Is Tough Reverse Mortgage Counseling Contributing to Record Fall Through?

The fall-through rate of seniors who go through reverse mortgage counseling but never end up closing a loan has risen steadily over the course of the last three years, from a consistent 10%-15% during the housing boom to hovering around a quarter in recent months.

In the higher fall through when comparing applications/case numbers to closed loans, according to data from Ibis, there are some obvious factors leading to the change—the drop in home values being chief among them, and preventing many people from qualifying. But there has also been speculation that the counseling protocols changed in 2010 have also led to some fall through, including the use of the National Council on Aging’s FIT tool.

Counselors maintain that the new standards aren’t leading to fall-through, low appraisals are. But the 25-question FIT presents questions to seniors that may raise an issue they might not otherwise have thought to address, says Chris Schafale, a North Carolina-based reverse mortgage counselor with Resources for Seniors.

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“For example, does one of the borrowers have a pension and does it continue if one person dies? That might prompt the client to think about whether the surviving spouse can keep up with the taxes, insurance, and maintenance. Often times, they don’t know the answer.”

But more stringent counseling protocols shouldn’t lead to more clients who ultimately don’t close a reverse mortgage loan, she says. The distinction in today’s market is overwhelmingly due to appraisals coming in lower than clients anticipate. In many cases, Schafale says based on her client interactions, the appraisal can be the deciding factor. In some cases, the borrower has already received some estimate of the home value that may not be realistic.

“When it appears unlikely that there is enough home value/equity, I recommend that the client get an opinion from a Realtor about their home’s value before paying for an appraisal.”

At that point, however, the counseling has already taken place, setting up the potential for fall-through.

For seniors of a certain low income threshold, it means the counseling agencies are responsible for making up the losses, while still awaiting new grant funding for 2012 housing counseling.

Counseling wait times had increased and costs rose, agencies and lenders told RMD upon the news that counseling funds were to dry up in 2012 after being slashed in the initial Department of Housing and Urban Development budget proposal. Counseling funds were later restored, but most agencies have yet to see the funding allocations.

Written by Elizabeth Ecker

Editor’s note: this article has been updated to reflect more accurate information provided by Christena Schafale, Resources for Seniors.

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  • Just to clarify regarding home values, what I actually said was that, when it appears unlikely that there is enough home value/equity, I recommend that the client gather more information before paying for an appraisal.  For example, if the tax value or Zillow value is $100,000, the client owes $90,000, and it appears that they will need an appraisal of $150,000 to close a HECM, then I suggest that the client talk to a knowledgeable local realtor and try to get an informed opinion.  Many times it appears that the estimates clients receive from lenders are based on what it would take for the HECM to close, rather than on a realistic assessment of what the house may be worth.  Clients misunderstand, and they tell me, “the reverse mortgage man says my house is worth $150,000.”

  • The quotations are full of anecdote, subjectivity, and deflection.  It puts the blame on everyone in the HECM process other than counseling.  It reminds one of the self assessment some in counseling had about counseling before the HUD OIG released its report on counseling.

    The first year most of us who track such things noticed a huge difference in the certified counselee fallout rate was not earlier than October 1, 2010, the date the new protocol went into place.  Since that date the there has been a marked increase in the fallout rate.

    As an originator, the greatest need to help prospects understand that property values have dropped was not in the last 18 months but from 2007 to 2009.  Yes, property values have dropped since August 2010 but most seniors were aware of lower home values and the impact that has had on the value of their equity.

    The piece of the dropout rate I can track using the rule of thumb of HECMs getting endorsed four months after case number assignment shows that the fallout rate following case number assignment was 26.93% for the fiscal year ended 9/30/2009 when endorsements were almost 115,000.  The next fiscal year when endorsements fell by over 35,000 to just above 79,000, the fallout rate was 27.03%.

    It was amazing that despite the huge drop in home values and applications, the dropout rate following case number assignment when the difference in senior expected values and appraised values was so great was only 0.1% greater, hardly any difference at all.

    The next year (ended 9/30/2011) the new counseling protocol was in full effect.  Endorsements fell by 6,000 and the dropout rate rose to 30.47%, a 3.54% increase over the fiscal year ended 9/30/2009.  So why caused this over 13% in just the dropout rate following case number assignment?  The interviewee claims it is the fault of the appraisers and originators for not preparing seniors properly and seniors for failing to understand the conceptual difference between market value and the minimum value needed to qualify for a HECM.  Now some of what the interviewee says is true but it does not explain a 13% increase.  [BUT this is just the smallest part of the fallout rate following counseling certification; however, since I have no information to follow, others need to fill in that space.]

    So if the fault is in the new counseling protocol, where is it?  Is it in the educational session where the HECM is explained or in the BCU portion?  None of that seems likely.  So if it is not in the FIT portion, where is it?

    As time permits, I hope to do a through analysis of FIT before the end of this summer.

  • Why is the heading about something alleged to be tough?

    Counseling is not tough; neither is FIT.  From what I remember about FIT when I read through it, it is clumsy, poorly constructed, and has less to do with financial assessment than its creators believe it does.

    Tough, no.  Misdirected, confusing, poorly designed, yes and more. 

  • For the past year I have been conducting Property Charge Loss Mitigation (PCLM) counseling for borrowers with reverse mortgages and have been conducting “regular” sessions for senior homeowners since 2002. Talking daily to seniors who are unable to pay their property charges since a spouse died, or one retired or lost a job (or their investments) has changed the way I counsel homeowners who are considering a reverse mortgage. I use the FIT as a springboard for discussion about not only their current situation but also about planning ahead. I explain that the questions are centered around:  1. their current finances and future considerations  2. how failing health could cause them to leave the home before they are ready (higher TALC) and how health costs affect their budget and 3. whether the home is suitable for aging in place or if modifying it is feasible in terms of cost. This discussion may help them see that the loan can be relatively expensive if they keep it only a short time and help them decide if it’s worth it to them. It may also help them give thought to how their income will look when one spouse dies or when they retire. If it becomes evident that the loan is a short term solution to a problem, as it sometimes is for homeowners with a history of bankruptcy, foreclosure threats or delinquent property taxes, then it is very valuable for borrowers to face this fact in the decision making process. I don’t tell them they shouldn’t get the loan in these cases but I do try to help them consider future budgeting issues so they can weigh their options. If they choose the loan knowing that it will help for only a few years but will give them time for the next step, then they’ve done so with “eyes wide open”. If they decide to not obtain the loan maybe that means there will be one less client in the PCLM queue down the road. (I’d like to note that the FIT score doesn’t reflect whether the loan is suitable for the client or not. They could get a “1” and decide that despite the many challenges they may be facing to remaining in the home for years to come, the loan is worth it to them. Or they get could a “5” and decide they have no real need for the loan at this time. The “T” in FIT stands for tool not test.)

    • ClineC,

      Your comment is exactly why FIT should be scrapped.  The very issues you launch into should have been reflected in FIT from its inception.  Imagine how handicapped counselors are in helping seniors who have not had the experience of counseling those who cannot take care of property charges?

      The FIT report is supposed to represent something rational or why have it?  If the T does not stand for “Test” of some kind, why have scoring?  FIT should be totally revamped with NO report and no scoring.  If a report should be issued, let the counselor create and issue it.

      Now the question becomes why are the questions in FIT better than the questions asked by CFPs in their initial questionnaires with new clients?  The designers of FIT falsely believed that no one in the financial community ever addressed the questions which the FIT designers thought up.  Yes, some of the CFP questions should be more tailored to the issues which are most applicable to HECMs but how those conclusions were ever reached without ever once reading standard questionnaires or risk tolerance questionnaires not only is arrogant but also not very reasonable.

  • I wouldn’t say tough counseling is a reason for decline, I would say good counseling is, assuming, of course, that counseling is a factor.  Someone who goes through a counseling session with a good counselor will not be “told” whether or not to take a HECM, they will be informed about what taking a HECM means, good and bad.  They will be more knowledgeable about the products available and the alternatives.  From there, they are positioned to make a choice that is correct for them.  I would say, on average, about 7% of the people I talk to do not end up taking out a HECM.  Some because all of the ramifications were not explained to them (best example is a couple where only one is over 62 and the broker did not explain that the one under 62 might not be able to remain in the house), some because I opened their eyes to other possibilities that they had not thought of (best example is a woman who had a condo, in addition to her home, that was the real drain on her savings and had never thought of selling it), and a few who did not really have any understanding whatsoever about how the program worked, but wanted one because their friend, sibling, cousin, etc. got one.

    Oh, and “The_Critic,” I agree with you 100% on the FIT.  It is, in my personal opinion, a complete waste of time.  Over the years I have gotten pretty good at understanding its predictions and I can tell you that anyone who puts down that there are stairs will most likely get a “3” no matter how much they really need HECM.  It is a yes or no question, not one that allows a counselor to really understand things.

    Frank J. Kautz, II
    Staff Attorney

    Community Service Network, Inc.
    52 Broadway
    Stoneham, MA 02180
    (781) 438-1977
    (781) 438-6037 fax
    FrankKautz@csninc.org –work
    Frank@Kautzlaw.com –private

  • First, let me say that I am not a huge fan of the FIT, but I do believe that it causes all counselors, not just the really thorough ones, to bring up some very important issues with clients, and for this it can be valuable.  Assuming that the counselor is allowed the time to do a good job, this can result in some much more thoughtful discussions with clients about the merits of a reverse mortgage in their individual circumstances.  The score, in my opinion, is worthless, and should be eliminated.  I ignore it completely.

    Second, as I have pointed out before in this forum, the changes to counseling that resulted from the 2010 HECM counseling protocol were far broader than just the use of the FIT.  Among other things, HUD mandated a much more detailed list of topics that must be covered with every client, required that client should receive written information prior to counseling, and gave counselors a tool to assess comprehension.  It is my opinion that these additional requirements have led, in most cases, to more detailed, individualized, and thorough counseling.  If in fact there is an increased dropout rate AS A RESULT OF COUNSELING since 2010 (which no one has yet documented, by the way), I’m actually surprised that the magnitude is not larger. 

    • rmcounselor,

      People have either not read the actual criticisms about the new protocol or have tried to deflect and cover up what is wrong.  Few claim counseling is too tough.  No meaningful complaint has been aimed at the HECM informational section of the new protocol or BCU.  The focus is all the same, FIT.

      ClineC did a fairly good job of stating what should be in FIT.  FIT is so poorly thought out and designed that the question of whether income will change over the next few years and if the counselee is currently working are not even addressed in FIT.  Surely expected changes in income and expenses should have be addressed in counseling.

      FIT scoring is nonsense and the report is dangerous.  If a report should be issued, it should be a written report by the counselor highlighting areas for further consideration by the counselee.

  • I agree, the focus is all the same.  My point is that I believe that focus is largely misplaced.   Large amounts of energy and hot air are being directed at FIT, but my belief is that, if FIT were eliminated tomorrow, it would make no difference whatsoever in the so-called fallout rate.  That’s my opinion, as a counselor, for whatever it’s worth.  We won’t know whether I’m right unless HUD decides to dump FIT, which I’m betting is not going to happen.

    • rmcounselor,

      But is there any evidence that the fallout rate has risen since the introduction of FIT?  Based on public information provided by HUD, the answer is clearly yes.  What we do not know is the rise in the fallout rate from certification to getting a case number for the related application since the implementation of FIT.

      Just the known increased fallout rate for last year means 3,500 HECMs were not endorsed which would have normally been endorsed in the prior two fiscal years.  While that may mean nothing to a counselor, to the industry that number is over 33% greater than the total endorsement production for the fifth largest lender for that fiscal year.  That number seems significant to a CPA since it is about 5% of total endorsement production for the entire industry in that fiscal year.

      In fact FIT could be a much greater portion of the 30.5% fallout rate and that is just between case number assignment and endorsement.  What the fallout rate is from counselee certification to endorsement is not publicly known or determinable per HUD.

      The fallout rate is not so called.  It is real, measurable, and its growth in the last four years plus is alarming.  Why it is so persistent over that time is unknown.  As to its size being worse if we had sufficient information is a fact but how much worse no one knows.

      The annualized dropout rate from just case number assignment to endorsement has risen from 4% to 30.5% in 52 months time.  Just think of the wasted dollars in appraisal fees.  In three years, at $400 each, that is well over $30 million out of the pockets of seniors who did not get a HECM (and this calculation excludes almost 25% of the dropouts).  Cutting this number down by 13% seems like a worthwhile endeavor, especially since all it entails is not sending out a misleading and worthless report.

      Is that too much to ask for?

  • What we know is:

    1) There is a higher dropout rate between case number assignment and endorsement than there used to be.

    2) HUD began requiring the use of the FIT tool in a time frame that roughly matches the increased dropout rate.

    You therefore conclude that the FIT is the cause of the increased drop out rate, DESPITE the fact that you admit that your numbers relate to fallout between case number assignment and endorsement, NOT between counseling and case number assignment.  If fallout was happening due to FIT (or anything else in counseling), would it not be largely happening prior to case number assignment, not afterwards?  If the client is going to run screaming from the reverse mortgage, would that not cause them to drop the whole thing before proceeding with a loan application and paying for an appraisal?  The data that you refer to would more logically be attributed to something that actually happens between case number assignment and endorsement — such as for instance, a low appraisal, or more rigid standards being applied by underwriters.  When I talk to clients about why their loan fell through, these are the things they tell me.  I have never, ever, had a client tell me that they decided not to get a reverse mortgage because of the FIT.

    I think that blaming the loss of these loans on the FIT tool is illogical and ignores the obvious fact that many other changes have happened in the time since the FIT was introduced.  It baffles me that you think the FIT report would have such power over people.  I would LOVE to have a tool for behavior change that is as powerful as you seem to believe the FIT is.  Understand, I’m not actually defending FIT — if HUD dropped it, I would not miss it at all — I just think you are wasting your energy campaigning against something that isn’t that important. 

    By the way, HUD does have data on how many certificates were issued took place, relative to the number of case numbers assigned, at least during the period since certificates began being issued in FHA Connection (September 2009).  I don’t know if they ever plan to make that data available, however. 

    • rmcounselor,

      If you will note, in this thread I never blame the increase that can be measured from current public data on any other part of FIT than the FIT report itself, period.

      When do certified counselees first read the report?  Not during counseling like you so wildly imply.  Perhaps you are not familiar with how the process works at a practical level following the required counseling session(s).  I would, however, have expected that you would know most of the time certified counselees have not read the FIT report before the required counseling session(s) has been completed.

      Certified counselees generally receive the FIT report with the hard copy of the certificate in the mail; most of the time the certified counselee has no idea what is in the report until it arrives.  Generally the certified counselee has signed an electronically transmitted (including faxed) copy of the counseling certificate before the hard copy even arrives with the FIT report.  By the time the FIT report arrives AND is read,  generally a FHA HECM case number has already been issued.

      So you see when most certified counselees first read the FIT report (if they do at all), it is after the FHA HECM case number has been assigned.  That is why I place the main blame on just the increase in the measurable fallout rate between case number assignment and endorsement since October 2010 on the FIT report.  If you can find a more likely  source for any significant part of the increase please name it.  

      [We all know HUD has the data you state. But perhaps you did not know HUD says it will not issue such information even under the Freedom of Information Act.  HUD National Office has stated that the data and any summary information thereto is covered by the Privacy Act.  Since I do not have the time or the money to pursue such things, I have not even tried.]

      I am a senior.  What drives my behavior today is much different than it was years ago.  My values have changed as well as my respect for life.  When I watch my 93 year old father and what controls his very lucid behavior, it is much different than it was even a decade ago.  That is why seniors are a protected class and you are in a special class of mortgage counselors who compose the only counseling required in this country in order to get a mortgage, one of the HECMs (and here in California all reverse mortgages).

  • James,

    While I am not a fan of the FIT by any stretch of the imagination, I honestly don’t think the FIT has anything whatsoever with the downturn.  First, as you state, most probably don’t read the FIT (although, since I do in person counseling, they do read it in session), so I doubt the FIT has much to do with it.  I do think the new counseling protocols have a bit to do with it, in that a good counselor is giving true alternatives and making sure people know what they are getting into prior to them taking out the loan.

    I have also noted a major drop off in counseling requests since October.  This tells me that either the market is becoming saturated (which I don’t believe), or the easy pickings have been picked and better education is needed.  Lately, I have been seeing more marginal clients coming in for counseling.  People who need to come up with money to get their HECM, people who are being told by the salesman/woman that their house is worth more than it really is, people where one spouse is significantly younger and they have been convinced this is the only way to go.

    There a lot of people out there who could use a reverse mortgage without selling people a bunch of smoke and mirrors.  The professionals are still out there, but there are also more who are just trying to sell so that they can get a pay check, with no regard for the senior.

    We also need to take into account how a lot of people got frightened into HECMs as HUD and Congress were screwing around with the program for two out of the last three years.  This year, HUD took away the fear factor, so people felt like they could wait and take things slowly.  I think it all plays into the current downturn.  Personally, as I said, I don’t think the FIT plays that much of a part in it.  I think that there are a lot of other factors.

    Good luck,

    Frank J. Kautz, II
    Staff Attorney

    Community Service Network, Inc.
    52 Broadway
    Stoneham, MA 02180
    (781) 438-1977
    (781) 438-6037 fax
    FrankKautz@csninc.org –work
    Frank@Kautzlaw.com –private

    • Mr. Kautz,

       

      Could it be that 3.4% of all certified counselees dropout because
      of the FIT report?  

       

      Maybe that is very hard for you to believe because of your very
      astute understanding of budgets, etc. and superb counseling practices.  BUT
      a VERY significant part of counseling is done in 30 minutes.  Most is
      completed in less than one hour.  We are talking about the impact of the
      FIT report on the very worst of the worst in counseling.  It is here the
      FIT report has THE greatest potential for damage and where it is most likely
      the impact of the damage of this poorly crafted report has it greatest
      potential damage.

       

      It is like the effect of the feather that causes the barely
      hanging boulder to fall down the cliff.  We are not even talking about 4%
      of all certified counselees, just 3.4%.

       

      To project your personal experience to an entire population of
      over 100,000 certified counselees during the fiscal year ended 9/30/2011 is
      faulty at best.  Your experience is
      subjective and anecdotal evidence even if it absolutely true when it comes to
      the counselees about which you have information. 

       

      What I am discussing is an annualized rate of fallout which
      changed for the fiscal year ended 9/30/2010 from 27% to 30.4% for the fiscal
      year 9/30/2011 for over 100,000 certified counselees each fiscal year. That
      annualized rate based on actual national numbers is still holding at 30.4% as
      of the 12 month period ended 2/29/2012.

       

      Anecdotal and subjective evidence is just that.  Using an
      objective measure we have seen a clear and distinct rise in the fallout rate
      which has now plateaued.  It starts with October 2010 and continues until
      today.

       

      Two major changes occurred around 10/1/2010.  The first was
      counseling protocol on 9/11/2010 (the selection of that date is most
      interesting) and on 10/4/2010.  Everything that occurred on 10/4/2010
      should encourage more closing EXCEPT the 150% increase in ongoing MIP.
       That rise is well known by a certified counselee before case number
      assignment.

       

      That just leaves counseling protocol.  The only thing which
      has not occurred by case number assignment in almost all cases is receipt AND the
      reading of the FIT report.  How would you
      explain this 17 month phenomenon?  Could
      any of it come from the FIT report?  I am
      only attributing the increase to that source. 
      It could easily be more.

  • Mr. Veale,

    Please, call me Frank.  I don’t claim my counseling is better than most, and to be honest, I would bet there are more good counselors than bad ones.  However, I do take your point that there are those who try to cram an hour and a half of material into thirty minutes.  However, I still don’t think the FIT is the real culprit, and there really is no way to prove it is or is not.  The problem is that we just don’t know one way or the other.  We can all guess, but we cannot prove it.  Further, you are only inputting the changes into the system, without taking into account that much of the “low-hanging fruit” has already been picked.  Again, I am not sure it is possible to make that call with the evidence we have.

    That being said, if anyone was on the edge and they let the FIT actually be the deciding factor, then they were a poor choice for a reverse mortgage in the first place.  Aside from the simple fact that no one should let a computer make that kind of life choice, such a person was both poorly counseled by the HECM counselor and the program was not properly explained by the broker/salesperson. 

    I would be far more likely to believe that good counseling, due to the change in the protocols, was the cause of those who were marginal dropping out. 

    • Frank,

       

      I fully disagree.  It is clear you are dedicated to counselee
      education not just in style but more importantly in content.  You also go
      beyond the minimums to ensure counselees are well
      informed even to the extent of working with them on a real budget.  That
      is why you may not be the best counselor in the industry but you are definitely among those who are.

       

      But I also take respectful exception to some statements on
      identifying where the problem lies.  In legal terms it is called
      circumstantial evidence.

       

      If counseling sessions are the culprit, why would there be any noticeable increase
      in the dropout rate AFTER the case number was assigned other than new appraisal concerns?  Yet there is no identifiable event which occurred in September or October 2010 in appraisal which would account for this increase.  When I have
      had qualified counselees drop out at the end of counseling, they told me then
      and there.  I have had one refuse to sign the counseling cert without saying
      why.  At the time that the electronic version of the certificate is signed, the FIT report is still most likely in the mail.  The timing of the rise could not be clearer.  Then the size of
      the rise over the last 15 months is not overwhelming and would most likely reflect
      the impact of the FIT report on some of those who are teetering on the decision.  Finally (like Sherlock Holmes would say) after
      eliminating all other reasonable possibilities what is left is….

       

      Most important decisions in life come with pros and cons.  Most major CEOs hope that their decisions are
      right just 50% of the time and particularly when it comes to major
      decisions.  I worry most for those who
      are 100% sold on any major decision.  Few
      have that kind of assurance on anything including getting married or having
      children.  Few seniors who get a HECM
      regret that decision.  If they regret
      anything it is generally 1) how they wasted some of the proceeds or 2) not paying
      it down when they had the funds to do so.

       

      Insisting that the source of independent and reliable information about
      HECMs issue THE FIT report as the concluding report to that very important
      part of the HECM origination process with such unreliable information seems not
      only irrational but verging on the derelict and irresponsible.  No independent and knowledgeable thinker I have
      conversed with believes that FIT scoring is reasonable or that the resulting
      report should be relied upon for any purpose; if they protect FIT at all it is normally
      on the importance of the type of questions used.  So
      rather than putting the burden on counselors to explain the problems with the FIT report, why not just end
      issuing this more than misleading report?  

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