Reverse Mortgage Rates – Greed or Need?

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Fixed rate reverse mortgages vs. adjustable

[vimeo id=”37826403″ width=”625″ height=”352″]

Reverse Mortgage Rates Factors

Reverse Mortgage Rates

With nearly 70% of all reverse mortgages being fixed rate some have said profit has driven the decision. Watch the video to see what factors make the fixed rate most popular.

10 comments

Steve March 5, 2012 at 8:24 am

You are correct, many homeowners here in California refinanced their existing loans within the past 10 or 15 years to new 30 year loans. Now they are finding they still have large loan balances to pay off well into their retirement years. So the fixed rate is a better choice for them.

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Tom March 5, 2012 at 9:03 am

I think the propensity of Borrowers, forward or reverse, is to want what they view as “more” over “less”.
When I did forwards (>25 years) I would explain to cash-out B’s what would occur by borrowing at a lower rate, long term to pay off short term accrued obligations. Upon the suggestion that they consider paying the cash-out portion shorter term by increasing their payment, they always agreed it made more sense, but I invariable lost the customer to an originator that would avoid such logic.
With reverses, I advise the B to acknowkedge the time value of money when there is excess drawdown at closing. They still want more, rather than less.
I should mention, however, that I have come across originators that exclaim that they have never sold anything but fixed and assert, “why would I?”
Maybe I am the one who has someting to learn?

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Joyce March 5, 2012 at 10:46 am

I find my customers are “afraid” of adjustable rates and acutally ask for a fixed rate regardless of the logic.

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rmcounselor March 7, 2012 at 7:48 am

As a counselor, I spend an enormous amount of time educating borrowers about fixed vs. adjustable rate loans. It does take time to overcome the knee-jerk reaction of most seniors that fixed=good and adjustable=bad. It also takes time to overcome the sales job that some (not all) loan officers do in convincing borrowers that a fixed rate is the best way to go. Many clients come to me AFTER signing a loan application for a fixed rate loan, not understanding what the implications are, and not knowing that this means taking a lump sum. It doesn’t help that most lenders are charging origination fees on adjustables, but not on fixed rate loans, so there appears to be more money available from the fixed. It takes time to help the client understand the benefits of creditline growth, the advantage of an open-end credit loan, the vastly lower amount of interest that will be charged in the early years of the loan, etc. It takes even more time to help a low-income borrower understand that they will lose their Medicaid, food assistance, and other valuable benefits if they take the lump sum.

I have the luxury of taking as much time with each client as I need, and my typical session is now running 2.5 hours. The only time a session runs less than a full hour is if it is a re-counseling session for someone whose certificate has expired.

Unfortunately, many of my colleagues with other agencies around the country do not have that luxury, and are being told by their management that they have to schedule sessions to last 60 minutes or less. I personally think that this is outrageous. I was very pleased to see that HUD recently came out with guidance to counseling agencies saying that the required content cannot be covered in less than 60 minutes.

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The_Cynic March 7, 2012 at 11:52 am

rmcounselor,

Some of your peers argue that less experienced counselors are gathering and imputing the data that used to take them over 30 minutes so it is no wonder they can get done in 30 minutes or less. I have real problems with that statement.

Some of your peers also argue that some originators are so skilled at teaching their clients, there is simply no need to cover some topics. When I hear discussions of that nature, one wonders. No offense to my peers but the issue is not the skill of the teacher or the content presented but rather the retention and understanding of the counselee which SHOULD BE the issue.

I have no problem with counselees making what you and I would consider the wrong choice just as long as they are mentally competent, have and understand the relevant factors, and have been presented with the most significant potential ramifications of their decisions. Who has never been wrong especially when the result will be obtained in an uncertain future?

I am pleased to hear your experience and that you do cover the various products. That is real consumer protection at work. I just wish all counselors lived up to that professional level of care.

Great and appropriate comment.

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Mike Johnson March 5, 2012 at 10:49 am

My experiences are alos 70% FIXED, due to three factors. YES, the need for as much cash as possible to repay an existing mortgage and other debts in #1. In addition to those who need the most going fixed for that reason, I find most want FIXED knowing that 5% FOREVER allows them to put their head on the pillow at night knowing it can never go up and they won’t be rsiking increases from the 3.25% average adjustable rate out there today going up to as much as 13.25% – – a very scary thought for seniors.

Also, the closing costs on a fixed SHOULD BE lower than that of adjustable with bankers and brokers waiving the LOF (Loan Origination Fee) when earning high percentages on the entire loan amount! Take $6,000 LOF out of the equation and we don’t need to steer, they’ll find it on their own.

Mike Johnson

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Ron Cole March 5, 2012 at 5:25 pm

I agree with Joyce. Perhaps the seniors fear the return of the double digit interest rates of the early 80’s but I think it is more likely that they want the certainty of a fixed rate.

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Pamela March 6, 2012 at 7:24 am

I do fixed rate mortgages for those who have a large mortgage to payoff. I am actually seeing more adjustable rate mortgages now. I believe it is all in how you approach these whether it will scare off the borrower.

The main goal is not to consider my compensation when helping a borrower choose which program is better for them. I get a lot of detailed information from them to determine how they are going to be using the funds. This helps determine which program is going to be better.

Great comments from everyone!!

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James E. Veale, CPA, MBT March 6, 2012 at 11:29 am

Economically it makes no sense for a borrower who needs $100K out of $400K in principal limit to get a fixed rate HECM no matter if the interest rate is 5.06% (fixed) or 13% (maxed adjustable). With the adjustable, there is little risk in pay downs since the borrower can re-borrow the amounts paid down and borrowers will generally see the amounts available to them increase.

The reason why seniors get fixed rate HECMs is not any one of the items presented but in fact, it is all of them. The problem areas are with steering (because it does exist at least to some degree) and fear of losing the loan if the benefits of the adjustable rate HECM are discussed.

But is greed simply an originator issue? I have heard of some TPOs only allowing their originators to originate fixed rate HECMs.

But when it comes to selling fixed versus adjustable, I have also faced cancelled loans. It becomes a true conflict of interest since at least in California (and a few other states) for most originators, there is a fiduciary responsibility to the borrower. So what can be done?

Counseling must lead on this issue. Counseling execs all but demand that the first education to a borrower be done by a counselor. Yet rarely have I found that the counselor has done anything close to presenting the true value of an adjustable rate HECM. Why???? If the true “teachable moment” is being delivered into the hands of counseling, then they are not only failing us, the originators, who want this discussion but worse their own counselees. Just to get over ingrain resistance on this issue takes more than 5 minutes. So how can so many counselors get done in 30 minutes or less per HUD with all of counseling including an adequate budget for counselees to follow?

Counseling must become the consumer protection we tell borrowers it is. What does counseling have to lose by emphasizing the value of adjustable rate HECMs? That would protect to some degree steering and would also help mitigate the conflict of interest issue so many of us face.

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Sandy March 10, 2012 at 5:44 pm

What law or regulation in California says the lender has a fiduciary duty to the borrower. Just curious.

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