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.
VP of Product Development at Reverse Fortunes.