Understanding Those Opposed to the HECM Key to Market Expansion
If we want to expand the reach of the reverse mortgage into the hearts and minds of financial professionals, we first must understand and objectively listen to their objections.
*Due to our new scripting approach we do not have a transcript of this episode. We will be providing transcripts once we secure a video to text dialog converter. Thank you for your understanding.
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13 Comments
Great piece to start my Monday with! I agree that it is so important to go through the costs associated with a HECM….and also options for mitigating that cost. And, as you pointed out, it is not a product that can cure all financial needs/goals. It is important to explain to the customer that this is one financial product, and they should compare it with other mortgage loan options to see which is the better fit (if any) for attaining their financial goals.
Why limit the financial options for seniors to other mortgage products? There are TIC trusts, Shared Appreciation rights (in some states),
It is not our job to provide in depth information on all options or even provide all available options but it is certainly our job to address the need for the senior to seek the advice of those who can help them evaluate their need for a reverse mortgage.
We want the research to be right. We do not want to know where the weakness lies and where problems exist. We just want something to run with, to sell with.
Yet is that good enough? Why not challenge the weaknesses of these studies? These are not proofs; they are estimates based on likely outcomes. They have levels of confidence, not standards of deviations from average ACTUAL outcomes based on a large sample of terminated HECMs where these principles were applied from the date that the reverse mortgage went into effect (i.e., date of closing).
Tackle the assumptions. See why a slight change in assumptions can produce a dramatic change in the alleged outcomes.
Although my heart is with the industry, my mind absolutely agrees with the comments of Daniel Moisand.
Isn’t this about aging gracefully-we forget. (HECM- save money) Same as life insurance-its not about you its for somebody else!! keep it simple
Jeff,
Here is a restructuring of your comment.
1. We forget “this” is about aging gracefully.
2. Same as life insurance.
3. It’s about somebody else not you.
4. Keep it simple.
Your comment is so full of pronouns without clear precedents that it is unclear what your points are.
It is clear you believe you are absolutely right about something but what that something is is unstated.
It seems you do not want what we hold dear to be challenged. HECMs are not the same as life insurance.
In the article Daniel makes it very clear he is looking out for the best interests of his client. You as an originator are not the best source of unbiased information.
Yes. The costs of any action should be fully discussed, but let’s not forget the cost of inaction. Consider a homeowner, age 62. Advance his/her age 20 years to age 82 in your HECM calculator, and ask the likelihood that they would consider getting a reverse mortgage at that time. Even if the PLF factors stay the same, AND expected rates are still under 5.06%, the opportunity cost of missed LOC growth is staggering. The keys to serving the client with this approach are: 1. Determine the likelihood that they will need funds in the future, and 2. Determine the likelihood that they will still occupy the subject property at that time. If both responses are high, the standby HECM would have to be seriously considered.
Mr. Hulquist,
You leave out one important ingredient. That is the effect of compounding interest and MIP on the upfront costs. You might be surprised what compounding can do to just $9,000 in 20 years.
We also forget about looking at how the same advice would have worked out today on a historical basis. So let us do just that. Yes, we can point out things are different now than then but 20 years from now HECM originators will be doing exactly the same thing not wanting to deal with things the way they are NOW.
At 2% MIP and 2% origination fee, a home value at the 1996 lending limit would have upfront costs of about $9,000. The servicing fee we will say will be $25 per month. With a margin of just 1,5% back then higher index rates experienced in the intervening years (despite the index being CMT), we will pick an average effective note interest rate of say 4.25%. The annual ongoing MIP rate was 0.5%
After 20 years, the balance due with no other transactions would be $33,252. So if line of credit was $80,000, it would have grown to $206,469. If the same HECM strategies were being pushed back in 1996 the way they are now, this senior would be looking at being $33,300 in debt so as to be able to borrower $206,500 in 2006.
If the value of that home is $625,500 today, the financed upfront costs would be about $11,600 and the line of credit would be about $410,000 at age 82. That means the financed upfront costs would be about one-third as much but the available proceeds would be almost twice as much.
Would early taking of the HECM have paid off? It would not only have been cheaper to have waited but the proceeds would have been greater by WAITING. In this case it would NOT have paid to act early. What we learn from the example is that if the purpose of getting the HECM NOW is deferred cash inflow, borrowers need to understand the upfront costs will at least triple at today’s margins and ongoing annual MIP rate.
Thank you,
Jim
The costs should absolutely considered in the Standby By Reverse Mortgage. Advisers would be more amenable to this strategy if there were little or no costs but lenders would lose money on these transactions.
It requires a lot of discipline for borrowers to adhere to the two bucket strategy of paying back interest when their investments do well. This strategy is for clients who really do not need a reverse mortgage and are well off.
Perhaps another approach might be to use the reverse mortgage in estate planning. Acquiring life insurance with the proceeds to eliminate estate tax exposure for their heirs.
Steve,
Estate tax exposure for heirs? So your suggestion is that reverse mortgages should be used by seniors who expect to die with over $5.45 million in NET assets? Interesting but hardly a HECM example.
Hi Jim… I have no issue with your math or your analysis here, but I can’t help but ask a question or two about its intended relevance to a homeowner who is making a HECM-related decision today.
Are you suggesting that such a decision made today should be based on the sort of example you provided… and are you therefore saying that the better answer is to wait?
I apologize if I’m off-base here, I wasn’t able to access the article that apparently spawned this dialog, so I might be missing some part of what you’re saying.
The reason I raise the question about your waiting v. now analysis is that in my mind, there are an almost innumerable number of other issues that need to be, at the very least, considered before the optimal decision can be reached.
Beyond issues like loan costs, I would have to say that the specific facts related to the homeowner’s situation need to drive the discussion and ultimate decision.
I know you realize this, but I just felt like I had to point out that the how and why that one is using the product has the capacity to change anything and everything.
In other words, depending on how and why I’m using the HECM, HECM for Purchase or HECM Line of Credit… your numbers in retrospect might not even matter to me, right?
It might seem an odd example to use, but to help make my point, I have a Visa card… the interest rate, I think, is around nine or 10 percent… but when I need it… I love having it anyway… in fact, having it has been almost lifesaving to me any number of times over the years.
I applied for it many years ago… but had I waited a few years, I might not have been approved for the card or I could have been offered a lower credit line or higher interest rate… who knows?
My point, of course, is that especially considering the financial assessment rules that went into effect over a year ago now, the potential volatility of any single home’s price, and the reality of health issues that can change everything for any of us literally overnight… I think for many people, waiting is a terrible idea.
… A husband passes away unexpectedly, leaving a spouse with half the income she’s used to… now she can’t pass the FA so she can’t qualify when she’d need it most.
… The house next to mine goes into foreclosure and then into disrepair… or down the street a short sale becomes a comparable in the appraisal… and now the homeowner no longer qualifies… due to no fault of their own.
… My alternative source of capital would have meant withdrawing funds from my 401(k), which would mean having to pay let’s say 40% in income tax, and prevented me from continuing to earn returns on the amounts withdrawn.
So, even though the costs could “triple at today’s margins and ongoing annual MIP rate,” that outcome might still be preferable in my situation, right?
… My health could change significantly overnight, creating need I didn’t have the day before… but that is not the sort of time to be shopping for a HECM… and it’s the perfect time for a con artist can to rip you off. Without access to the funds I need for home care, I end up forced into some sort of assisted living situation… that I could have avoided by having the HECM in place before I needed it.
And then there are countless personal reasons why someone wouldn’t want to wait… reasons that you or anyone else might not agree with or find optimal, but nonetheless make getting the HECM now as opposed to later worth its cost… to me.
Look, obviously I could go on providing these sort of individual examples almost indefinitely, but again, I also know that you’re aware of everything I’m saying here… so what am I missing?
And isn’t what you’re talking about something along the lines of trying to time the market… I mean, when is the optimal time to get in or out? Without a crystal ball or the benefits of hindsight that would seem a low percentage game.
Now, if your issue was disclosure of HECM costs over time… well, I’m 100 percent in favor of that. The HECM is an absolutely fabulous product when used properly by an informed borrower, and there’s no reason to hide or attempt to obfuscate anything about it.
Looking forward to hearing your thoughts… and I’ll try calling you so we can catch up.
Martin
Martin,
Full disclosure is always of concern especially when it comes to the strategies such as delayed cash inflow, Standby Reverse Mortgage, and the Sacks coordinated strategies or whenever the customer is a referral from a financial planner. What is at risk if a client (or the financial planner) finds out later what the future cost is estimated to be is that customer could be lost even as a client of the financial advisor.
One friend chimed in that if the current HECM was that much better, he would simply refi the senior into today’s HECM. Now you have created even more upfront costs and if the borrower might not qualify for a HECM in 20 years, what makes it more likely that the same senior will qualify for a refi?
You might be surprised how many seniors react to borrowing $10,000 or so just to get a HECM. Now try to get them to hang in there when you explain that those costs will actually increase to $30,000 or more in 20 years.
Thanks for your reply since it provided me the platform to expand on the previous comment.
Jim… Thanks for that clarification… I think I completely agree with what you’re saying… it makes complete sense, other things being equal.
In other words, I would say that absent other conditions or factors that would dictate otherwise, what you’re saying would have to be optimal, right?
I still view the HECM, HECM for Purchase or HECM LOC as being most effective when designed and utilized for specific purpose and with specific intent… and it’s those sort of conditions that therefore dictate the optimal timing more than anything else.
Why are you using it… how are you using it… what is your situation, objectives, concerns… all as compared with available alternatives, etc. etc.
Are we talking about someone with a million dollar home that’s free and clear who needs $200,000 for some purpose… or are we talking about someone in a very different situation. The number of variables and combinations are limitless.
So, that’s why I say, I agree with your thinking on waiting and cost, but when I first read it, I wasn’t sure. I think it’s because I view the entire process as emanating from the unique and individual circumstances of the borrower.
To me, what that analysis shows in terms of benefit to the borrower’s situation dictates the optimal timing.
However, I’ll catch up with you sometime because I want to know more about the application of what you’re saying.
Thanks again and hoping to talk soon.
Martin,
I looked forward to your call.