Clients Who Don’t Obtain HECM, Could Cost Counseling Agencies

While the estimates are rough as to the overall impact the recent budget cuts to the Department of Housing and Urban Development’s counseling funding will have on the HECM program, there is one particular scenario for which counseling agencies are certain they will suffer.

In cases where a borrower participates in HECM counseling but ultimately does not go through with the reverse mortgage loan, the cost of the counseling can not be financed into the closing costs and the agencies are concerned that they will have to pick up the tab—now, without the help of HUD funding. But how many counseling sessions does this segment include? The actual impact is less clear cut.

One national counseling agency executive told RMD the number of such sessions was around 25%; other industry estimates place the figure closer to 20%.

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A quick poll of RMD readers, which clearly span different roles throughout the industry, shows just how disparate the views on this counseling segment are. Our poll, which included 178 votes as of May 16, was divided—nearly evenly—when it comes strictly to opinion on the matter. Twenty-nine percent of readers think that less than 10% of those who go through counseling never close a loan, while 26% think the figure falls between 10% and 20%. Almost a quarter, or 23%, think the number is between 21% and 30%; and the smallest number of respondents, or 22% think more than 30% of counseling sessions do not ultimately lead to a reverse mortgage.

Using data from HUD to estimate the actual number is tricky as well due to the lag time between counseling, application, closing and endorsement data explains Jerry Wagner, of Ibis Software Corportation, which tracks counseling data. Wagner provided an example: When only considering the last 12 months with a two-month lag between counseling and endorsements, 41% of those counseled never closed a loan.

Accounting for the September flux of applications and data discrepancies, Wagner says more accurately the figure is closer to just over one third, but he points to a larger trend in counseling that shows a near-record high in March.

“In March, 11,642 clients were entered into Ibis’ [tracking system],” Wagner told RMD in an email. “That’s a record not counting the September 2010 stampede….counseling has been growing steadily in the last three months.”

Cases where seniors undergo reverse mortgage counseling but never close seem to be causing the most concern from counseling agencies.  In recent months, many announced they would waive the fees but without the funding from HUD, they may have to reintroduce them.

“It is impacting our ability to provide free reverse mortgage counseling,” said Helen Raynaud, vice president for national grants for the National Foundation for Credit Counseling. “While agencies have been allowed to charge clients to cover the costs, more and more seniors have been using this product. They’re not people who would necessarily be in the best position upfront.”

Raynaud said there is an option for the agencies to be reimbursed at closing, but that the process hasn’t been very smooth and that NFCC’s agencies have not always been reimbursed successfully. In instances when there is no closing and the potential borrower opts out of the loan, the $125 fee falls back on the agency.

“We’ve had limited success with client fees,” she said.

Written by Elizabeth Ecker

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  • For counseling there is a huge difference in a 10% versus 41% rate.  But there is a much bigger consideration for the industry as whole.  Is the fall out rate actually rising?  If it is, that has a lot of impact on marketing costs as well as overall conversion rates.

    It would be helpful if RMI and Ibis could work data of this nature into the RMI monthly reports. 

  • Critic is right… the disparity between 10% and 40% is huge.

    I’d suggest that the difference may lie in the different “populations” that originators and counselors deal with. Originators would be paying attention to the folks they have talked with and probably explained how reverse mortgages work. If the the potential loan will probably close successfully, the borrowers should know that, so the reverse originator could be serving a screening function for the counseling agencies prior to the counseling session.

    Counselors are likely to see a larger number of  “walk-ins” who have either done their own or no research and who have not discussed their questions and thoughts with any knowledgeable professional yet. My experience is that more upsetting “surprises” take place in the counseling sessions where the counseling precedes a discussion with a reverse originator and the potential borrower is less well informed about how the program works..

  • Did the survey determine why the HECM was not obtained after counseling?  My experience has been that loan applications were submitted but went nowhere because the values came in too low to make the loan work.

    Consequently, potential borrowers do not want to pay for counseling if there is a real chance their home will not appraise high enough to do the loan.  The same principal is true for the appraisal. It is very expensive for a senior to risk paying a counseling fee and an appraisal deposit on a deal that may not end up with a funded loan which is the norm not the exception these days. 

  • This is an important topic as to the price which should be charged on an “endorsement fee” for counseling.  If counseling is to be paid in full by this tax, then the cost will be greatly impacted by the fallout rate.    For example, assume the price of counseling ends up being capped at $200 (an easy number to use in calculations, then if the fallout rate is only 10%, the tax should be $223.  If the fallout rate is 41%, then the tax should be $339. But if HUD wants to provide for a 20% increase in volume then the tax would have to be raised accordingly.  So again is the fallout rate is 10%, the cost including a 20% growth factor would be $268 and for a 41% fallout rate, $407. This is why it so crucial for HUD to strip counseling of items which are nice and helpful but do not directly pertain to consumer protection related to HECM loans and HECM loans alone.  Neither FIT nor BCU belong in counseling.  They both drive up the cost of counseling and are not justifiable especially with taxes and insurance defaults at between 3% and 5%. The real problem is the “endorsement fee” must be passed on to someone.  It seems this cost should be wrapped up with other closing costs and should not be an out-of-the-pocket expense of borrowers.  Please note that the real problems come if the HECM growth rate returns to that of the mid 2000s.

  • >>In instances when there is no closing and the potential borrower opts out of the loan, the $125 fee falls back on the agency.

    I feel their pain.  If the borrower opts out of the loan with me, in addition to my time and other resources, I can lose for FedEx, Notary, Credit Report and Flood Certification fees.  And sometimes the Appraisal fee.  My Processor loses all the time and resources shes invested, and so do the Escrow and Title teams.  I don’t mind losing the money as much as I mind losing my time.

    All disciplines lose when that happens.

  • So, why are we concentrating on the counselors if not to blame them instead of the CFPB for destroying the reverse mortgage. Last go around, it was the LO’s, but in case you missed it, everybody is afraid to say it — the CFPB did it intentionally. Somebody asks why is that? And, are you ready for the answer? The government is going into business. They won’t need any of us to do what they have planned to do all along.

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