Single out most any neighborhood in America and even a casual drive around will feature foreclosure signs.

The scrooge of foreclosure is rampant across the nation today, yet some seniors can avoid losing their homes by taking out a reverse mortgage. Pursuing a save-the-home strategy with a reverse mortgage has its challenges, however. Some lenders have compared making such reverse loans to pro-bono work, considering all the time required. But that has not discouraged them from helping seniors in need. There are ways to smooth the process.

The first step is getting seniors to simply acknowledge their challenging financial circumstances.

"Most seniors believe that it's un-American to be foreclosed upon and that no one will ever take their house away from them, so they bury their heads in the sand. They ignore foreclosure notices and they think that it will all just go away," said Pamela Kirkpatrick, senior vice president at Allied Mortgage Group Reverse Ultra in Dania Beach, Fla., during a recent NRMLA webinar.

Because these seniors usually live in denial about their dire financial state, Kirkpatrick suggested that loan officers pose pointed questions in initial conversations like, "How long have you lived in your home" and "Do you want to remain living in your home?" to get seniors to open up about their finances. She also advised that lenders ask seniors whether they would like to include a trusted advisor in these financial discussions as a way to get the senior to talk more freely.

Once the senior decides to use a reverse loan to avoid foreclosure or bankruptcy, a loan officer should:

• Explain to the senior about the reverse mortgage counseling requirement and provide the senior with a list of counseling agencies to receive the education;
• Execute the Home Equity Conversion Mortgage (HECM) package and submit it to FHA;
• Obtain conditional approval for the reverse mortgage; and
• Supply clients with a letter, which describes the "Good Faith" estimate and loan comparison, as well as request a short pay-off from their lenders.

It's the "short pay-off from the senior's lender" that is the tough part. In order to shake a borrower from foreclosure, the reverse mortgage lender must free the property from the past-due forward-mortgage lien. The question is, how?

The negotiation between the reverse mortgage officer and the senior's existing forward lender invariably boils down to how much less than the full balance will the forward lender accept to end the foreclosure proceedings - a discount known as a short pay-off.

Short pay-off negotiations are, by all accounts, time-consuming and frustrating, but there are strategies for increasing the likelihood of a deal with forward lenders.

Even before negotiations start, the reverse mortgage loan officer must find the right person to talk with at the senior's forward loan provider. And that's not always an easy task, which is why Kirkpatrick suggested lenders secure a better understanding of the senior's situation even before making that first call. For example, knowing from those conversations whether the senior believes he or she was the victim of an inappropriate mortgage in the past is crucial, Kirkpatrick said. She said a forward lender is more inclined to consider a reverse mortgage pay-off if that senior even hints at being a victim of overaggressive lending at the hand of the forward mortgage provider.

Once the reverse officer finds the right person with which to discuss a pay-off, the negotiations begin. To help convince a forward lender to agree to a short pay-off, Kirkpatrick recommended that the reverse officer, or someone on behalf of the senior, call the forward lender everyday, advocating a senior's needs for a mortgage discount. In part, these calls will need to educate the forward lender about reverse mortgages and short pay-offs.

The forward lenders "are speaking in their language and not reverse mortgage discount language," Kirkpatrick said.

A forward lender contemplating a short pay-off will request certain documentation from the senior, such as two recent bank account statements, tax returns, a conditional reverse mortgage approval document, reverse mortgage benefit summary, a recent mortgage statement, and an FHA appraisal.

Much like the language barriers, the heavy dose of time required to negotiate a pay-off is another frustrating challenge for reverse loan officers. Kirkpatrick estimated that closing such reverse loans requires triple the time of a standard reverse loan origination. Both Kevin McNichol at Largo, Fla.-based mortgage broker Freedom Retirement Trust, and Kirkpatrick equated negotiating short pay-offs to pro-bono work and even advised reverse officers to find pro-bono attorneys to handle negotiations with forward lenders.

"I have to think that having an attorney contact the lender is going to probably go a long way at getting something done, as opposed to having a reverse mortgage loan officer contact the lender," said McNichol during the webinar.

The pro-bono analogy is literal; McNichol and Kirkpatrick said there is little money to be made on foreclosure-saving reverse mortgages.

Kirkpatrick estimated there is a 30% chance of closing a reverse mortgage loan for a senior facing foreclosure or bankruptcy. Yet, the more forward lenders know about reverse mortgages, the higher the close rate on such reverse loans will go. In fact, the attorney general of the State of Illinois now has a hotline for seniors to call (866-544-7151) to learn more about how reverse mortgages can be used to avoid foreclosure.

"There are lots of ways to try to get the word out there, and [it] certainly paints an excellent picture of how and what the reverse mortgage industry is all about," said McNichol.

20 YEARS LATER, HUD'S SZYMANOSKI STILL WORKS TO IMPROVE HECM

About 20 years ago, Edward J. Szymanoski was asked to join a small team within the Department of Housing and Urban Development to build something that hadn't been built before: a financial model for a government product that came to be known as the Home Equity Conversion Mortgage (HECM).

In short, Szymanoski succeeded. Today, HUD still uses the model Szymanoski crafted when he was in his late 30s, and that is a testament to him and to the rest of the HECM team of 1988-1989.

Szymanoski [pronounced Si-ma-NOS-kee] has the formal title of Associate Deputy Assistant Secretary for Economic Affairs in HUD's Office of Policy Development and Research. Yet, he talks with the quiet modesty of a numbers guy.

Each word is deliberate. Each idea is fully crafted. In an interview with Reverse Mortgage Online Update, Szymanoski reflected on the 20 years since he built the HECM "black box," and offered a preview of the changes to come. Those changes will include Szymanoski's involvement, of course.

Q: What was your role on the team that developed the HECM?
A: I was doing most of the formula development. There were five of us on the team. Judy May was leading the team; she was mainly coordinating with people in the industry. We started the process in 1988, after legislation was passed that allowed for the product in 1987. I was in the Office of Policy Development and Research and I assessed the risk and came up with a relatively easy way to define payments that seniors could get from these mortgages, as well as understanding the risk.

Q: How did you go about building the model?A: I did research on the ways that people had been modeling house prices. The key was to figure out a way to model house prices under a degree of uncertainty. That was at a time when a lot of academic literature was coming out on modeling forward mortgages.

Q: How long did the work last?A: It was the majority of my time for eight or nine months. Then I stayed involved in the reverse mortgage program. At the time I was working on other FHA mortgage programs, but reverse mortgage stuff was always something I followed. I was the guy who would analyze the numbers.

Q: What do you think of the model you helped build?A: It has held up remarkably well. I don't know how much was luck or careful preparation -- I like to think some of it was the latter. It was relatively straightforward, even though the formulas were complex. We happened to guess fairly correctly on some long-run assumptions that have held up pretty well over the years.
We haven't had to make many major corrections since we launched the program. To what we attribute that, I think - and Judy was an excellent team captain - we went over an enormous number of what-if scenarios. It was that extra effort that proved to be the most valuable.

Q: What were some of the assumptions you needed to figure out? A: One of the things we had to figure out was how long people would stay in their home. Death you can measure fairly accurately, but move-outs was a critical factor we had to figure out. An economist at a university did some research for us using some existing move-out rates. We analyzed that and we figured out that move out rates would be an additional 30% on top of mortality rates. That figure has largely held up well. It has been a bit too low for younger borrowers and a bit too high for older borrowers, but on the whole, it has proven to be something that has been fairly robust and enabled us to stay with the same factor tables.
Another assumption we had to make - we had to account for interest rates. We knew very few lenders would offer fixed-rate loans, even though they were permitted to do that. We had to set up some modeling to figure out future interest rates. We determined that there needed to be two interest rates for loans - the note rate, but for long-term we linked it to the 10-year Treasury rate. While that is still an assumption being used, we have had to tweak that to calculate how the credit lines of borrowers would grow. The interest rate environment has changed over the years. Rates were in the 10% range when we did this program, and they have come down over the years. Growth of lines of credit at those initial 10-year rates was not workable over time as the rate environment was shifting and coming down.

Q: Considering all the turmoil in the housing marketing, why is your HECM model holding up? A: The recent decline in house prices is a unique event. I think generally we have discovered that the reverse mortgages are basically ... more tied to long-run house price trends than regular home purchase mortgage. The reason is on the regular home purchase, when the housing market softens, people are losing their jobs, and you get short-run losses. This is not the same for reverse mortgages. There are no payments, there is no job to be lost, since these people are mainly retired, and there is no reason for them to cash in the loan when housing prices decline. The terminations are more driven by death or move out, so you don't get a rush of losses when you have a decline in home prices.

Q: How can the HECM model be improved?A: With regard to the model itself, we can always improve upon the way in which we predict the rate of terminations. When this model will be revisited, we will likely revisit the termination and move-out rates. The industry has been asking us to think about whether the mortgage insurance premium should be restructured. Some of their clients are uncomfortable paying the 2% mortgage insurance premium upfront. That is something we can see -- if the premium can be paid later in the life of the loan. That is also something that is contemplated.

Q: Is there a schedule for these changes?A: There is not really a schedule. The model has held up fairly well over time, and we haven't felt the need to do much to it for many years. As time goes on, we begin to see some patterns that can be improved. We do review the programs annually. ... So these improvements to the modeling are probably at a point where we need to rethink it. We have gotten more data and we have been through a turbulent time here, so it would be prudent to look at this in the near term, I would think.

Q: It's the 20th anniversary of your work on HECM. What are you personal feelings about the milestone? A: It is hard to believe it has been so long. I think for myself it has probably been the most rewarding part of my government career, to work on this for an extended period of time. It is clearly something that can benefit older Americans. It is not for everyone, but for those who really need it, it can be a benefit. It is a privilege to work on it. For all of us at HUD, the HECM is a good example of the good that can come out of public service. The government does do right sometimes. The government was able to do it, has stuck with it, and it has held up well. I feel a sense of pride. It was something worth doing and it makes it that much more enjoyable to have a government career. It was a highlight of my career to date.

KITCHEN TABLE QUESTION

The Kitchen Table Question, which appears in each issue of the Reverse Mortgage Online Update, offers answers to common "kitchen table" questions lenders field from prospective clients. We hope the features helps you "at the kitchen table."

How do you respond to a borrower who asks, "Why do I have to pay mortgage insurance?"

Michael Branson, All Reverse Mortgage Company, Garden Grove, CA:
Mortgage insurance is exactly that: Insurance. This program is insured by the federal government to assure that you will never have to make a mortgage payment as long as you live in your home. It's insured if you choose the monthly payment option and receive your monthly payment every single month, on time, for life, as long as you live in your home. It's insured regardless of what property values do in the future. You and your heirs will never owe more than the property is worth in a bona fide third-party sale. Like all insurance, it comes with a cost, but this insurance insures that you will be able to live in your home for the rest of your life without ever having to make another mortgage payment.

Darrell Johnson, Financial Freedom Senior Funding Corporation, Bloomfield Hills, MI:
Because it protects you and your heirs from ever owing more than what your house is worth, or should I say: In case the debt rises to the ceiling, and the house value falls to the floor; no one is caught owing any money!

Kevin McNichol, Freedom Retirement Trust, Largo, FL:
That's a good question, and I hear it from most people I work with to complete their reverse mortgage. We all have some kind of insurance for protection, right? Well the mortgage insurance protects many of the benefits that you get from the reverse mortgage including that if the value of your home goes down, we can't come to you and say that you now have less money available to you. It protects you and your heirs, so you can never be personally responsible to repay the loan: the most that the lender gets paid is 95% of the appraised value at the time you sell or pass away. The insurance protects the lender as well. If the lender wasn't protected the benefits you receive would not be available.

John Elliott, MetLife Home Loans, Highland, IL:
Let's not talk about what Mortgage Insurance is. Let's talk about what it does. This valuable protection is for you and your heirs, assuring you will never owe more on your loan than the value of your home. For example, should you beat the odds and live much longer than expected, and supposing your home's value does not continue to grow as it has in the past, you could end up in a situation where your loan exceeds the home's value. Under normal situations this would be a problem, wouldn't it? What do you think would happen? However, with MIP, you have transferred this problem to someone else. Thus, it is a vital peace of mind protection, don't you agree?