Second Lien Reverse Mortgages, with Adam Potafiy of Finance of America

0:01 Welcome to the Reverse Mortgage Podcast. We get together every week and talk to leaders in the industry, most commonly reverse mortgage originators. But one of the products I learned about as I launched this podcast that I think is tremendously underutilized as a real estate broker. I'm talking more and more to my homeowners about is the second lien reverse mortgage. I'm really excited to have to today on the call the account executive at Finance of America who offers this product both on a retail to consumers and more importantly I think to originators on a wholesale basis through finance of America we have Adam Pottery Adam thank you so much for joining us today you are most welcome thanks for having me so to me secondly in reverse was kind of like what there's such a thing do you get that do you get that reaction and what's the most common use that you see brokers coming to you to help fill their business need with this niche 100%. Now that is the reaction because really it's the first of its kind in the industry ever. So we've had proprietary reverse mortgages come into space you know 20 years ago and then they pulled back and then 10 years later they came back sort of thing. But never did we ever see a second lien reverse mortgage product. And really I like to think of it as a second lien optional payment mortgage because that really is the reality. The borrowers can only always send a payment should they choose to send a payment. And quite frankly, some do because they the idea there is they want to slow down the negative amortization of the loan so that there's more equity for their estate. That's the idea and really the most common use is there are many there are many reasons one would tap into their equity but I think the highlight the reason this product stands out is because it subordinates to existing first lien mortgage. Most customers are sitting comfortably in their two, three, 4% first lien mortgage. And while they may find themselves trapped at the end of the month, looking for some

2:04 Liquidity, generally it's not it's not so much so that they're willing to give up their 2 3% forward lien. So this allows them the option to do exactly that. And really, we compete head-to-head with the HELOC. HELOC is really meant to accomplish exactly that. So tap into your equity today as a second lien for any need whatsoever. Same idea here. For any need whatsoever, Mr. Borrower, you tap into your equity as a second lien reverse mortgage product. But the kicker is the payment is optional. So that's a big difference. And so this let's walk that through. The choices they have are they have a first mortgage let's say on a you know LA million-dollar house and they have a first mortgage let's say of 200,000 at a low rate they don't want to touch but for some reason they need to pull some equity out maybe $100,000 just to use a round number and maybe they're either consulting credit paying student loans paying tuition going on vacation whatever they want the money for one choice is to go to a bank and get a line of credit bank America Wells Fargo who the hell wants to do that even still though and they have to qualify on the income basis on debt ratios are fairly strict. So, let's talk about the qualifying on a reverse mortgage.

3:23 Obvious generally speaking, it's not that you don't need to qualify. There's qualifications. Is it similar to a forward regular line of credit loan or is it more relaxed kind of like reverse mortgages are? You know, it's a lot more relaxed a lot like a reverse mortgage but in many cases it gets even better. So it's like a reverse mortgage in the sense that there's still residual income requirements. So very similar to a VA loan if that's what you know people are originators are more comfortable with. The idea is simply taking the borrower's gross income subtracting property taxes, home insurance, utilities and minimum payments off the credit off credit report. And as long as say California borrower has at least $589 left over, that is the requirement for one borrower and two for two borrowers and is 998. The kicker though happens when you got someone with a FICO score of 720. At that point, we could do stated income only. So the borrower literally just signs a piece of paper that says, "Yeah, I can I can afford to stay in this house. I get enough income." So, as long as they kind of confirm that for us in writing, we can proceed stated income only. So, that's a big advantage because you're probably there was a time when we did state income seconds as loans. I was a forward originator years ago. Those don't exist anymore.

4:46 And the opposite. They're much more difficult, challenging, and again, the companies that tend to do lines of credit are your local bank, which who the heck would want to walk to brunch and get a loan or go online? Woo! Not fun at all. And the truth of the matter is that most still do. Why? Because they have to. Like they have to. They need that additional liquidity. So you've seen HELOCs being pretty prevalent in the last couple years. Yeah. So this is why this product is perfectly ripe for such a time as this to where it offers them exactly that flexibility and give them gives them the cash that they're looking for. So, I'll tell you a cute story for everybody listening is I had a business project that I'm working on, doing really well with it, but I knew I need to borrow some money. And I kind of knew I had some credit cards I could access, but at some point I was going to run out of that. And I didn't want to liquidate savings, didn't want to liquidate stock, didn't want to sell a house. So, I set up a line of credit and I knew I need it in about 30 days. So, I planned ahead. I got the line 60 days ahead of time, but it was a line of credit. And they kept bugging me after I got it. You know, you want advance, you want advance. Well, I knew I needed it in 60 days. I didn't need it day one. They were fast. I got approved in five, but I had drawn it. And after 30 days, send me an email. Since you haven't drawn out, we're canceling the line. And I'm like, what? I need the money now.

6:04 And then, of course, because they cancelled the line, that was a negative my credit. And then because I had, you know, I didn't have other credit, you know, available to borrow on, I didn't really plan ahead. All my credit score drops tremendously. I can't get a line somewhere. It was a nightmare. And so this is a reason why to get a line ahead of time I think when you don't need it for security reasons. And so I kind of learned my I talk about this all the time and it's funny how we don't take care of ourselves the way we should but here's a case where the line of credit so let's talk a little bit about another aspect of the line of credit is a subject cancellation and I know as a originator in 2008 when the banks and you have to remember Bank America went bankrupt it's not the bank America today is North Carolina national bank who bought the brand Bank America and renamed themselves because Bank America was bankrupt well was bankrupt walk bought them renamed them But the original Wells Fargo doesn't exist. These companies all went out of business, but along the way they just cancelled all their lines with their customers. So if you had a lot of credit and you might have needed that money for something serious, it was gone and the company was out of business. Talk about I know in reverse mortgages that's a big advantage particularly in HECMs where you know the loan's not going to go anywhere. It's guaranteed by the government. Now this is a proprietary product. So talk a bit about getting a line of credit getting a second lien because the lien is that going to be on in place but the line might be cancelled or capped out or what's how does that work? Yeah. So let me clarify sort of an important piece in this conversation.

7:30 So as it pertains to like HELOCs we're used to HELOC truly being an open a revolving credit line. So the HomeSafe second lien as it sits today it is only a fixed rate option. It is only a lump sum option. So, we're working on creating a revolving so something that really is going to compete with a HELOC. That is currently not in the in the market today. So, I would say I couldn't even give you a timeline to be honest, but unlikely that we would see it until perhaps fourth quarter of this year or maybe even spill into the following year. But we are absolutely looking into creating a revolving credit line that would be head-to-head competing with a HELOC. As it sits today, the HomeSafe second is a lump sum product. So, if the borrower say qualified for a million bucks, they take that million bucks at closing. Now, if they qualified for too much money and if they don't want that much, we could always reduce the number that they qualified for to a number that they're looking for. But they just have to realize that the money they're saying no to at closing is the money that they're forfeiting for good, right? So, that's the key there. And while I'm on the subject of loan amounts, I would say the minimum loan amount is 50,000, so 50. And the maximum is a million. So depending on the home value, tough home values technically go all the way up to 10 million that we will consider, but there's not really a minimum home value.

9:02 Simply a minimum loan amount. So 50,000 up to a million of the loan amounts and it's a fixed rate product. Now I go on your website and it showed I know these are subject to change but shows a fixed rate at 9.99. Is that still accurate for the second loan? Correct. That's cheap compared to getting. So, there's really two options today. And really, the two options are think of them as LTV tiers. So, I'm actually going to pull up today's RA just to make sure I'm looking at the most current rate. So, we've got the 949. That's the top tier. So, not the 999, but the 949 is the current max LTV. And then there's a reduced LTB at 8.99. And these loans, these loans, they're proprietary, so portfolio deals. So there's no mortgage insurance involved here. So closing costs typically are just title escort appraisal and on the HomeSafe second specifically because we have a minimum comp in place we have a flat origination fee in place of $3,995. So that just guarantees that borrowers at $50,000 are served and borrowers are at a million dollars are served at more or less the same the same service because we wanted to make sure our loan officers are incentivized to sell all right and frankly this is for example I as a real estate broker I deal with investors who buy houses and flip them and hard money rates there are going to be a typ for a flip when they're buying a property you're not living in you're going to turn over in a few months. You know, you're not going to get a regular loan legally. You're going to pay 10% in about five, six points. This is cheaper than that.

10:46 And so, as a home flipper, if you have the equity, you can use your equity, I would think. Now, you know, again, there's restrictions to everything, you have to use things judiciously. I'm just saying in terms of the cost of the money, on one hand, yeah, it's higher than your first mortgage. The other hand, it's way cheaper than other options it might be for using money for your business or for investments. That's why I think makes it attractive, right? And for those loan officers listening, I would say, you know, you probably because I come from originating deals, you know, a decade ago, but I've started in this industry as a reverse or yeah, a reverse mortgage loan officer and I'm fully aware of to this day how much some of the negative connotation revolves around what a reverse mortgage is. So, what the homesave second has been used successfully and really for the true value of what the product is. It's not like we're adding more to it. Like I said from the very beginning of the call, it's an optional payment. Optional payment second lien reverse mortgage. So a lot of times the punchline here is I see loan officers using this product as a stepping stone for potentially later selling on a full fullblown reverse mortgage for someone who's tasted and seen what the concept of no payment or optional payment looks like. Then they'll be a lot more prone to potentially take on a reverse mortgage when maybe the rates come down, maybe their financial situation changes and all of a sudden they find themselves really in need to get rid of all mortgage payments. But using this product as a stepping stone, something more something most customers can understand a little bit easier.

12:19 Still, the idea of no payment is tough to it. Everyone's always scratching their head thinking where is the catch? And at the end of the day, it's really not a catch except that we're a bank. We're lending money. The money that was lent to you is accruing interest. We want to slow down the negative amortization. Amazing. Send a payment. Send a payment in monthly, annually, however you want to go about that. But at the end of the day, we're a bank that's assisting that's helping seniors retire successfully. Now is the loan on standard reverse mortgages they're nonreourse as FHA loans. Are these are recourse loans though? Correct. These are also non-reourse loans which is wow big advantage. Huge. Yeah. Yeah. What that means is the customer can never owe the more than what is owed against it. So that's and this applies to all proprietary not just second lien but the HomeSafe suite of products at large they're all non-recourse big advantage and so again from a customer risk point of view when you deal with financial planners and attorneys always are going to be concerned about that well what if and the reality is the loan to value you're never going to get to where the value is less than you know that happened back with the original reverse mortgages I originated some of those back in the 90s and early 2000 and there then you could you loan a value of 80%. Well, if the appraisal was a little too high and the house went down 10%, you could and you didn't make payments for 5 years because it's reverse mortgage. I had customers who were slightly upside down and there was no recourse, meaning the lender just took whatever they got for it and said thank you and were paid off and they moved on. So, again, I think this is more of a feature to explain to an estate planner attorney than in reality because you're never really going to get to that number, but is I think important to know. And so why might you use this? So at a rate of 9.99 or 9.49 I think you said also we're talking about some you know alternative to something else. What might that be? Well high credit card debt would be one. Business opportunities that pay more return would

14:23 Be another one. Seems to me use your word stepping stone. You know you can't use a reverse mortgage to buy a property that's not your residence. You can do a second and take that equity and buy your next home and close escrow if you have to remodel it or set it up, whatever, and takes six months or a year, whatever. And then, to use your words, once you're in the new home, you could do a new a reverse mortgage there to pay off as the other house sells off. But now you've tasted the benefit of not making payments. So, it seems to me a way to get somebody whose intention is to sell the property down the road, but they want to buy something else in the meantime. They can't get reverse on the new purchase because it's not yet their residence. But here's a way to kind of make that work, I would think. Yeah. No, that's definitely one way to go about it. And I feel like a more common scenario really is taking some of the money and buying a property for their kids. So giving them some sort of a inheritance while they're alive and perhaps in much need today. So using this as a way to reward their kids before they actually pass. And another one would be, I think, to make cash offers on property because you can save 10%. Let's say if you're buying a property for cash for your kids, you can buy it with your reverse mortgage and say to them, you know, we want you to get in and re, you know, refinance in two or three years or 5 years or we'll count your inheritance. But meanwhile, this is equity that's costing you money so you they have incentive to pay it off and get better rates. So I can see all kinds of flexible. I think the key the way I look at this loan in particular, it's true of all reverse mortgages in general more so with this is it's a tool in your toolbox and now I say this because I don't really do anything with tools but I get the concept which is there's a right tool for every job but also certain tools have multiple applications and you can use it and if you really learn how to use this tool and to me this is a great tool for hard money lending alternatives, right? The person has equity in their residence. Why wouldn't you use this instead of a hard money loan? You don't need an appraisal. You don't need to. You can wave inspections.

16:22 You can waive insurance on the house you're buying. I'm buying I'm looking at this now saying I should have done this because I'm buying a house to flip. We're going to hold it for maybe 45 days. The house isn't worth anything. They're going to knock it down and build it. There's of course liability, but there's other ways to get to that. But really, as a as a loan, I wouldn't need to get insurance. Spend $2,000 for insurance policy I don't need because the hard money lender needs it. And this a case where this is more flexible option. So again, I think anywhere you're getting interest at 10% and it's efficient and saves you time and money or speed, this would be a fantastic product. When you pay back, just to cover a little bit what you said on the option, but you can't pay it back. I believe like on most reverses, you'll be paying back your interest first. You'll be getting the to the extent you have interest deduction, you're going to get the benefit of that first rather than principal and interest. Is that correct? You know that piece I haven't been asked in so long that I'm scratching my head to it's going to be more of an issue now with a salt discussion. You know, it's going to be one of those things that attorneys are looking for or CPAs are looking for. I think it's one of those features that again if as originers we need to know the answer. I don't know that really is practical for the customer, but I believe it's true on your product that obviously you take out a lump sum and then accumulates interest if you make payments and then as you pay back the money first goes to pay back those unpaid interest is accumulated and then goes back towards the principal.

17:51 And so that gives you some flexibility but gives you the opportunity to the extent you want it tax advantage in the year you're paying it back which usually the earlier years rather than the later years where your income is probably going down. Right. I would say for someone who's looking to this as a truly revolving line, it's best to perhaps wait until our line of credit product formally comes out. So, we've got that revolving one where you can actually draw it, buy a fix and flip sort of thing. Yeah. Pay back as needed, draw it again. But something else I remembered as is one of the main reasons especially in Southern California I see this product used is for building ADUs. So it used in the backyard has been a very hot thing. But primarily in Southern California right now, though I wouldn't be surprised if it's catching wind nationally, but using this as an opportunity to build an ADU in your backyard to then perhaps Airbnb it, you know, make some money for whatever purpose, but purely using it as a wage for improvements on the property justly make some more money out of it. Well, again, because you're getting a stream of income that you can apply whether it be to pay down the loan or take that income on the on the ADU of yourself. And I believe there's some zoning issues now where you can break off the ADUs. That's it's a bills in California. Wouldn't surprising if it passes where you now you have the ADU, then you can sell the back house, pay down the second if you want to or keep and build another property or something. So, it gives you some options. But, yeah, it's a way to put your equity to use. And again, I think that goes back to it's a tool, you know, it's in your tool box. G, I need to punch a hole. Well, here, this will work. And you pull out and use it. Yeah.

19:26 And you know what else is surprising? Like from where I sit at least, I get to see a lot of transactions and I'm always I shouldn't say surprised at this point because it's so because it happens so often that we're paying off an existing HELOC with the second. Oh yeah. They took out a HELOC. They bought into the comps that they already needed the cash and now they used it, but now they got to make a payment on it. Heck, I can refinance essentially that second lien into the HomeSafe second and now we'll have an optional payment all day. And once you're doing that, taking out an extra amount of money, an extra 10, $20,000, you're already paying all the closing costs. You're going through all the work. So, let's talk about the work involved. You offer on a wholesale basis for originators to bring to you as brokers as well as consumers. What's the timing on a loan like this look like? Is it the same as a standard reverse? Does it app and flow based on your workload? Is it standardized? Yeah, it's it is standardized because we more or less we didn't reinvent the wheel. We kind of fell into the rails of what the product what the reverse mortgage product has always looked like. But I would say that the main difference would be if the value of the first appraisal is greater than $10 million than $2 million, then we have to order a second appraisal which we order and pay for. And that you usually takes another adds another 10 maybe 15 days to the to the closing process. I would say on average with one appraisal we're looking at about 30 days. With two appraisals closer to 40 45. Is that bad at all? And for brokers who are not doing this product yet but want to talk to you about it. What's the what's the next step look like? How are you guys taking on new broker relationships or is this only for companies that already signed up with you? We are and that's the best part and we this product has been very hot. The good news is that we are accepting new clients but it's so few of the companies nationwide. I mean it's a small drop in the ocean how many brokers are offering the product today. So I absolutely encourage any loan officer broker listening today to be on the forefront to be among the first to reach out get signed up so

21:30 You can offer this to your clients. And really the easiest way to reach me would be by emailing [email address]. [email address]. Or of course you can always call me at the number on the screen. Fantastic. So we put on the board down below has a picture of him with his phone number as well as the banner has his email address [email address] and then there's the link to the partner resources. And you know, I think one of the things that impressed me about I mean, I know Finance America is a company and been committed to reverse mortgages, but this product in particular, I met Adam recently at the regional meeting for the National Reverse Mortgage Lenders Association. Hope I got that right. And you know, there aren't that many vendors there. And I think that to me, partially because it's it was a group of really dedicated professionals. I was there and I was really impressed u not being one myself but really more peripheral to the industry to see how committed the people were there like they were in a recession involved the recession and only a couple vendors and one of them was fans America and that's where I met Adam offering this product which I think is really hot and I know there's a lot of people talking about it so Adam congratulations on the product and you know wish you continued success look forward to working with you again soon thank you for making time for us on the podcast absolutely thank you for having me thank you so much and first you I'm Bill Gross This is the Reverse Mortgage Podcast. We get together every week and interview industry leaders, most commonly originators, but also vendors that can help us in management to learn about how to better serve our customers with the reverse mortgage product or I would say really tool which I think is you know benefits from our adding good education about it. I think Adam hit on the head which is the reputation of product precedes it unfairly and with proper discussions and proper education we can improve that. So I'm Bill Gross at Bill Gross probate. If I can help. If you have any questions, comments, please put it in the description below. If you have suggestions of who I should interview, please add that as well. And as always, make today your best day ever. Thank you

23:32 So much.