Reverse mortgage counseling is an important part of the process in the Federal Housing Administration (FHA)-sponsored Home Equity Conversion Mortgage (HECM) program, and while the industry and regulators have done a lot over the past few years to address ongoing issues there remain some problems which need to be addressed.
This was the perspective shared by Brenda Grauer, a reverse mortgage counselor with Housing Options Provided for the Elderly (HOPE), Inc. based out of St. Louis, Mo. HOPE says that it sees upwards of 3,000 clients per year for HECM counseling sessions, and is the only HUD housing counseling national intermediary that focuses exclusively on reverse mortgages.
To better understand the current landscape of HECM counseling, Grauer presented about issues she and others in the space are seeing on both the origination side of the transaction as well as the default side during an August meeting of the HUD Housing Counseling Federal Advisory Committee.
On the origination side, the issues come down to the reduced amount of available proceeds on a HECM compared to one year ago; miscommunication with loan officers who may misrepresent the length of time the counseling takes; and issues related to misunderstanding the payoff process after a borrower passes away or leaves the home.
Reduced loan proceeds due to rate volatility, PLFs
Grauer first addressed issues related to loan proceeds on the origination side, which have surprised clients who may revisit the prospect of a reverse mortgage loan after first acquainting themselves with the process at some point previously. Specifically, this is in relation to the October 2017 changes to Principal Limit Factors (PLFs), she explained.
“Those [PLFs] were increased [in October 2017], thereby reducing the amount of money people could get from a reverse mortgage at various levels, in some cases as much as 15 to 20%,” Grauer said. “Because of the low interest rates that we’ve been experiencing in the U.S. and internationally from 2017 to 2021, that change in [PLFs] didn’t really have a huge impact on the amount of money somebody could get from a reverse mortgage.”
That has changed in the past year, however, since the one-year Treasury rate used to calculate how much money borrowers could get from a reverse mortgage rose precipitously from .07% in July 2021 to 3.11% one year later, she said.
“It has had a drastic impact on the amount of money people can get from a reverse mortgage,” she said. “And so, it’s getting more difficult. [F]or those baby boomers that have those forward mortgages [and are ssking] enough money from the reverse mortgage to pay off their existing loan, that HECM [has become] a less viable option at a time when more borrowers have forward mortgages to pay off.”
Looking at her own data, she compared the change in situation with the circumstances of a pair of clients Grauer saw in 2021. They are ages 65 and 66 with a lien-free $300,000 home, and were looking at a lender with a 2% margin.
“Last year in doing the calculation, the gross loan proceeds — what we call the available principal limit, the loan proceeds before any fees are deducted — this couple would have received on a $300,000 home with no existing mortgage [total proceeds of] $162,600 and then the fees would be deducted from there.”
That same couple with the same situation 12 months later would see a 28% decrease in available funds to $127,200, she explained.
“So, the people that we have calling in are kind of surprised to find out how much less money they actually get from the reverse mortgage,” she said.
Miscommunication with reverse mortgage loan officers
Grauer also described an issue on the origination side that has been persisting for many years related to miscommunications between counselors and loan officers which can manifest in several different ways.
“[I have seen] difficulties with some loan officers telling clients that counseling sessions last 20 to 30 minutes,” she said. “It tends to discredit the role of housing counselors in that we, as the housing counselors, are just seen as another hurdle to get over in the process rather than being collaborative and really taking a holistic approach to the client’s situation.”
She has also describes scenarios in which loan officers may try to schedule counseling sessions for their clients, and other counselors who prepare narrow product estimates, she explained.
“We have volume counseling agencies, as I refer to them, who don’t necessarily prepare their own individual loan estimates for the clients prior to the counseling session,” she said. “The counselors end up really just speaking to a particular product offered by a particular lender, rather than just speaking in the more general sense [about] what’s available in the market.”
She also cited what she called “very quick turnaround” in scheduling counseling sessions, as well as a lack of opportunity for some clients to review information independently, she said.
“And also, you do have some counseling agencies that accept direct referrals from lenders, which of course they’re not supposed to do,” she said. “So, these are just general issues that we’ve seen over the years.”
Understanding HECM payoff processes, counseling capacity
Grauer also alluded to issues that can come up for counselors when it comes to the information related to borrowers about what the process looks like after a borrower dies or leaves the home, which moves a reverse mortgage into due and payable status.
“[We have seen issues with borrowers needing] a clearer understanding of what the payoff process is for the loan after the death of the borrower, and really wanting to try to get better and clearer information to what the heirs are supposed to do with the end of the loan,” she said. “We find that the servicers can provide limited assistance on that end, and there’s a lack of counseling funding and capacity on the back end to assist with these borrowers. It’s not an origination, and it’s not really a PCLM.situation either, a default situation.”
Counseling capacity has been an issue that has bled into several individual localities. In Massachusetts, for instance, legislative pressures on reverse mortgage counseling have threatened the ability for any reverse mortgage business being done in that state on multiple occasions, and what has been seen as onerous requirements for in-person counseling has stretched a roster of five-to-six counselors to try and find ways of operating in a state encompassing 10,565 square miles.
Relief has allowed telephonic and video counseling in that state to resume for the time being, through 2023.