NY Times: Reverse Mortgage Fees Are Changing

The New York Times is reporting that new reverse mortgage programs will change the way reverse mortgages are calculated for borrowers starting this week.

Barb Stucki, vice president for home equity initiatives for the National Council on Aging, told the Times, the HECM Saver really changes how the organization thinks about reverse mortgages.  “In the past, with the sizable upfront fees, it was only appropriate for people who wanted to stay in their home for the rest of their lives. But now that advice no longer applies to Saver loans,” she said.

On Monday, consumers at least 62 years old will have access to the HECM Saver and the HECM Standard.  The Saver program will eliminate nearly all of the upfront fees borrowers are required to pay and the standard reverse mortgages will significantly increase certain costs but, in some cases, make more money available.

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According to data from Reverse Market Insight, more a wider range of baby boomers are using reverse mortgages.

For the last decade, borrowers were most commonly in their 70s. But now, borrowers are increasingly in their 60s: more than 5 percent of borrowers in 2009 were 63, compared with just 2 percent 10 years ago, according to Reverse Market Insight, which tracks the industry. While the sheer number of baby boomers eligible can explain part of the increase, the economy is probably forcing many people to resort to these products earlier, John K. Lunde, president of the R.M.I., said.

Changes on Reverse Mortgages Will Alter Fee Structure

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  • “In the past, with the sizable upfront fees, it was only appropriate for people who wanted to stay in their home for the rest of their lives. But now that advice no longer applies to Saver loans….” I find these statements by Dr. Stucki most revealing.

    This is a very glossy picture of the Saver and a very strained one of the HECM market as of September 30, 2010. If the secondary market will only deliver par on Savers for the near term as expected, they would be just as costly upfront as many of the Fixed Rate HECMs we originated in the prior fiscal year; in fact compared to some no upfront cost Fixed Rate HECMs they could be more costly both upfront and long-term on a borrowed dollar for dollar basis. In fact by simply returning a portion of the loan, any no upfront cost HECM Traditional can be made into a HECM Saver.

    It is exactly because of the last quoted statement of Dr. Stucki that the secondary market is not sure how to price the Saver. Worse Savers may not provide the financial reward needed to make them the product they could be. Some expect they could carry higher interest rates than Standards. How will market conditions impact the interpretative framework of the FIT and BCU and the advice to get HECMs overall?

    The market is far different than some believe. What is troubling about the first few statements is that they represent the thinking of those who promoted FIT and BCU. Worse they expose the framework upon which interpreting them is based. I hope counselors pay more attention to market conditions than to such bias.

    • It’s obviously way too early to tell what the market reception (consumer or investors) will be for Saver. And I’m on record as fairly bullish about the new product, so probably a different opinion than your own.

      That being said, I strongly believe that the way forward for our industry is not in comparing the cheapest way to get a dollar to seniors, but rather in finding ways to fit our products to their desired life choices. The existing HECM Standard/Traditional is pretty good at delivering a dollar amount to our customers at low cost, and I don’t really see the Saver as targeted at competing there.

      The goal for the Saver is to provide flexibility in when to borrow and repay equity funds, with the same great no payment required core feature of our industry. That dollar might be more expensive in financial terms if you assume they need all of it now, but I don’t think that assumption fits the vast majority of customers our industry should be serving.

      You can argue that the original HECM Standard/Traditional also offered this flexibility on cash draw timing, but the reality of high upfront costs is that customers without a pressing cash need now weren’t generally interested and therefore self-selected out of the marketplace.

      I think the Saver is a test of whether there are other potential customers out there that want cash draw timing flexibility, rather than just repayment flexibility.

      • John,

        My comment is addressed to the quotation cited in the comment. It has absolutely nothing to do with my outlook on the product. I guess you have ignored my other posts on this subject. If so, please see my reply to Bill below as one such instance.

        Is Saver better than Standard? It all depends on how the secondary market receives them. I am surprised with your answer since you participated in an industry call on this subject last week if my memory (and rereading emails) serves me. If I am wrong, chalk it up to one of those senior moments.

        Certainly if we are talking about a no upfront cost and no monthly servicing fee fixed rate Standard versus a Saver, what is the difference unless the Saver is charging upfront costs or monthly servicing fees (or that little demon — different interest rates)? If the upfront costs, monthly servicing fees, and interest rates are identical, why couldn’t a senior make up his or her own Saver by simply paying down a Standard immediately following funding and make it a virtual Saver? Or will there be a difference in interest rates? Acceptance in the secondary market of both products is a big deal and will make a huge difference as to whether there is any legitimate difference between the Standard and the Saver at least as to fixed rates, i.e., other than principal limits.

        Now as to the adjustable rate Saver and Standard, there could be a very large difference. Some argue about HELOCs. The truth is Saver puts all players in the market on a more level playing field. Few players were able to compete with the offerings some of the retail units of the larger banks made in the last part of the last fiscal year when it came to adjustable rate HECMs. Some referred to it as “buying” future refis into fixed rate products.

        Here is my concern when it comes to any of these products. HUD, counseling, and, yes, NCOA need to address the “lottery winner” syndrome which seems to hit those who have an available line of credit or receive “excess” proceeds on closed end HECMs. Some have said that it is not untypical for the average borrower to spend down almost all of their available line of credit within three years of funding even in cases where it was obvious the loan was not taken for the purpose of making such expenditures. While HUD has gone overboard with FIT and BCU because of the alleged “family secret” {technical defaults which few if any had any real handle on}, this problem should be of even greater concern to “senior advocates.” But as usual they spite “on the financial types.” Only they know best.

      • John,

        Please describe what you mean by: “…the way forward for our industry is not in comparing the cheapest way to get a dollar to seniors, but rather in finding ways to fit our products to their desired life choices… . The goal for the Saver is to provide flexibility in when to borrow and repay equity funds…. That dollar might be more expensive in financial terms if you assume they need all of it now…. I think the Saver is a test of whether there are other potential customers out there that want cash draw timing flexibility, rather than just repayment flexibility.”

        Please help me on these issues. It is my understanding that there is no difference between the Saver and the Standard except in two important areas, principal limit factors and upfront MIP. That is it. The rest of this reply presumes those are in fact the only differences

        If the upfront costs, monthly servicing fees costs, interest and MIP rates, and all other borrower costs turn out to be exactly same, where is the difference between the two products? It seems to me to be solely bound up in the principal limit factors. Are you saying there are other differences such there are no Saver Fixed Rates or Standard Adjustable Rates?

        I think too many are trying to find a marketing niche difference which will not exist until the pricing issues are actually worked out, if at all. In fact Savers may turn out to be more expensive than Standards whether borrowers need all of the money or not — at least for awhile. It all depends on pricing and how lenders work with brokers and their own originators. This is the one area not even HUD could or can predict.

        As market conditions change, differentiations could grow but there again they are cost issues unless somehow HUD tweaks them in the future. Besides all of that you seem to ignore Fixed Rate Savers.

        What seems obvious is the vast majority of seniors are not desperate for our products at the high upfront costs which we were charging in the past. Those products were by and large rejected by the vast majority. Their main objection was upfront costs not our lack of marketing to their life choices. Even as to our proprietary products, the main objection was interest rates — again cost, not life choices.

        So I do not quite see what you are saying. I think of you as one of the good guys in the industry so somehow it seems I am missing something. Please provide what seems to be missing.

      • You come across as pretty intelligent and at the same time combative. Why do you ask for someone to provide you with their meaning, just to start another arguement? I am reminded of a notable baseball writer who loves the game but doesn’t like the way its currently played; games too long, strike zone too big, hates the designated hitter rule, etc because its not on his terms.

        I’m just giving you a hard time here, don’t take it personally but you do come across as combative BUT in need of some additional fire power.

        On another note you must not be a bank rep or you would have an answer to your question about the differences between the Saver and Standard- yes its that obvious.

      • wealthone,

        You cannot be serious. What does being a bank employee have to do with anything? There is one thing that is true about bank employees in this day and age and that is they generally have not passed the NMLS exam and that is it. What does it take to understand a simple mortgagee letter, a badge with a logo on it?

        I respect John’s opinion and generally agree with his opinions. Here I am completely baffled by his reply. John is no one’s dummy and his reply just seemed “off key.”

        If there are truly the problems with pricing Savers as the secondary market people were stating on the Reverse Fortunes webcast last week, one has to wonder if Savers will be as effective as quickly as anticipated (or at all). Until the pricing issue is worked out, there seems to be no way to determine how well Savers will do or just exactly how they will fit in. If the Standard has significant profit in the secondary market but the Saver has little, the upfront costs of a Standard could actually be less than a Saver — substantially marginalizing the value of the Saver.

        I thought the Reverse Fortunes presentation last did a great job of presenting different sides of the Saver issue. The secondary marketing guys made it plain that this is still the biggest unknown regarding Savers. John was on that phone call as one of the speakers. He did a great job but never presented what he did in his reply.

        I am not trying to argue with John. I am trying to find out what is the foundation for his statement — less about cost and more about desired life choices. John is no wilting lily and is fully capable of making his case. I for one want to hear that case.

  • IMHO, this is more evidence that the Saver Program was designed to address the concerns and talking points of advocacy groups rather than those of borrowers themselves. That doesn’t mean it is bad, just that it is a top-down change rather than a more organic market-friven bottom-up product.

    • Bill,

      You may have a very valid point. I am not so certain. I think the good people at HUD were trying to give more options to seniors. Either way, it is good HUD seems to be more flexible than ever before.

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