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A tough sell.

A Tough Sell

Thirty years after the first so-called "reverse mortgage" was written, the market for home equity conversion lending finally appears ready to blossom.

The Federal Housing Administration's (FHA) pilot program to enable house-rich but cash-poor seniors to unlock the equity they've built up in their homes is getting off the track. The Federal National Mortgage Association is making a secondary market for some FHA loans, and Wendover Funding of Greensboro, North Carolina, is servicing the loans for any lender who will make them.

Though Congress expanded the FHA's now three-year-old demonstration program from 2,500 to 25,000 loans last year, only 900 mortgages have been written to date. But the pace of activity has quickened of late, with closings, which were once trickling in at a rate of two or three a month, now averaging 25 a week.

Nine hundred loans doesn't seem like much, and it isn't. But the significance of the FHA program isn't in numbers, at least not to Ken Scholen, perhaps the nation's foremost authority on home equity conversion mortgages, or HECMs for short. The importance of the FHA pilot program is in the life it has given a segment of the mortgage market that has yet to see its expectations reached.

Scholen heads the National Center for Home Equity Conversion in Marshall, Minnesota, a clearinghouse for information on reverse mortgages and other financial arrangements that allow older homeowners to maintain their independence by borrowing against the equity they have in their homes. And he says that with the FHA program, the quality of HECMs has taken a giant step forward.

"The state of the market has never looked better," Scholen says. "Some very exciting prospects are just around the corner. Three years ago, we were just hoping something would happen. Now, we're poised to handle a growing market."

To be sure, the market for reverse loans and other arrangements has nowhere to go but up. Including the 900 FHA loans, only about 152,000 HECMs have been written since the first one was made in 1961, and 90 percent of those have been made by state and local governments so seniors can have enough cash to pay their property taxes and/or repair their nests.

But you have to crawl before you can walk in any endeavor, even one that's now three decades old. And, for the most part, it is a relative handful of mortgage bankers who are on their hands and knees laying the groundwork so that others may follow. They aren't making any money yet - they may never make any money - but they are nonetheless committed to home equity conversion lending.

There are numerous reasons to get into home equity conversion loans and a number of reasons to stay away from them. Ted Eisch's reasons for deciding to participate in the FHA program are part social and part economic. But mostly it makes him feel good about himself.

"You get caught up in it," says Eisch, who heads the Executron Mortgage Network, a Minneapolis mortgage company with annual originations of about $120 million. "It's a niche product, so you can't do it exclusively. And it may take up to two years to achieve the volume you need to live on the 1 percent loan fee. But you get tremendous satisfaction" from helping seniors fulfill their desire to age in place.

Eisch, who has 23 years in mortgage banking, has loads of advice for his colleagues who are thinking about offering reverse loans. For starters, he says, look for a senior officer who not only has the ability to implement the program but also is no longer afraid of getting his or her hands dirty.

"I do not believe a person can manage the implementation of the HECM program at a distance," he warns. "And the committee approach is a sure way to disaster. Implementation should be done with personal involvement of one senior officer and the help of no more than two others. If you do not have available [a] senior officer well rounded in the creation of total mortgage programs, you should not even attempt to get into the program, unless as a correspondent."

Eisch, who has six children, three of whom are in the mortgage business, suggests that HUD's Manual 4235.1 is required reading. But read it with an open mind, he warns. Don't try to relate it to what you're doing with other FHA programs or you'll be "led down a series of blind alleys."

The concept of reverse mortgages is different but not necessarily difficult, the mortgage banker says. "Once you understand the broad concept and [the] total flexibility that was intentionally set up by HUD, you can then assess current legal documents, forms, originations, processing, closing, shipping and servicing in light of the special requirements of a HECM loan."

One major difference is in how loans are originated. Eisch says the originator shouldn't be a traditional commissioned loan officer but rather someone who is more proficient with the legal side of lending, so that person can respond to the myriad of questions potential borrowers are certain to ask. Also, while the originator can be of any age, he or she must be able to relate to seniors and vice versa. "Salesmanship is not part of the program," he says, "unless you are selling sincerity and concern."

Denver's United Mortgage Company took its first reverse mortgage application in September 1989. The loan didn't close until seven months later, and Paulette Wisch had to do a lot of legwork in between. But it was worth it, she says. "The program has offered me a personal sense of reward, and based on the phone calls and thank you letters I have received, I know the program works."

United since has been taken over by Norwest and Wisch now works for Wendover Funding's origination office in Englewood, Colorado. But the 19-year mortgage banking veteran still remembers what it was like to be a pioneer. The biggest obstacle she faced was putting together a set of documents that met state requirements. That alone took several months - not to mention $20,000 of United's money - to accomplish.

Because of publicity surrounding the new FHA program, United feared being overwhelmed by borrowers, so it did no advertising. This only frustrated interested seniors, who couldn't find a lender who was making reverse loans. Those who eventually found United did so by inquiring at their own banks.

Wisch says anyone in equity conversion lending must let the public know they are in business. "Get the word out that you're doing the program and calls will come in." One way to do that is to let banks in on the secret, especially those with "Over 55" and "Empty Nesters" clubs. But she says a better method is to advertise in local senior newspapers, making sure to put your phone number in large type, and speak at senior centers.

Wisch deals with her borrowers on a personal, one-on-one basis. She sends information packets to each caller, for example, and if she doesn't hear from someone after two or three weeks, she calls them. "This is critical," she says. "Even if the client has information, he may interpret it incorrectly and never pursue the loan."

Wisch doesn't use loan originators. She and one other person staff the office, which is a small, ground-floor executive suite with oversize hallways and double doors for easy assess by handicapped seniors. All phone calls are answered in person, not an answering device. "The elderly do not like phone mail," she explains.

Although a document preparation service does the documents, she handles closings herself, even though it may involve a trip to the client's home. In fact, if the borrower can't travel for one reason or another, she'll go to him or her to take a loan application. And rather than wait for borrowers to call, she calls them on disbursement day (the day the rescission period expires) to verify that they haven't changed their mind.

Like many others who are involved in equity lending, Wisch believes that counseling would-be borrowers is critical to the success of reverse mortgages. But also important, she says, is making yourself available, not just to clients, but to counselors, too, "especially during the initial sessions" when questions are most likely to pop up.

Since 1980, when Peter Mazonas left Bank of America where he founded BofA's personal financial counseling and private banking divisions, he has started three different automated financial service companies. But two years ago, after his mother had a stroke, he couldn't find an equity conversion product that met her needs. So he began tinkering with designs of his own.

Now, as president of the Reliance Home First Income Plan in San Francisco, Mazonas is at a crossroads. He's spent $1.5 million of his own money and needs a partner with plenty of cash and a household name. He's convinced equity conversion lending "can be a very profitable business. But it takes volume, and to have volume, you need plenty of capital. I expect to be profitable after the first year, but it will cost $4.5 million to get there."

Mazonas has high expectations because he is certain he has found the answer to a key limitation contained in most reverse loans; severely restricted mobility. When a HECM borrower moves out, the payments upon which the person has been depending stop, the house must be sold and the loan must be paid back. Consequently, many people who should leave for medical or other reasons become prisoners in their own homes because they can't survive without their monthly checks.

To solve that problem, Reliance would make the benefits portable by combining a reverse mortgage with a deferred annuity. The annuity would kick in after 12 years, and would guarantee lifetime benefits, no matter where the borrower lives. Mazonas won't reveal anything more about his patented product, except that it also leaves something for the borrower's heirs, another frequent concern expressed by seniors. But he vows that his annuity wrinkle can withstand any doomsday scenario Standard & Poor's or Moody's wants to throw at it.

Mazonas has already turned down one funding source who he says "wanted to juice the fees" to make money. But he's talking to another "national player." If they can strike a deal, he says he can be writing loans within 90 days. If they can't come to an agreement and no other financial partner can be found, he may proceed on his own with a franchise-type operation. Reliance is set up as a mortgage banking company that will live off origination and servicing fees plus a 1 percent charge when the home is sold.

One thing Mazonas won't do, however, is pay lip-service to social responsibility. "Your customer is everyone else's mother," he says. "If there is someone you want to protect, it's Mom. That philosophy has to flow through the entire deal."

But he also believes that besides being responsible to borrowers, the program must be attractive enough to appeal to investors. Otherwise, it won't fly. Toward that end, he put his documents through 19 drafts before he felt comfortable with them, not only to protect Mom, but also to protect his sources of capital.

"The papers must be able to convince a court 10 years from now that the borrower was mentally capable of understanding what he or she was signing," he explains. "The industry does not yet have a black eye, but if someone screws up, it will screw it up for everyone. If there is litigation - and there will be - it won't be a real estate loan but as a consumer finance loan."

With $17 billion in assets and 2.5 million customers, Capital Holding Corporation has some pretty deep pockets. But the Louisville-based insurance company hasn't exactly set the world on fire with its Home Income Security Plan, a form of reverse mortgage it introduced several years ago.

Sales Director Michael Nelligan won't divulge the number of loans that have been closed, saying only that "well over 1,000 applications" have been taken. His company is presently active in California, Florida, Kentucky, Maryland and Virginia, but has no plans to expand into other states at this time.

Nevertheless, Capital, which is one of the few private firms that funds its own loans, doesn't intend to get out of the market, if only because the company sees itself far ahead of the curve. "We're not making any money right now," says Nelligan. "It's been a tough nut to crack, but we've forged through a lot of roadblocks and we're in it for the long term."

The sales executive is certain there is demand for a product such as his, but a general lack of awareness has hampered growth. "Still well over 90 percent of our customer base doesn't know what a reverse mortgage is or how it works," he says. Capital has hired public relations professionals to educate consumers, but for every step forward, Nelligan says, misinformation in the media sets equity conversion two steps back.

The company also has spent a considerable amount of time and effort on marketing and distribution, not to mention $1 million in advertising last year alone. "We still haven't figured out how to cost-effectively generate prospects," Nelligan concedes. "We're trying to get the cost per loan down to $300 but we're not anywhere near that."

Capital also didn't recognize how important counseling would be to its success. "It's a very different product, so seniors need as much advice as they can get," Nelligan warns. "It's the biggest financial decision the average person makes, period. It's not like buying or even selling a house, or sending your kids to college. We don't require counseling, but we encourage it at every opportunity."

The sales manager also suggests that lenders treat equity conversion as "a positive purchase decision. It's not appropriate in all situations, but it is a viable tool, so seniors should feel good about what they're doing. Approaching them like a wolf at the door tells them you think they are financial failures."

Lew Sichelman's weekly housing column appears in more than 150 newspapers throughout the country.
COPYRIGHT 1991 Mortgage Bankers Association of America
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes related articles; reverse annuity mortgage market
Author:Sichelman, Lew
Publication:Mortgage Banking
Date:Nov 1, 1991
Previous Article:The selling of Freddie.
Next Article:Winning with service.

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