Secondary Market Lowers Reverse Mortgage Costs, Brings New Opportunity

For the first time in the 20 year history of the HECM program, lenders have started to eliminate servicing fees and lower if not get rid of any origination fee for the HECM fixed product. Most see this as a way for seniors to get access to more proceeds, but some feel the industry is focusing too much on a “proceeds-based approach” with consumers.

According to Michael Hild, CEO of Live Well Financial, most originators focus nearly all their attention on the amount of proceeds available for a specific reverse mortgage product at the expense of nearly all other product features.

“This focus has come at a tremendous expense because it has worked to alienate the majority of seniors who own their homes free and clear and are more concerned about costs than the traditional reverse mortgage customer,” said Hild. The company recently started offering a fixed rate HECM at 4.99% and feels the current secondary marketing environment provides the industry a once in a lifetime opportunity to offer enormous cost savings to borrowers who have been sitting on the fence.

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However, he does realize that the inevitable process of rising rates will hurt the changes but he does believe the current environment has “created a meaningful improvement in adoption amongst the free and clear borrowers.”

Without reaching this group of consumers, the industry won’t to see any meaningful increase in the adoption of the product said Hild. While it’s much too soon to be sure, he tells RMD that his company is seeing some hopeful indications and its outlook is “cautiously optimistic.”

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  • Michael strikes a nerve in our industry. We have been great about caring for the needy. Despite what we think about ourselves, we have been lousy in communicating the value of our product to other seniors.

    We have been focused so long on proceeds that we have yet to adjust to the current product and legal environment in which we find ourselves. However, the problem is far more fundamental than merely understanding costs and proceeds. For many of us it in part has to do with a switch in the standard of care to which we must now adhere.

    To some degree It is evident in the manner we comment on this website that those of us who are governed by this new standard of fiduciary duty have no idea we are so govened or worse what that standard entails. Where before January, we could advise on such subjects as non-borrowing spouses without substantial concern, for many of us, those days are gone. No longer can we afford to give sophomoric answers on subjects that we believe ourselves experts; instead we need to advise customers to seek the advice of real experts.

    Many do not seem to realize that things are different now. Despite what some seem to believe, no one rescued us many of us here in California from a “fiduciary duty” standard. Yes, it was deleted from AB 329 (the California reverse mortgage legislation) before that bill was passed but that was because it was in AB 260 which was signed into law the same day as AB 329. While it may not apply to all originators, it applies to all state licensed originators whether that license was issued as a CFL or under the DRE laws. It also applies to originators employed by state chartered banks, credit unions, and more. AB 260 concerns all mortgages not just reverse mortgages.

    A simple determination and understanding that more proceeds are available to a customer appears to be terribly insufficient under the “fiduciary duty” standard. We literally must put the financial interests of the customer above our own. That means we need to know what those interests are. For some this new standard will be next to incomprehensible. For others it will strike a chord that will cause a revisiting of what we do as originators. It is to this latter group to whom this comment is directed.

    While this is a California matter, it seems as if NRMLA should be addressing it at its Southern California Road Show. We need to know what this standard means and how we must handle origination now and in the future based on it.

    Things have changed…..

    • I think that most retail originators think about what is best for the client. I know I do and I always have. I think that brokers, who originate most of the HECM loans today, think about how much money they can make and don't care about the client financial needs. A local CA broker told me the company made over 3 points yield spread premium on a fixed rate loan. He said it equalled almost $16,000. Don't know what to believe or all the circumstances but the money is going to drive what is sold. As long as there is that much motive the borrower will not be well served.

  • As a potential HECM borrower, I am influenced by the elimination of the Origination fee and Servicing fee, but have not been able to find a formula for comparison with lower interest rates and reduction of fees. I ask and never get an aswer (even from counselor today, who had no clue) how to compare ten years down the road if the higher interest rate catches up with the origination fees. thank you to anyone who can direct me. I read this site daily (am a retired real estate broker).

    • Hi Marypatmorris
      The adjustable interest rate sure could catch up and use up the savings of no origination fee and serviing fee. One way to look at it would be if the fees were not elliminated the probable catch up would be greater.

      The fixed rate eliminates the future change but it also forces you to take all the proceeds in cash and there by having your home pay interest on a larger amount.

      • Thanks, that was what I figured, just was trying to calculate the differences. I am hoping not to use much of the Line and actually “earn” interest for the first few years. I just have to be certain the lender does not have some way to weasel out of that.
        I don't know who you are, but appreciate your kindness in responding to an anonymous old lady. Mary Pat Morris

    • If you do not need all the money available, then the fixed rate product is not the way to go. You will be charged interest on day one on the entire loan balance. This is fine if you have a large mortgage to pay off, or some other large expense, that you need all the cash for. This is what fiduciary responsibility is about. Putting the clients needs first, ahead of selling the product with the highest possible commission.

      With the line of credit the initial interest rate is lower, but will surely increase as it is adjustable. If you have an immediate need for a small percentage of the available proceeds, and leave the balance as a line of credit, or take equal monthly payments, your total interest costs & fees should be lower over the life of the loan which (I believe) averages only 8 years.

      Any loan originator should be able to provide you with tables that show the difference, based on the variables which you provide.
      Hope this is helpful.

    • Mary,

      I am not only a CPA but hold an active real estate broker's license in California. So I hope the real estate background helps.

      There are several ways of looking at your situation. However, it is much more difficult if you are considering an adjustable rate HECM. The remainder of this comment assumes you are looking at and comparing fixed rate HECMs only.

      Be aware that this comment is incomplete, inadequate, and could even be misleading without knowing your facts and circumstances. A website even of this nature is no place for you to provide such information.

      Although information on a gross basis is helpful, it is also important to look at after tax numbers especially when analyzing your expected return from investing any excess proceeds that will not be used in paying down debt or paying off costs at funding. Sometimes excess proceeds can cost more than you earn from them. But then if all proceeds will be needed in the future, how does one include that in a cost matrix? This is food for thought.

      Comparing APR statements, the TALC schedules, and analyzing total costs on the amortization schedules for the same time periods is helpful. If you know Excel financial functions or know the ins and outs of a financial calculator, you can generally calculate APR for any period of time yourself.

      You also need to know that the interest rate you are quoted may not be the interest rate you will incur at funding. Be sure you know the lender rules for the fixed rate HECM you select.

      If your originator cannot help you, find a different originator. This is not the normal analysis that is done for customers but there is no reason why you should not be able to find someone who can get it done to a reasonable degree.

      I wish you the best.

      • Not sure why you focused on the fixed rate because she mentioned she doesn't really need the $$. There is really no question that the adjustable is the better fit. Why get charged interest if she doesn't need to. I think so many are pushing/suggesting clients into the fixed rate because there is so much $$ to make on the back side. Again, lets think of the client and not your pocket.

      • 2545,

        It is simple. My first comment was responding to her first comment. Even though my comment was written after her second, her second comment had not been posted before I submitted my first comment to Admin. This is the most significant flaw in the new comment system on RMD but it is not by itself by any stretch of the imagination.

        Had the info in the second comment been available when I wrote my first comment, my response would have been much different. I hope that it explains it.

  • Hi Marypatmorris,

    As Mr. Veale has mentioned this is a rather complex question to answer. I assume that if you have come to read this blog on a daily basis, then you have been doing your research as an educated consumer.
    The basic problem you have is that in order to consider different scenarios (future interest rate growth and future house appreciation) you must find a loan officer who is well versed in developing the software or excel spread sheets necessary to do the calculations. Most LO's rely on the software given by the lender but this type of calculation requires more.I have performed this type of analysis in the past for customers and if you are considering cost/benefit of fixed rate vs adjustable rate HECM with the differences in origination fee and servicee set aside fee then your LO or financial advisor must develop spread sheets to take into account potential interest rate hikes and house appreciation rates as a function of time. Of course, this quickly becomes a probabilistic problem since for the we dont know exactly when and if rates will increase. From a macro economic point of view we know rates are at an all time low right now, we are coming out of a recession, demand is supposed to go up, along with prices and the Feds will have to raise rates at some point to combat inflation (so we can assign some probabilities to different interest rate profiles). We also know that house prices have stabilized in some markets so we can assign some appreciation curves.For example, lets say you compare the fixed rate with no orig and ssaf at the give fixed interest rate with the adjustable rate with some closing cost, the key is to do several scenarios with different interest rate schedules, along with different housing appreciation schedules (this both feed into the APR calculations that Mr. Veale has mentioned). Also keep in mind that facts surrounding your situation, ie are you paying off a mortgage or is your house free and clear? Some people assume that the fixed rate is not as good as the adjustable in the case you are not paying off a mortgage but I would say that the opportunity cost must be taking into account, if the rates go up in the future, the proceeds of the fixed rate can be invested at those higher rates creating a potential high return (of course taxation cost must be accounted for, as well as any implications to medicaid benefits and estate planning benefits/cost) which on a net worth analysis maybe better than the adjustable rate HECM (here it will depend on the type of payments you have, margin etc).Bottomline it wont be easy to find an LO who will workout these scenarios for you to compare apples and apples.
    The one thing I would say that except perhaps for the few months where we had the full principal limit at the current loan limits, this may be the best time to pull the trigger on a reverse mortage. Why? simple: cost of the loan are at all time low due high demand in secondary markets, pending legistation and possible HUD action will further decrease the available principal limit so the PL are still attractive enough (good % of equity is converted to liquid asset), and rates are at all time low (u have inflation protection with the fixed rate here and again almost maximum [in some cases the maximum] % of equity conversion given the floor of the expected HECM rate ) so you have a window of time to play with from a cost, economic and political point of view to maximize proceeds and minimize cost (win-win scenario for you the borrower).
    I know this is not a definite answer but it gives you some idea of the parameters involved.

    Good luck

    • Thank you all for your very thoughtful and insightful responses to my question. I am leaning toward the Monthly Libor variable interest rate with Wells Fargo because they not only have removed the Origination fee, but also the serviciing fee and set aside. Their margin is 2.4, not as good as Mel Life, which is 1.75, but the way I understand it, since I don't anticipate using much of the Line of Credit for next few years, (even may pay back the $10K+ closing costs), I should earn interest which will increase my Line when I need it. I have been promised that this can work AND that when I want, can covert to a Fixed.
      I am concerned about inflation requiring me to go back to work…..selling real estate again in my pearls and high heels, like so many of those old broads I learned from in the '80s, so am hoping this plan will allow me to avoid that outcome. Again, thank you so much. I have printed your answers and am going to try to do the analysis myself on Excel and then teach my loan officer. She is a lovely woman with kids, which always works my heart strings.
      Remember your wives and Mothers on Sunday, I am sure I speak for all, that it is our favorite day of the year, unless the card does not arrive in the mail until Monday. mp

  • 2545,rnrnIt is simple. My first comment was responding to her first comment. Even though my comment was written after her second, her second comment had not been posted before I submitted my first comment to Admin. This is the most significant flaw in the new comment system on RMD but it is not by itself by any stretch of the imagination.rnrnHad the info in the second comment been available when I wrote my first comment, my response would have been much different. I hope that it explains it.

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