The New Reverse Mortgage Opportunity

Over the course of the last year, the reverse mortgage has changed. And along with it, so has the approach to reverse mortgage marketing.

For some time, lenders have been moving away from the tried-and-true TV advertising model, featuring the familiar celebrity spokesman. Several have tried more focused messaging, including recent campaigns launched by Finance of America Reverse, and One Reverse Mortgage.

But in addition to experimenting with different advertising campaigns, lenders say the approach has changed quite completely when it comes to today’s borrower. That means shifting from a needs-driving borrower to a consumer who has many choices and may be tapping into home equity not because he or she has to, but because he or she wants to.

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The tools are in place, but thriving in this new landscape also requires adapting to it accordingly.

The new borrower

With new reverse mortgage requirements and restrictions comes a new level of credibility. The industry has seen mainstream messaging adapt accordingly, and lender marketing is also shifting based on the fact that the reverse mortgage is no longer a taboo term.

“We have been able to capitalize on that and tailor our messaging to the financial practicality of the loan, which in some cases has moved us away from some of the emotional aspects, away from the needs-based,” Barry Scoles, division sales manager for Reverse Mortgage Focus, a division of Georgetown Mortgage, said on a panel during the National Reverse Mortgage Lenders Association Western Annual Meeting in Huntington Beach in May.

The new borrower is familiar with the loan process, although past borrowers do not qualify as easily due to the new financial assessment requirements, said Paul Fiore, executive vice president of retail lending at American Advisors Group. However, the “new” borrower meets different criteria, such as having a home that is paid off.

“With more positive press, more free and clear people are calling in or are interested in using RM as a retirement planning tool,” he said.

The new average borrower’s age has ticked up slightly since 2013, and is between 72 and 73 years old, versus 71 years on average three years ago, according to data from the Department of Housing and Urban Development. Just 11% of borrowers have taken fixed rate loans year-to-date in 2016, HUD’s data shows. And a major push among some finance professionals is leading some households to consider a reverse mortgage now much more so than they would have in the past.

Some lenders are having success with the new prospective borrower and are finding that even if they are very familiar with financial tools and mortgage products, several basics should not be missed in working with them.

“Our client is relatively new to the reverse mortgage product,” says Mark Reeve, reverse mortgage national director for Plaza Home Mortgage, based in San Diego. “We want to make sure they understand the benefit, and the amortization schedule. Where will the equity position be in 10 years? They have to understand that. And No. 2: What is the credit line growth rate? These can’t be missed in the presentation of the program.”

The new sales professional

Selling the new reverse mortgage has driven some lenders to change the borrower approach. Depending on the sales model, the approach may change a lot, or a little. Many originators who work under a “kitchen table” approach report having changed their conversations slightly. Call center originators say for their process, consistency is key.

“We teach a consultative approach to the sale,” Fiore says. “We encourage a conference call with every family member. [The changes] shouldn’t inherently change your process; you need to create consistency.”

With the new reverse mortgage have come new questions. Given a more savvy prospective borrower pool, lenders are having to come prepared with answers to those questions.

This comes into play in particular for training loan originators who have experience with forward mortgages but may be new to reverse mortgages. While those salespeople are very in tune with specifics relating to the financial assessment, they need to be able to address product questions just as well.

“We are getting far more questions and have to be far better at answering questions about the financial aspects,” Scoles says. “For the credit line growth rate, we get a lot more questions where [prospective borrowers] are asking: ‘How will this benefit me? How can I use it? Do I really need it?’ We have to connect those dots.”

Messaging around the product is one area that is changing to accommodate the new borrower, but salespeople must adjust as well, Fiore says.

“Sales people are still stuck in the mindset of what they have been selling before. We have to make an adjustment to the non-needs based consumer,” he says. “They are using it as a retirement tool and helping their investment portfolio. That’s a different conversation we need to have.”

The new opportunity

Many of the tools needed to succeed in the new reverse mortgage landscape are already available, originators say. With a marked shift in the number of positive news stories about reverse mortgages and a growing positive opinion among financial planning professionals when it comes to reverse mortgages, the industry has a unique opportunity.

But it must use this opportunity wisely.

“The industry has handed us all the tools we need,” Scoles says. “[Research from] Texas Tech and the American College has been handed to us on a silver platter. The issue is not that the tools aren’t available, it’s that we need people who can take the tools and [do something] with them. It takes education.”

Being prepared for conversations both with borrowers and prospective referral partners is essential. It’s an opportunity, but it won’t be around forever.

“When you are selling someone an adjustable rate mortgage and line of credit growth rate, you need to be able to speak about an amortization schedule,” Fiore says. “We need to educate on speaking intelligently with financial planners.”

A poor conversation with financial professionals could deter them further from recommending reverse mortgage options to their clients, he says, resulting in a negative outcome.

It’s also OK to acknowledge that changes have taken place across the reverse mortgage program, lenders say.

“Understand the changes that have happened,” says Reeve. “When you are sitting at the table [with a prospective borrower], make sure to say: ‘We did have some problems. We have fixed them.’”

This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.

Written by Elizabeth Ecker

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  • To indicate how hard it is to leave the old, notice that one participate states: “’We want to make sure they understand the benefit…'” What benefit? This is a loan with loan proceeds and when upfront costs are financed, available loan proceeds. This is not Social Security or some other federal government program where benefits are paid to beneficiaries.

    The speaker goes on to finish the quotation with the following ridiculous statement: “…and the amortization schedule. Where will the equity position be in 10 years? They have to understand that.'” It is all but guaranteed that the equity position of the homeowner will NOT be as indicated on the amortization schedule in 10 years. It seems few learn by seeing if even one of their borrowers ended up in 10 years near where the amortization schedule indicated. First, home values do NOT rise at 4% per annum in most areas in the US. Second with adjustable rates and lines of credit who knows what the balance due will be in 10 years; rarely will the average effective interest rate be anything like the expected interest rate over 10 years.

    So what if the average age of the youngest borrower has risen by 2 years! That means little. In March 2012, leaders from NCOA and MetLife Mature Market Institute made a big deal of borrowers supposedly getting substantially younger. Sadly the reliability and substance of such joint studies have been in question ever since those faulty conclusions were proclaimed. Since day one of the HECM program, the average age of the youngest borrower has been on a slow up and down trend for almost three decades now.

    “They are using it as a retirement tool and helping their investment portfolio. That’s a different conversation we need to have.” Which is code for leveraging. Many of the borrowers are generally adverse to having margin accounts but not to a mortgage that is negatively amortizing. If the borrower has any intent of leaving an inheritance to their heirs and see their million dollar home put to its best and highest use, many times taking proceeds over portfolio proceeds from selling securities may be a huge mistake due to negative arbitrage on the total of accrued interest and MIP over the growth of the underlying assets (such as portfolios).

    Here is a great suggestion when questions about changes come up: “…make sure to say: ‘We did have some problems. We have fixed them.’”If the problems are all fixed, why were new changes being proposed within days of the close of the NRMLA western conference? It is clear that a new originator core is needed who understands financial terms and does not live in the terminology of yesterday and yesteryear. These leaders seem like they are coping with change not meeting them head on and grasping their opportunities.

    Look at how they express themselves and the terminology they use and it is clear that few are ready to show financial planners how a HECM can be successfully be incorporated into a plan for their clients. Success is far more than parroting the writing of articles we think we understand because at times what they are promoting is wrong.

      • EricSD,

        Notice the word “advantage” is not used in my first comment in this thread so I have no idea why you brought it up. I will ignore it as superfluous to your angry reply.

        HECMs are non-recourse mortgages. The language we use to describe them should be in line with the language generally used in describing such products. In all of my years of dealing with mortgages, it is only in HECM land, that I heard the word “benefit” being used over and over again. Outside marketing consultants to our broker (my first employer) explained that seniors were adverse to getting mortgages and, therefore, we should limit the vocabulary of mortgages as much as possible except where legally required. These advisors noted that there would be some confusion forthcoming from that practice but sales would vindicate it.

        Benefits are how insurance disbursements to policy beneficiaries are described, distributions from defined benefit plans, Social Security payments to beneficiaries, etc. Payouts to borrowers are known as loan proceeds.

        HECMs have available loan proceeds. They have no required periodic payments of interest and principal. They are non-recourse. It could on and on. These are the positive aspects of a HECM.

      • Cynic,
        My reply was far from angry LOL! I was seriously just trying to turn the conversation around from what it isn’t to what it is and was actually interested on your take of how you think it should be presented as I am always interested in others point of view and what successes and failures we all have in selling RM’s. I put in the word Advantage to use as another term for Benefit, sorry you thought it to be superfluous!
        Understanding that there are always different camps on approaches about how to present something whether it is a mortgage, CD, or a New Car. I believe many industry veterans were probably trained in sales and to always incorporate “Features and Benefits” in a sales presentation. How the word Benefit is used and it what context is probably always up for debate but that should not preclude the word from being used to describe the proceeds from a RM, ” So Mr. and Mrs. Smith, now that I have thoroughly explained how the Reverse Mortgage Program works, can you see how you might benefit from it? I am not here to argue but rather to discuss and learn from others in the industry.
        Now, that didn’t sound angry did it? 🙂

      • EricSD,

        The reply format is now too narrow. Please see my reply in the full size comment format.

    • “What benefit? This is a loan with loan proceeds and when upfront costs are financed, available loan proceeds.”

      Come on, Cynic – the meaning of the word “benefit” as used here was not meant to denote ‘government entitlement’; that interpretation didn’t even occur to me until I read your comment.

      “many times taking proceeds over portfolio proceeds from selling securities may be a huge mistake due to negative arbitrage on the total of accrued interest and MIP over the growth of the underlying assets (such as portfolios).”

      I’ve read this several times and believe you may have a good point but I’m not sure; could you elaborate?

      Bottom line: I think you are right – the leaders in our own industry are still struggling to separate themselves from the concepts and terminology of the “traditional” HECM marketplace.

      • REVGUYJIM,

        (As to the rationale for finding the use of the word benefit as problematic, see my response to EricSD.)

        As to negative arbitrage, it occurs when the economic increase to an estate of a financial strategy is exceeded by its total economic costs and losses. For example, one puts $10,000 from a HECM into a CD. After a year the marginal accrued costs of the HECM on that $10,000 is $450 while the CD earned $67 after tax. That is a clear picture of negative arbitrage. The same can be applied to the purchase of $10,000 of a growth stock at the same time the CD was acquired with proceeds from the same HECM and it only went up 0.67% in that same year.

        Our leaders have a genuine interest in seeing us succeed with financial advisors but change comes from the top. If they will not change, our change is just that more difficult.

      • Excellent – thank you.
        There have actually been some detailed studies done on this

  • Good article, I like many points brought out in it. Yes, the HECM of today does take on a new appearance and a lot more credibility than it ever has!

    Yet, we can’t forget, our product is still their for those that need a reverse to improve their quality of life. Paying off an existing mortgage, paying off credit card debt, medical bills or balances due on automobile loans. The HECM can still serve that purpose and we owe it to our seniors to be there for them!

    Yes, FA is now in the picture, we know we have to face the fact that many that would qualify prior to FA coming into existents, may not today! However, many still will, especially if they have been maintained paying their monthly debt obligations on time, have enough assets and equity in their homes. So many of these seniors can still meet the residual income requirements, let us not turn our heads from these deserving people!

    Getting back on track with the article, we have so many new opportunities available to us that were not present prior to many of these changes. Also, let us not forget about the statistics in our favor, such as, the amount of equity in seniors homes today and the amount of seniors turning age 62 daily!

    I like what Paul Fiore said about being able to communicate with the financial planner and advisors. Paul stated how important it is to relate to the amortization schedule when speaking with these financial professionals on the ARM product.

    We need, no, let me change what I just said! We must understand how to communicate with these financial professionals. We need to understand their business and how they handle restructuring a clients financial assets and risk. This will be very important for us when it comes time to show them how our HECM product can fit into their analysis equation.

    It is no different than communicating with the small community banker or credit union, we must understand what motivates them and how we can show them what value of our product can be to their customer or member base.

    No doubt, we have many new opportunities available to us out there. However, we must be educated enough, not only on our own product and changes but on how the mindset of the new professionals we are going to target as our potential business partners work! We contour that and we are in the door, hopefully for a long time to come!

    John A. Smaldone
    http://www.hanover-financial.com

  • It was neither an apology nor an excuse, and no squirming here.
    Very interesting perspective on your part in regards to the use of the word benefit and the HECM, very interesting indeed…

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