Like rivalrous siblings, the forward and reverse mortgage worlds frequently sneak sideways glances at what the other is doing. Escrows? Suitability? Counseling? “Let’s see – what’s he doing now? Should I do that?” Practically speaking the two products are more unalike than similar, yet the comparison game goes on, now with a new question, this one about rate locks – or the lack thereof.
“Because the reverse mortgage business doesn’t really have any long-term rate lock provisions like the forward industry does, consumers are left unprotected when it comes to the rate they will get at closing,” argues Mike Gruley of 1st Financial Reverse Mortgages. He is referring to fixed-rate products. “In our experience, if a borrower applies for a 5.06 percent fixed-rate and the rate goes to 5.31 percent by closing, the borrower receives less money at closing. For LIBOR loans, the borrower gets the better PL [principal limit] either set at the application date or the closing date.”
“Yes,” says Jerry Wagner of Ibis Software Corporation. “HECM already has a price lock that is good for 120 days from the case number date. The borrower gets the higher of the PL as of the app date or the closing date.” And, HUD tells RMD that Mortgagee Letter 2003-16 established FHA’s policy to allow lenders to lock-in the expected interest rate, which is used to determine the principal limit, at initial loan application. Subsequent guidance, according to the federal housing agency, can be found in ML 2006-22.
Gruley adds that “for the majority of my tenure in the reverse business, rates have mostly stayed the same or gone lower, so this was not an issue. Rates have almost always moved in the borrowers’ favor. But, in today’s environment, what will happen as rates rise and loans die?” he asks, answering: “Lenders are forced to take hits on pricing.”
From an image – or better yet a personal service perspective – Shannon Hicks of Reverse Fortunes, notes that “keeping promises to the customer is key, even more so when dealing with a protected class of consumers such as seniors. A principal limit lock would be beneficial as a ‘good-faith’ promise and for many who have borderline equity to qualify paying off existing mortgage(s).” According to Hicks, “the real question is the feasibility of such a proposal in the secondary markets.”
Written by Neil Morse