Need for HECM Counseling Escalates as Funds Dry Up

Counseling agencies are helping a growing number of reverse mortgage borrowers who have gone into technical default on their taxes and insurance, in response to government-issued guidance on delinquency proceedings in January 2011.

Although there are no absolute figures, some estimate that about 5% of reverse mortgage borrowers have defaulted on their taxes and insurance, often because their budgets are stretched too tightly to accommodate the payments, say T&I default counselors.

Mortgagee Letter 2011-01 specified loss mitigation options that lenders must provide to borrowers who are delinquent on paying T&I, which included establishing a realistic repayment plan to the mortgage’s servicer, and having the mortgagor contact a HUD-approved housing counseling agency for assistance.

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Counseling agency CredAbility has been involved in default counseling since the mortgagee letter was released in January, and through the end of August had counseled more than 1,000 borrowers who were in T&I default, says housing counseling director Sue Hunt.

On average, those receiving the counseling had an average net income of $1,400 a month, with monthly living expenses (excluding housing costs) of about $1,105. The average amount that needs to go toward T&I, at $291, leaves those borrowers with a scant $4 or $5 monthly surplus, Hunt explained.

“We spend time working with homeowners to help work out ways to make the budget look better,” says Hunt; this includes searching for government benefits and other programs for which the borrower may qualify.

“What we want to do is ultimately create a budget that has some surplus in it, so they can start repaying their servicer, while maintaining other needs,” she says.

Each month, CredAbility counsels between 100 and 125 borrowers, who owe an average of $6,600 in advances to their servicers, says Hunt.

The findings are similar to numbers cited by The National Council on Aging, which has completed about 3,000 T&I default counseling sessions since February.

More than 80% of NCOA’s clients fall below 200% of the federal poverty level, say Barb Stucki, vice president of Home Equity Initiatives at NCOA, and Elizabeth Rose, who heads the T&I default counseling program, says that on average they owe their servicers more than $6,000 in T&I advances.

Thanks to counseling, many have embarked on repayment plans.

“We’re certainly helping people avoid foreclosure in the short term as well as the long term,” Hunt says.

However, the counseling is intensive, with initial sessions lasting an average of one and a half to two hours, and sometimes requiring a second, third, and even fourth session, says Hunt. All of this must somehow be paid for, even though housing counseling funding has been slashed by $88 million. (A recent Senate subcommittee appropriations bill would reinstate about $60 million of HUD counseling funding into the fiscal year 2012 budget, which would include HECM-related counseling.)

For now, CredAbility is drawing from available HUD funding, but Hunt says that depending on overall demand for service, those funds will likely be exhausted soon. Other counseling organizations are facing the same problems.

Historically, NCOA has not charged its clients upfront for counseling, says Stucki, adhering to HUD mandates that those who are below 200% or more of the federal poverty level receive free initial counseling, with fees added to origination costs once the reverse mortgage closes. However, as around 20% of clients receiving pre-application counseling never close on a loan, Stucki says this is an “unsustainable business model,” and says NCOA may have to begin charging for their services upfront.

Both Hunt and Stucki have found servicers to be accommodating in their dealings with seniors, showing a willingness to work with borrowers to establish repayment plans.

“In this [reverse] market, everyone’s committed to doing anything we can to make sure seniors can stay in their homes,” says Hunt.

Written by Alyssa Gerace

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  • In a January 2011 RMD article cited below, NRMLA, a group of lenders, and NCOA worked out a deal to fund the pilot program.  Why not do the same with default counseling as a whole with lenders paying based on who originated the loan? 

    http://rmdaily.wpengine.com/2011/01/06/ncoa-announces-pilot-program-to-assist-hecm-borrowers-in-default/

    If the funding for the pilot program could be done that way, why not the actual program?  Somehow the group Marty Bell describes in the thread of comment back in January 2011, as making that decision reached the conclusion that neither HERA nor ML 2008-28 applied to that decision, why would it be different now? 

    As Marty stated then:  “This is being done by a group of people (and companies) with the best intentions across the board totally focused on trying to help seniors out of hardship. Any other interpretation is bogus.”  Why can’t the same be done now to help shore up the problem of cost?  If that reasoning prevailed then, it should prevail now.

  • Not long ago, Michael Kent, a SVP at RMS gave an interview in which he stated the default rate is 5%-8%.  If that is true, the counseling agencies are not putting much of a dent into all of the borrowers who must be reached.
     
    I also found this statement by Sue Hunt bothering:  “We spend time working with homeowners to help work out ways to make the budget look better.”  It seems as if this group is doing more than something cosmetic or at least, it is hoped something far more substantial is taking place.
     
    It was not long ago that those providing loan modification services were saying the same kinds of things about restructuring debts so that borrowers could keep their homes; then it was discovered that a large percentage of the modifications were falling apart at the seams.  There is little doubt counseling is trying but as the stats indicate it will be hard to squeeze blood from turnips.  Helping seniors find programs to overcome budget problems is commendable but will it be enough?  If George Soros is right, we are in the middle of a second recession.  How much longer will these benefits stay in place?
     
    Servicers need to tell us what percentage of HECMs are in default.  They also need to tell us what percentage have agreements in place and the status of those agreements.  We need a little trust but verify going on right now.  It is hard to be realistic about results especially when payments are being made to the servicers.  Counseling will need some help in determining how well their hard work is progressing.
     
    The recent story about Texana Hollis did not help our image; it went viral.  Thousands of such stories could be a nightmare.  What counseling is doing now if successful to any degree at all could make a huge difference later.  Let’s not live in the illusion that we are doing better than we are.  Better to find problems now and correct them than to have things fall down around us later

  • This is perhaps one of the most revealing articles from RMD in some time.  Ms. Gerace did a great job.
     
    To read Dr. Stucki complaining that the current dropout rate experienced at NCOA is causing NCOA to reconsider its upfront fee policy is both surprising and telling.  If true at 20% the NCOA dropout rate is half the national average.  NCOA could teach other counseling agencies a lot about helping prospects understand reverse mortgages rather than discouraging their use.     
     
    Even as bad as the endorsement numbers were for the last calendar year, the certified counselee dropout rate seems to have risen by one-third this year.  The separate dropout rate from case number assignment to endorsement seems to have risen by about one-eighth but the dropout rate between counseling and case number assignment has risen many times that fractional rate increase. 
     
    While NCOA may choose not to discuss it, FIT may be harming its creator.  As to its ability to provide meaningful results, it is not reliable and its results should NOT be shared with counselees at all.  While FIT provides a tool from which to perform a financial interview, that is where its real value ends.
     
    The difference between how the FIT results are being presented to counselees is rather amazing.  One counselee told us that his score was explained to him as the closer it is to 5, the more consideration the prospect should give to getting a HECM.  Another counselee was told that the score was the means counseling had to see if the prospect even qualified for a HECM.  It seems even counseling is confused by what the score might mean but in any case it is greatly misunderstood.
     
    The real problem is the risk assessment system is a very poor indicator of much of anything.  To cover the areas of concern seems appropriate but that could be done without a scoring system.  Borrowers do not need scores, they need information with some guidance on issues which might help them in the decision making process.

  • In terms of dropouts between counseling and case number assignment, you might bear in mind that a lot of borrowers arrive at counseling with no idea of whether they will qualify for a reverse mortgage.  I’m finding that more lenders are refusing to provide loan estimates of any kind until after counseling.  As a result, I more often find myself in the position of explaining to the borrower that they will not be able to pay off the $95,000 mortgage on their $100,000 home using a HECM.  (Yes, I know that I don’t really know what their home is worth, but sometimes it’s quite obvious that nothing short of a miracle will make the home appraise high enough.)  In a case like that, I go through the whole counseling, show them the estimates, show them what their home would have to appraise for, and tell them that it’s their choice whether to gamble on getting an adequate appraisal.  With the drop in home values, it’s no wonder that many decide not to proceed at that point.

    I have never, ever, had a client drop out because of the results from the FIT.  I do agree that the results report from the FIT is nearly valueless, and the “score” is entirely so.

    • rmcounselor,
       
      First, thank you for your input.
       
      It is very strange that with all of the upfront cost which goes into obtaining one single prospect, originators are letting them go without providing basic financial information.  Even the NRMLA counseling webinar THIS WEEK recommended providing that information.
       
      It seems some originators may feel uncomfortable with providing such data without some kind of preliminary independent verification of value from an appraiser but that seems odd since no appraiser will generally get involved until after case number assignment anyway.
       
      Some do not understand the “most teachable moment” concept.  To be quite frank, in this day and age, it is a dream more than fact.  If a senior has been on the Internet, at a seminar, reading articles, or just talking with friends and family, the “most teachable moment” died long before any call to an originator.  The “most teachable moment” occurs in pre-school years, not with seniors in the age of television and the electronic media.
       
      As to FIT, the risk assessment, scoring, and report are not just useless; they are in fact misleading and detrimental.  Some counselors have been using that information to “qualify” the counselee for a HECM, not caution the senior that a higher score indicates the need to more carefully weigh the HECM decision.  So the question remains, why is that portion of FIT even required?

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