Reverse Mortgage Loan Blog

Call it lying, misrepresentation or bending the truth, but fraud by any other name remains an anathema upon the mortgage industry, costing not only reputations but cold hard cash.

Indeed, the industry’s myriad troubles the last two years may be traced to some buyer and business behavior that fell awfully close to – if not squarely within – the purest definitions of fraud.

Whether it was a lazy zero in the applicant’s income calculations, an inflated appraisal beyond what a property could fetch or terms that exceeded any hope of being met, the purpose was the same – to twist the system for personal gain; in other words, to defraud it.

A chastened mortgage community now knows better, as evidenced by new government regulation and tougher scrutiny of transactions. The effects of this cure will be felt in areas not much affected by the earlier disease.

In reverse mortgages, for example, where government oversight and control remained strong even during the “Roaring Aughts” of this decade, increased regulatory and compliance scrutiny will be apparent.

In the landmark housing legislation (H.R. 3221) (passed by Congress/signed into law by President Bush) this summer, several provisions take aim squarely at the reverse mortgage sector, including:

• Reduced origination fees of 2% on the initial $200,000 of maximum claim amount (lesser of the home value or county lending limit) and 1% on the balance thereafter with a cap of $6,000. (Lenders’ fees are currently capped at 2% of maximum claim amount.)

• Prohibitions on requiring the purchase of annuities and other financial products.

• Requirements on counseling protocols, funding and practices that promote independence and quality in counseling.

• Restrictions around cross-selling financial products.

The last provision, which restricts cross-selling of financial products, has been a source of some fraud charges against the reverse mortgage sector, dating back to the 1990s. The resulting scrutiny since then – not to mention this codified prohibition – likely will make that more of a non-issue.

Another area of potential fraud lies in the area of documentation. Prior to the arrival of imaging technology, it was more difficult to verify signatures when monetary draws were requested from a reverse mortgage fund. Using the best technology helps find and prevent fraud spotting data anomalies that raise red flags. It’s the ultimate borrower protection.

There is particular concern about fraud occurring in appraisals, especially with today’s plummeting valuations – particularly problematic in states that have experienced extraordinary property value appreciation.

Of more general concern are abnormal account occurrences, which is one reason we may require a notarized signature to release funds. Our servicing staff will immediately contact family members if something appears amiss.

Proper vigilance is necessary to prevent fraud in the reverse mortgage sector, particularly because of the single feature most prevalent in this customer group, namely the senior age characteristic. For both moral and legal reasons, this is a protected class, one who could be hoodwinked more easily.

It takes a daily focus on borrowers’ needs and a system of controls that ensures proper handling of their accounts, avoiding the temptation to be diligent about customer concerns only when someone’s looking over our shoulder.

Like a disaster relief plan that looks good on paper but may leave the needy behind when the real storm hits, there is no need for a special “plan” to protect reverse mortgage customers only if something goes awry. It must be a company mindset that is present throughout the entire system.

Reverse mortgage providers are more often these days relying on greater automation and decisioning technologies to eliminate redundancies and the need for staff increases. Until now, this technology has been beyond the budget of a smaller company. Now, through the use of a private-label subservicer like RMS, the opportunity to compete with larger competitors in the reverse mortgage arena becomes a reality. Access to the latest technological expertise also enables companies to convert variable servicing expenses to predictable fixed expenses through the reduced costs realized from economies of scale savings.

Subservicing has emerged as an almost universal solution for a wide range of players interested in getting into the reverse mortgage game – financial institutions including banks, credit unions, mortgage companies, housing authorities, companies waiting on investor approval for secondary market loans or in need of interim servicing needs, businesses with high volume cycles in need of overflow assistance and anyone holding portfolios with unique loan characteristics.

The best subservicing platform provides several types of loan products and risk mitigation characteristics, which ultimately eliminate confusion over the life of the loan, providing a better borrower experience. Along with ability to access servicing platforms without any downtime, expanding service capabilities without changing existing infrastructure are extremely appealing.

Additionally, clients seeking to mitigate the risk associated with nontraditional products may transfer operational and compliance risks to the subservicer.

The technology used by subservicers has benefited greatly from recent developments in the Microsoft .NET developer environment. Web-based solutions have the answer for the unique integration needs of companies both providing and servicing reverse mortgages. Systems that are not Web-based are simply less accessible because they are not as user-friendly.

As a result, .NET applications have become the industry standard.

As the reverse mortgage marketplace expands, subservicers who can offer solutions with functionality, flexibility and product diversity will become the most valuable. For example, with reverse mortgages, credit issues are not as important as property valuation; a highly desirable reverse mortgage system will include Automated Valuation Models that precisely factor in property appreciation as part of the calculation of total annual loan cost.

Following the “once burned, twice shy” axiom, players in one of the few bright sectors of the housing finance business – reverse mortgages – are watching very closely to insure that mistakes in the “forward” world, are not repeated here.

Found here.

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