Recently I had the privilege to speak to over one hundred originators and reverse mortgage professionals about the new excitement over the Fixed Rate HECM. My goal was to take a second look at how and why we make certain product recommendations to our customers.
While loan volume has been increasing in recent months, overall we are considerably down from last year. The reasons abound, but chalk it up mostly to last October’s 10% Principal Limit Factor cut and falling home values. We are scratching for every dollar we can find in many cases just to get the customer qualified paying off existing liens. Enter the new “profit-sharing” of lenders eliminating service fees, loan origination and even paying in some cases the FHA MIP insurance!
At first glance this is good news; a great opportunity to overcome the “too-expensive” objection of many while helping some qualify. Business should see some uptick in volume. Sounds good and it is.
But are we giving our clients the full picture when it comes to which HECM program they choose: Fixed or Adjustable? I mean, is it really worth it for the client to save $10,000 or more in upfront costs if they have a low mortgage payoff or don’t have immediate need or plans for the cash proceeds? The old saying “walking over a dollar to pick up a dime” comes to mind.
Why? It comes down to the question of suitability and quite frankly liability. Now no one likes the “L” word in lending…meaning “liability”, but truth be told we are being held to ever increasing standards of conduct and suitability. Could selling a customer a fixed rate with lower upfront costs come back to haunt you (or their heirs) if they really didn’t need a lump sum distribution? Absolutely. The amortization, although at a fixed rate is impressive to say the least. What if that same customer with an adjustable rate loan kept most of the money off the balance sheet in the Line of Credit? Even with ridiculous interest rates (a possibility) they would be miles ahead in equity preservation and even better have access to more cash in the growing Line of Credit.
Now comes the question of YSP. Let me be clear, I am not against YSP. It is needed for many institutions to operate at a profit modest though it may be. However, what if your loans are examined later and it is found the vast majority are Fixed Rate HECMs with generous YSP payouts to you? It could pose a problem.
Thus the need for us as reverse mortgage professionals to fully appreciate the effects of negative amortization, leverage, managing equity consumption and ultimately which product better meets the needsof our customer in the long term. I would recommend documenting why a customer is choosing a particular loan and the circumstances. Keep it on file. Also a suitability worksheet may be a great way to train and standardize your staff’s approach to product choice.
At some point the elimination of fixed rate fees will pass, but it is a great opportunity for us to examine (fees or not) our process, suitability and commitment to our customers to provide the best information and education about product choice.
Shannon Hicks
VP of Product Development at Reverse Fortunes.
1 Comment
Shannon,
i think you story on fixed and adjustable rate mortgages is wrong.
i use to be able to pay for seminars, pay for christmas parties but with the home equity loss i feel which ever loan can give them the most money may always be the best choice. it has been in my last 5 years.
the borrower needs money.
simply: Noone i know has any equity. Medical costs, taxes, family costs, increased credit card interest rates, lost annuity equity, and loss stock market portfolio along with loss real estate equity have destroyed every senior family i have. Plus, the seniors i know have lost their job but we do not age discriminate.
they have 1/3 of the asset they had 3 years ago at best.
i say take the most money you have, work with your current state to be prepared financially to get subsidized medical care from the government and live the best you can until you need it.
all my seniors get medical care at the end. i focus on this portion of their life so they eat and have electricity for air conditioning. i also want their children to know me because sometimes the bank push for money for taxes, association fees, and home owners insurance when they have stated in writing they do not have to pay for all of these costs, the family wants to do a deed in lieu of foreclosure for the procedure to give mom’s and dad’s home back to the government. the banks push for all they can get. the parents have died and the reverse mortgage in most instances has saved the family money each month as it was needed to take care of either mom, dad or both.
we have lost a minimium of 50% equity of the home in Arizona which means every home with a reverse mortgage has no equity. At 62 the government gives them about 50% equity to loose.
the reverse mortgage is a 7 year loan, this means there will never be enough equity to refinance if you have a reverse mortgage today. the educated realtors tell us to expect no growth for 3 years.
the story we should be singing, yelling or tell all 62 year olds:
i feel we should be teaching the baby boomers, how to buy a home with a reverse mortgage and they will be able to refinance in 10 to 12 years as the program was intended. the market is very low, the values will increase and there are a lot of homes available which are very nice. they should be quite happy, they could even buy big and down size in 10 years and have alot of assets after they sell the big home, pay off the debt and get another smaller home with a reverse mortgage. this formula works.
this is the only workable viable story today for the reverse mortgage program users.
i say take the most money, educate the family, work together to take care of each other and enjoy life. i educate my families on taking the most money and buying another home or their kid a home today. in arizona you are paying about 50 to 68 dollars a square foot in the outer areas. this helps the family to have no house payments, this allows the kids when they are 62 to get a reverse mortgage, to have money for retirement.
i know my adjustable rate for the last 2 years has been about 2.5% but all my seniors still have no equity so why discuss it. the government has shown us that more money is better than less money and protect what you have using your own people. no financial planner is better than another.
i use to work hard for the kids, for their equity but i could not control the government program 1 home for every family. this program was wonderful except it was abused in every way. We feel the bad debt as we all have it now. we all have a home with less equity. my seniors are dying because they just do not want to be here, too much stress, their kids are broke, the kids are ill and they are ill and they have no money, no resources, just pain.
so now i work for each and every senior everyday. how can i make their life better? i know their car will have a problem so they can call me or the air conditioner will break or their roof will need repair every 10 years at least. we cannot complicate life they need money to live and it is my job to protect the borrower understanding every phase of the reverse mortgage.
i am a reverse mortgage loan originator who believes no more payments is a wonderful thing.
hall ewing