Two yeara ago little did I know how prescient my words would be when it comes to inflation. Continue reading for some of the uncomfortable questions we could ask potential borrowers.
[September 2020]
Like it or not, the reality is that fear and anxiety sell. To put a point on it, fear motivates us to take proactive steps to reduce risks with a reasonable solution where we would typically run to comfort instead. As it’s said, ‘action defers anxiety’.
Here are just a few motivating fears and actions many have taken.
Fear: A young income-earner worries his family would suffer financially should he die prematurely.
Action: They purchase a life insurance policy.
Fear: A conservative investor worries that today’s low-interest-earning CDs and money market accounts won’t allow them to keep up with inflation.
Action: They purchase an investment/contract that guarantees a higher interest rate.
Fear: A senior widow is anxious that medical expenses outside of Medicare will break the bank.
Action: She purchases a Medicare Supplement policy to reduce her financial exposure.
Fear: The U.S. debt added $2 trillion to the federal ledger making federal debt exceed our annual gross domestic product (GDP) for the first time since World War II. Higher taxes are likely to follow.
Action: They convert their existing IRAs to Roth IRAs to stop future tax liabilities.
Fear: Inflation is likely to increase substantially in the wake of the COVID-19 pandemic making nearly everything more expensive.
Action: They get a reverse mortgage which eliminates their existing mortgage payments and leaves them an available line of credit should they need to increase their cash flow even more.
Ethically we never want to sell only from a position of fear. However, we should ask the uncomfortable ‘what if’ questions to uncover a homeowner’s hidden fears. Those things they wouldn’t volunteer to discuss yet eat away at their peace of mind. After all is it better to shy away from sensitive topics for our own comfort or check to see if the homeowner could benefit by taking some proactive steps to leverage their home’s value?
Now more than ever before, older homeowners would benefit to think through these realistic ‘what if scenarios’. So, let’s commit to getting a little uncomfortable ourselves and address the proverbial elephant in the room.
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1 Comment
How dumb can things get in the industry? First, lenders complain about the potential of HMBS investors retaliating over the high volume of HECM Refis since early 2020 but no steps are taken to mitigate the problem by being proactive through such measures as compensating first time borrower HECMs at a significantly higher rate than HECM Refis. If the lenders were reluctant to take that step because of legal considerations, why didn’t the investor community take appropriate action to see that the volume of HECM Refis would decrease to a more comfortable level? So what happens? The investors have retaliated and the lenders seem to have passed the related financial loss down to the originators who were just following orders to increase HECM closings.
Then we come to adjusting principal limit factors (which some mistakenly call principal limits). Rather than increasing the factors, the issue becomes why not increase the expected rate floor to what it was on 10/1/2017, 5.06% and lowering the upfront MIP to 1.5% through increasing ongoing MIP to 0.9% to 1.1%.
Of course, right now there are many questions about how the current economic situation will affect the NPV of future cash flows from the cohorts of HECM endorsements accounted for by fiscal year in the MMIF, such as: what will be the impact to the various NPVs from 1) rising interest rates, 2) falling home values, and 3) smaller volumes of annual HECM endorsements now and in the future in light of higher MCAs?
Unfortunately some who don’t care about their image are still declaring that there is enough room for everyone who wants to originate in this industry to do so and by that increased volume of originators this industry will grow. In the last 30 plus years of the industry there is no history that substantiates such naïve thinking. The problem is in the current economic environment who is running to this industry to be added to the number of our originators?