“Handle them carefully, for words have more power than atom bombs.”
Ironic. That is on the eve of the National Reverse Mortgage Lender’s Association Annual Meeting in San Antonio the New York Times published a front page expose “A Risky Lifeline for the Elderly is Costing Some Their Homes”. The morning prior to the conference members quietly discussed their concern if the article would create substantial public fallout. After a year and a half of mostly positive press since the introduction of the HECM Saver has the media pendulum swung back to its traditionally negative view? And more importantly, does the article point out some legitimate issues that we as an industry must address?
Words are powerful
The media’s choice of words when discussing reverse mortgages is not a matter of chance but design. For example the word “pitch”. Referring to selling a “pitch” is often used in a negative light to describe a huckster selling an inferior or worthless product much like the traveling snake oil salesman in the old west. Columnist Jessica Silver-Greenberg’s sees lenders ‘pitching’ reverse mortgages to those who cannot aford it nor the property taxes and maintenance. Choice of words aside this makes absolutely no sense. Haven’t these same senior homeowners paid property taxes and maintained their home long before getting a reverse mortgage and wouldn’t they continue to do so regardless? This begs the question, how would increasing one’s cash flow also increase the risk of default from not paying property taxes?
The choice of words by some reverse mortgage originators cannot be overlooked either. I have lost count over the last eight years on how many mailers promoted the loan as “free money” and claims the borrower could never lose their home. Certainly these misleading and outlandish claims have diminished greatly over the years, yet those who continue such practices provide easy ammunition for critics like the Times.
Both the removing of a younger spouse from title and the disproportionate number of fixed rate HECMs have come back to tarnish our industry’s reputation in the eyes of some. The Times article cites two heartbreaking examples of widows facing foreclosure having been removed from title. Contrary to what the article claims most instances of removing a spouse were not done to increase commission payouts but rather to make at least one borrower eligible if the younger spouse was under the age of 62. Regardless of motive, any spouse removed from title to close a HECM poses a potential future time bomb, creating both legal and repetitional risks.
Then there is the fixed rate HECM. It’s a case of numbers and trends creating the perfect storm. The introduction of the fixed rate in March of 2008 and investor’s preference for a product less risky than the adjustable rate created a demand that proved profitable for both lenders and investors. Consumers won in part as well as many lenders waived origination fees ‘sharing’ some of the profits from the secondary market. Now with nearly 70% of HECMs being fixed rate the specter of greed has risen in the minds of media critics and government regulators.
Following the refinance boom and housing crash of 2008 the introduction of the fixed rate HECM could not have come at a better time. Many retirees found themselves enticed to either refinance their mortgage and in many cases take cash out. This left many with higher mortgage balances. The fixed rate HECM had a higher principal limit often needed to payoff the existing mortgage balance and close the loan. A strong argument for “need” versus greed could be made in many instances however high compensation to brokers can not be overlooked. . A risk-adverse FHA who insures these loans sees future risk of these full draw products accelerating loan balances leading to more insurance claims and reassignments. Some lenders sensing the potential backlash and seeking to remove undue influence in product recommendations, have adjusted their commission schedules to equalize fixed and adjustable rate payouts to originators.
One front page story critical of our industry does not constitute a crisis. After all, how many of our potential borrowers read the New York Times. It does however point to the need for our industry to improve it’s effectiveness in policing itself. We serve two missions: to help our senior borrowers and make money in the process. No real business should ever apologize for making a profit. After all without profit we would not remain to serve the needs of future borrowers. However, we must take an unflinching look a media negativity (even when inaccurate or exaggerated) and ask “what brought this about?”. The silver lining of this article and even the CFPB’s report to Congress is that such criticisms may drive innovation. The HECM Saver answered criticisms of high costs and perhaps a future Hybrid HECM (fixed & adjustable rate) would improve the reality and perception of consumer choice and care.
Self-policing our industry and responding to an ever evolving borrowing climate will serve both lenders and borrowers well. As for the media, good news doesn’t sell as good as bad but we can work to eliminate easy targets for criticism.