a financial planner in conjunction with a reversed mortgage lender can help smooth out a lot of those issues on the front end because this issue is really part of a more comprehensive estate-planning situation. The counselor that is required for all reverse mortgages can assist with this in a limited capacity, but it is incredibly sensible for reverse mortgage lenders to advise the use of a financial planner in preparing for this type of situation.
Q: Borrowers have also complained about struggles with foreclosure due to issues with property taxes and homeowners' insurance: A previous CFPB report found that nearly 10% of reverse mortgage borrowers are at risk of foreclosure because they failed to pay these expenses. Consumers who complained to the CFPB described unsuccessful attempts to halt foreclosure proceedings by paying overdue taxes. Others insisted that their loan servicers had incorrectly determined that their taxes were overdue. Sometimes, these inaccuracies were due to a failure by loan servicers to keep accurate records. What, in your opinion, can be done to fix these problems and eliminate these complaints?
Button: Although ReverseVision doesn't operate in the servicing side of the reverse mortgage market, one change that may help reduce defaults/foreclosures in general is the recent financial assessment rules issued by HUD. The core of financial assessment is evaluating the borrower's ability to pay tax and insurance in advance and, if needed, creating a set aside much like an escrow account in the forward world to help ensure the borrower stays current on taxes and insurance. This change will very likely have a sizable effect on these kinds of issues – and could essentially eliminate them as a problem.
Retroactively, with respect to existing loans, financial assessment is going to provide more in-depth analysis and data around borrowers' past experiences in paying taxes, and that information will carry over into servicing. Therefore, my guess is servicers will have substantially better insight into the facts in this area for each borrower than they have today, which could make the resolution process run much more smoothly.
Q: The CFPB also recently brought action against three lenders for using deceptive marketing when advertising reverse mortgages. Specifically, these lenders were using marketing materials that implied affiliation with a government program. Do you think reverse mortgage lenders need to more careful, or thorough, when developing their marketing campaigns?
Button: ‘Careful’ is probably the operative word. It's important to help borrowers understand the role that the Federal Housing Administration (FHA) plays in HECM loans so avoiding any mention of the FHA entirely isn't the right answer. People need to understand that connection and how important that is, but by the same token, lenders should not overstate the FHA's level of involvement, which is, I think, where some of these lenders happened to get into some difficulty. Reverse lenders need to be very crisp in their language in both marketing materials and one-on-one sessions about the FHA's involvement in the HECM product.
Q: What else do you think can be done to better educate consumers about reverse mortgages? Is education the key to reducing some of the negative attitudes and false perceptions about these products, or is there more to it than just education?
Button: Education certainly plays a role. Most consumers understand the notion of a classic forward mortgage very well because that product has been around forever, and anyone that owns a home has experienced how that works. However, few consumers have ever experienced a reverse mortgage, and as such, they tend to view the product with a level of mistrust. Therefore, education around the program is key to helping borrowers understand what HECMs are and how they work before they make their decision.
This is another area where financial planners could play an incredibly strong role in not only helping consumers understand the HECM loan product, but, in a more in-depth way, analyzing how that loan product fits in to a borrower's overall retirement plan and, more broadly, the family's financial plan.
In addition, there also needs to be a shift in perception about the purpose of a reverse mortgage. The program's original intent was to allow seniors who wanted to stay in their home as they aged to do so, and it is the use of HECMs as a means of last resort for seniors in financial distress that has contributed significantly to the negative perception of HECMs. Financial assessment and other regulatory changes have more closely aligned today's HECM product with the program's original intent and eliminated some of the "wiggle room" in borrower qualifications.
Q: The mainstream media has done much to cast doubt on these products – what do you think are some of the more egregious errors the media has made in the past when presenting the ‘facts’ about reverse mortgages? In other words, how much damage do you think the mainstream media has caused for the reverse mortgage industry? What can be done about that?
Button: There certainly has been quite a number of mainstream news articles that present bad cases or bad situations, and sometimes, those have been presented poorly without fully describing the reality of what happened. That said, I think there has been substantial change in how the media has presented HECM products in general over the last year or 18 months.
There have been substantially more positive articles in the media than there have been negative ones, which is a significant change and is certainly good news. The aspect that's maybe been missed in past coverage is the vast majority of people who've gotten reverse mortgages over the past few years have been very satisfied with what they have done. It's really the outliers or exceptions – the ones that have had negative experiences – that have gained the most attention.
The satisfaction rate for HECMs right now is running well above 95%, so the biggest disservice the media can do is to present one negative case without helping the reader understand that the vast majority of cases have been incredibly positive. It's that misrepresentation about the overall picture that can be the most harmful – just singling out one story out of many, many positive stories.
Q: How is technology helping reverse mortgage lenders stay in compliance and improve the origination process? How far along has technology come in the reverse mortgage space, and how much more room is there for process improvements?
Button: Technology certainly has been an important ingredient in staying compliant, but particularly right now, technology is going to play an even larger role. Until recently, the majority of the focus of originating a reverse mortgage had been around the property, and that's certainly sensible and important given the nature of the product.
With the advent of financial assessment, lenders now have to evaluate the ability of the borrower to stay current on taxes and insurance over the life of the loan, however long that may be. Making that underwriting decision requires the application of logic as well a series of complex calculations. It brings a much higher level of complexity to the act of originating a reverse mortgage loan, so I think technology is going to play an even stronger role than it has in the past, from a compliance point of view.
In addition, I think the opportunity in the space for technology improvement from both a compliance perspective and an efficiency perspective is still substantial. There is lots more that can be done that is not yet in place in general in the industry, and that's true for a couple of reasons. First, the reverse industry functions different than the forward industry, so it's not quite as straightforward of a process to take some of the kinds of technology tools that are used in the forward industry and immediately apply them to the reverse market. They need their own special flavor, if you will, to work properly in the reverse space.
This is especially true in the secondary market. One could assume that calculating future cashflows for a pool of assets is the same regardless if the pool is made up of forward or reverse loans – and on the surface, that is true. The difference lies in how the assets behave over time. Reverse loans don't behave financially the same way forward mortgage assets do. Modeling cashflows for forward mortgage assets relies heavily on factors such as prepayment models, which aren't nearly as big of an issue with reverse mortgage assets. Property values, however, matter a great deal more to cashflow models of reverse mortgage assets. It's these kinds of differences that provide challenges in applying forward mortgage technology directly to the reverse mortgage space.
Second, as the reverse mortgage industry continues to grow, the sophistication of the loan product and increases in volume will drive the demand for technology improvement. When you are doing a modest number of reverse loans per month, the need for high degrees of efficiency in the use of technology is not as strong as when you are doing quite a few more loans per month. Therefore, the volume increase in itself is going to drive a lot more of demand for efficient technology tools.
Q: In terms of its potential, reverse mortgage origination volume so far has only been a ‘drop in the bucket.’ This market could grow explosively over the next several years. Some industry professionals say they are surprised it hasn't grown more during the past several years. What top three things do reverse mortgage lenders need to do in order to fully capitalize on the potential of this market? What are the main barriers to achieving more growth?
Button: Increasing education about HECMs in general is definitely one. Such a large volume of consumers just don't understand this product or its role, and as an industry, we've not yet succeeded at getting that knowledge implanted broadly into the potential market.
The second thing reverse lenders need to do is advance the acceptance and use of HECMs by financial planners in an overall retirement strategy. I think a significant portion of the potential HECM borrower space is utilizing a financial planner of some kind – and if financial planners are not considering HECMs in their overall portfolio, arguably they are not fully evaluating, per their fiduciary responsibility, all of the possible solutions to meet the needs of a future retiree. That needs to change. Having reverse lenders help financial planners ensure they are able to correctly consider and evaluate the product is going to be another big key for success.
Third, lenders need to do all they can to adjust the perception of HECMs to match the reality. Education plays somewhat of a role in this as well, but today's HECM product is so dramatically different than the product that existed a couple of years ago. Reverse lenders need to get that message out to the market, and I think we're heading in this direction. The percent of positive articles in the trade press compared to negative ones has changed a lot in the last couple of years, and that's helping to promote a more accurate perception of the HECM product.Â
Of course, the main barriers to achieving more growth are sort of the inverse of the three things I just mentioned, but to some extent, the lack of more, let's say, household brands in the industry is also certainly a barrier. I think that it would be incredibly helpful to our industry to have more national banks or super-regional banks – entities that represent brands that borrowers are very familiar with – participating in the market to help them recognize the opportunity and be comfortable with the financial product itself.