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Mandatory Nature of Counseling

One of the early criticisms of the HECM program was that homeowners would be alienated by mandatory counseling, which could be viewed as paternalistic or demeaning. The 1995 evaluation noted that lenders and advocates for the elderly generally had come to accept counseling as an important aspect of the program given the complexity of these loans. The interviews conducted for this evaluation found essentially no opposition to mandatory counseling from borrowers, lenders, or other industry observers. Counselors reported little resistance from owners about counseling. In fact, in most cases where clients professed that they did not feel that counseling was needed, after the session most of these owners indicated that the session had been helpful. Lenders also did not express the view that counseling should be optional. In part, lenders’ acceptance of counseling appears to be related to their understanding that borrowers need to feel assured that these loans are sound and appropriate for them. The involvement of an impartial third party helps provide this assurance. Lenders also noted some concern about the use of the term “counseling” for these sessions as this has a negative connotation for many seniors. The Rhode Island Housing and Mortgage Finance Corporation (RIHMFC), which is unique in acting as both a lender and counselor, uses the term “information session” to describe this part of the process to avoid these negative connotations.

While lenders did not express a desire to eliminate mandatory counseling, several suggested that allowing certified public accountants (CPAs) and lawyers to provide this counseling would be

helpful and appropriate for financially savvy owners. In cases where borrowers have an established relationship with a professional advisor, they may feel most comfortable with their lawyer or CPA informing them about these loans. There are issues with this approach, such as how a determination would be made of whether a CPA or lawyer is appropriate for a given borrower since these

professionals may be less informed about programs aimed at lower-income seniors. Another issue would be whether these professionals could be compensated for their time, as at present HECM counselors are prohibited from charging clients a fee.

General Outreach and Education

HUD’s handbook for the housing counseling program notes that one of the objectives of the program is to have counseling agencies conduct outreach to households eligible for HUD’s housing programs.40 For the most part, the agencies contacted were conducting little outreach. Several noted that they included HECM counseling as one of the services they offer in brochures describing the agency. A few indicated that they participated in seminars or housing fairs to discuss reverse mortgages when invited by organizers of such events. Several agencies indicated that they did not conduct any outreach, which was attributed either to a lack of funding for outreach activities or a lack of funding for counseling so that they would not be able to serve additional clients. Only one agency, which had a long-standing dedication to promoting reverse mortgages, actively pursued opportunities to educate owners about the availability of the HECM program. Several agencies indicated that they would like to do more general outreach and education if more funding were available. They viewed such efforts to reach owners who would benefit from a HECM as essential to expand use of the program.

Lenders’ Concerns about Counseling

As has been touched on above, lenders generally expressed concern about the availability of counseling. Lenders also noted that the quality of counseling varies quite a bit among counseling agencies. Poor quality counseling was a concern both because it did not adequately prepare owners to decide about whether to obtain a HECM and because it could create more confusion by contradicting accurate information provided by the lender.

Another lender concern about counseling is the potential to lose customers that they had cultivated because of steering by counselors to specific lenders. Some counselors are reported to have developed relationships with certain lenders and recommend that owners use these lenders, regardless of whether the owner had already been dealing with another lender. In some cases, counselors are reported to steer owners to lenders who have loan officers that are salaried and not commissioned because of the counselors’ feeling that commission-based lenders put too much

pressure on owners to take out a loan. In other cases, counselors may simply use materials developed by a lender to inform owners about the program, which in essence appears as a recommendation for these lenders.

Lenders also express concern about the tendency of counselors to suggest that owners shop around among several lenders before obtaining a loan. Some lenders viewed this as a strong disincentive to conduct marketing since the lender cannot control whether they are able to retain borrowers that they reach with their advertising. Given the existing limit on the amount of origination fees that can be financed and the fact that almost all loans are purchased by Fannie Mae at par, lenders argue that there is little difference among lenders in loan terms or costs. As a result, at present owners may gain little from shopping around. Of course, future program developments may introduce greater variation in loan terms and costs, so that shopping around may enable borrowers to find the best deal.

Lenders also reported that some counselors hold strong views that reverse mortgages should only be used as a last resort, and will counsel owners against these loans unless it is the only option that allows them to stay in their home. In contrast, in order to expand the market for reverse mortgages, lenders would like to promote reverse mortgages not simply as a way to maintain their current lifestyle, but as an option that allows owners to enhance their lives by tapping their home equity. Lenders also cite the possibility of using a reverse mortgage to reallocate a borrower’s wealth so that it is not so heavily invested in real estate as another potential use of the program. Lenders are frustrated by this divergence in opinion between the lender and counselor communities regarding the appropriate use of reverse mortgages.

It is difficult to evaluate lender concerns about counselor activities that undermine their ability to close loans with particular borrowers. On the one hand, lenders point to the language from the statute establishing the HECM program which does not indicate that the counselors should make recommendations about how borrowers should choose a lender. Lenders also suggest that the loss of loans due to counselor recommendations may chill interest by lenders from entering this market. On the other hand, counselors obviously believe that part of their role is to help owners to make the best choice about these loans, including the choice of lender. Lenders would like HUD to clarify what is acceptable counselor behavior regarding recommending specific lenders or whether owners should be encouraged to shop around among lenders.