Seniors Suffer Under New Loan Officer Compensation

Following loan officer compensation changes in early April, originators are finding they have much less flexibility in being able to work with seniors to qualify for reverse mortgages.  In cases where a broker could previously offer to absorb some of the closing costs in order to help a borrower close, the Federal Reserve’s loan officer compensation rule prohibits such practice.

While some brokers say they are losing their competitive edge to large lenders, who suffers the most from the Fed’s change? Borrowing seniors, say several brokers who spoke with RMD.

“For years, one of the primary concerns prospective applicants had when considering a reverse mortgage was the high closing costs,” says Ken Klawans, President of iReverse Home Loans. “Pre-April 1 (and with the help of a strong secondary market), we frequently utilized a portion of our revenue to pay for the borrower’s closing costs. A no-closing cost reverse mortgage helped battle the widespread ‘too expensive’ perception and helped improve the image of the product. This was truly beneficial to the consumer…and our industry.”

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The shift ultimately hurts the borrower in cases where the seniors who need the HECM most, often can’t quite make ends meet. In other cases, the broker may see little to no profit on the loan.

“In the past we had more flexibility to lower closing costs,” says Lance Jackson, president and CEO of Castle Reverse. “Now we aren’t allowed to pick up any of a customer’s MIP or third party charges, so overall costs to borrowers has increased and our ability to compete with the banks has decreased.”

All Reverse Mortgage Company has faced similar difficulties and reports at least one instance where, under the new compensation rules, a borrower facing foreclosure could not get the loan.

“As it currently stands, originators cannot pay fees and it has stopped us from closing at least one reverse mortgage for a borrower who was in foreclosure,” says Michael Branson, All Reverse CEO. “No one was injured except the senior homeowner.”

For those who see the new rule as having a negative impact on the borrower, there is uncertainty to why government would create a sweeping policy that could so adversely affect the borrower’s ability to obtain a HECM loan.

“I feel the Fed should have made two rules, one for Forward and one for Reverse. There is no logic in not letting originators discount and it has made loan costs higher for seniors,” says Thomas Mastromatto, of Homerun Financial.

“I would like the opportunity to help every borrower I possibly can,” says Branson. “I fail to see how ‘consumer protections’ like these to help any senior homeowner.”

The days of helping seniors with closing costs may be gone, the brokers say, but there is hope for a change in Washington that will level the playing field and bring the benefits of working with brokers back to senior borrowers.

“Post-April 1, our government has forced us to keep all revenue without the option of sharing it with the consumer,” says Klawans. “While I don’t believe we have had loans fall out due to this rule, I’m hoping that one of the bureaucrats in Washington will wake up soon, understand this unintended and anti-consumer consequence and fix it.”

Written by Elizabeth Ecker

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  •  This article is all about competition and little more.  It is full of bias using a single anecdote.  The Fed did not create the rule out of the air; it simply implemented what the Dodd-Frank Act created in a logical and fair fashion; as to whether or not the Dodd-Frank Act is reasonable or not is another story; it should be repealed.  There is no one “bureaucrat” who can change the rule; that is utter nonsense.  In fact it is very doubtful if all of the “bureaucrats” at the Fed agree with Dodd-Frank or the new Fed comp rule.
     
    When a broker is paid by a lender then that is not “a no-closing cost reverse mortgage.”  It is nothing more than a prepaid cost to the borrower which is wrapped up in a higher note interest than the lender might otherwise require the borrower to incur.  It MAY be contingent to the borrower depending on the terms on the loan but history makes clear it rarely is.
     
    What is clear is that the Fed comp rule has brought about a more level playing field for all borrowers of fixed rate mortgages.  Brokers do not seem to like it but that is in part because their fiddling with closing costs on fixed rate mortgages as to individual borrowers has been wiped out.  This will help prevent borrowers from getting lost in upfront cost bidding which distracts from the basic issue of whether a senior should be getting a new mortgage or not.

    While it is significant that the brokers in question do not address adjustable rate reverse mortgages, it is even more significant that they do not discuss how they are negotiating their compensation with lenders on fixed rate mortgages on an overall basis as to what costs their borrowers will pay and what they will not.  They make it seem that they have decided not to pass any cost savings along to any fixed rate borrowers if they cannot decide it on an individual by individual basis.   
     
    These brokers want the old system where some borrowers pay more upfront costs than others because they negotiated harder or on some other basis.  This is part of the image of brokers having some borrowers paying full fare and allowing others to pay much less for exactly the same loan; rarely is it as a result of the broker offering the same lower fees to all borrowers or just to prospects who are in foreclosure.  This shows that article is more about competition than anything else.

    • so offering customers lower rates and costs was a bad thing for consumers?  You potray brokers as the general public potrays reverse mortgages.  If you think brokers make a lot of money you would be shocked if you new how much these retial lenders are making off thier originators and now they don’t have to lower costs anymore to compete.  The consumer’s cost to obtain a reverse mortgage has increased due to the elimination of competition. 

      • reverseguy123,

        Which broker offered an interest rate lower than its lender permitted?  Please point one out!!!  It is the lender’s which offered lower interest rates to brokers, not vice versa.  Brokers get it exactly backwards all of the time.

        So brokers originate reverse mortgages at personal losses to themselves, is that what you are arguing?  Their gross revenues are negative.  Please even I am not that naive!!!!  They offer lower costs and interest rates to bring in more revenues whether that is $1,000 or $20,000.

        While competition may be a good thing in some cases, it is never a good thing if it results in some seniors who cannot fend for themselves paying more than those who put brokers through the wringer.  The discounting game makes us all look like the worst kind of used car salespeople.  It adds nothing to the professional image we should be maintaining for the sake of the industry as a whole.

      • reverseguy123,

        Which broker offered an interest rate lower than its lender permitted?  Please point one out!!!  It is the lender’s which offered lower interest rates to brokers, not vice versa.  Brokers get it exactly backwards all of the time.

        So brokers originate reverse mortgages at personal losses to themselves, is that what you are arguing?  Their gross revenues are negative.  Please even I am not that naive!!!!  They offer lower costs and interest rates to bring in more revenues whether that is $1,000 or $20,000.

        While competition may be a good thing in some cases, it is never a good thing if it results in some seniors who cannot fend for themselves paying more than those who put brokers through the wringer.  The discounting game makes us all look like the worst kind of used car salespeople.  It adds nothing to the professional image we should be maintaining for the sake of the industry as a whole.

      • Lance,

        You can do more than disagree.  You could debate.  You are one of the better authors on this website and your opinions and views are even quoted in some of the articles.

        I am simply presenting the views of those who do not believe that brokers provide the cost savings they claim.  In fact many believe they are used by lenders to hide the higher interest rates lenders charge in line with their wholesale activities.  Lenders love YSP and brokers help justify higher interest rates or so some claim.

        If you feel strongly that brokers provide real benefits to consumers, then please speak out and point out the errors.  I would love to hear how brokers are demanding lower comp for the sake of lower costs to all borrowers rather than for competitive purposes alone.  I have never been fond of discounters who get into bidding wars.

      • Lance,

        You can do more than disagree.  You could debate.  You are one of the better authors on this website and your opinions and views are even quoted in some of the articles.

        I am simply presenting the views of those who do not believe that brokers provide the cost savings they claim.  In fact many believe they are used by lenders to hide the higher interest rates lenders charge in line with their wholesale activities.  Lenders love YSP and brokers help justify higher interest rates or so some claim.

        If you feel strongly that brokers provide real benefits to consumers, then please speak out and point out the errors.  I would love to hear how brokers are demanding lower comp for the sake of lower costs to all borrowers rather than for competitive purposes alone.  I have never been fond of discounters who get into bidding wars.

  • This article is really not that different from many other stories where the reverse mortgage is portrayed as the ‘bad guy” but where it really was “something else” going on behind the scenes.  If you can’t get the borrower to the table, they don’t fit the borrowing requirements, simple as that.  We’ll always have our excuses, if the property appraised at a higher amount, if the borrower’s wife wasn’t so much younger, if their current mortgage wasn’t so high, if Fixed rate adjusted up, etc, etc, etc.  Isn’t the underlying point to the article that we aren’t allowed to make as much money as we were accustomed?  Sounds to me that only 1 person couldn’t facilitate a reverse here.
     
    Honesty and integrity are hallmarks of our position as advocates to seniors.  Don’t try to make this about something else.

    • With all due respect, I don’t believe you understand how broker comp is working now.  In most cases our revenue is higher than before on fixed rate deals, and our rates are equal to or lower than the big banks.  In our case this article is about being able to offer the customer the best product at the best price possible, and to compete on an even playing field, and the new legislation is clearly an obstacle to doing that.  

  • Both comments from my colleagues are very good and have valid points. However, we have come to the realization that the new compensation rule was not just created for the consumer’s protection.I am convinced that one of the primary reasons were to eliminate the the broker from the playing field. Eliminate the broker that does not have the ability to obtain warehouse lines or have underwriting approval from FHAAs a sad as this sounds it makes all the sense in the world when you look at the disadvantages the pure broker has now that the new rule was put into effect. It is not only in the mortgage industry we are seeing this transition. This is happening in all walks of our business sector. Small businesses are failing all over the country and the large is dominating and surviving.I have said this before, we are losing our capitalistic way of life and going more toward a socialistic society every day.We have some very good people in the reverse mortgage industry that are what I call pure brokers, the industry and especially our seniors can’t afford to lose them. However, this may happen sooner than we think?John A. Smaldone

  • The main reason seniors will suffer under the new compensation rules are options we had at our disposal to help have been eliminated or severely curtailed. How is having less choice and higher cost going to help anyone? That is the crux of all of the legislation passed regarding forward and reverse mortgages of late. The take it or leave it mentality is not going to help the clients we serve or ourselves. Every time I have a senior who can’t qualify due to the new rules I will document this and sent it to my senators and congressman. If we all do this we just may be able to get the GOD’S on Capitol Hill to make changes that actually help their constituents.
      

  • When a broker is paid by a lender then that is not “a no-closing cost
    reverse mortgage.”  It is nothing more than a prepaid cost to the
    borrower which is wrapped up in a higher note interest than the lender
    might otherwise require the borrower to incur.  It MAY be contingent to
    the borrower depending on the terms on the loan but history makes clear
    it rarely is.

    Are you saying that when a broker applies his ysp commission to the closing costs it is bc he is giving a higher rate to the borrower, and this is a pre paid cost?

      • Under the new regs we can’t receive higher commission if the rate is higher, our revenue is the same regardless of rate.   The point of the article is that we can’t use any of our revenue to help the borrower lower their costs under the new regs. 

      • Lance,

        But you still do not address adjustable rate HECMs or negotiating for lower costs for all borrowers in your wholesale contract.  The presentation above is far more are being competitive than it is about lowering overall costs to all borrowers, which you can do even through Dodd-Frank.  But I would venture to say that most brokers will not do it. 

  • I haven’t check in a month or so, but all retailers were charging an origination fee. Wholesalers do not have to. We can also pay for counseling, and the appraisal something retail cannot do. If you are smart you should also be dealing with a title company who has very cheap fees. Wholesale is still beating retail in price, and there is no comparison in time it takes to close a loan.

    • Ricky,
       
      No lender or broker (i.e., mortgagee) can pay for counseling, period.  Where are you getting your information?  You are playing right into the hands of the big banks which make claims (and your statements make those claims valid) that brokers are the last vestiges of the “Wild West.”  Your comment proves why borrowers should not be dealing with brokers. 
       
      Ricky, there are many HUD and FHA employees who read these articles along with their comments daily and you have admitted to violating ML 2008-28.  You may feel you have a lot to add to these threads but if that is the level you are adding things; a word to the wise… DON’T be tempted to do it.
       
      Ricky, brokers are by and large retail operations in a different setting; it is the lenders who provide the loans to the brokers who are the wholesalers, NOT brokers.  Yes, in very rare cases brokers can serve as sub-wholesalers but only SUB-wholesalers. 
       
      Why can’t retail pay for appraisals?  I would love to hear that theory.

      • Ricky Young (now shown as Guest),

        Your comment was regrettable.  Paying for the costs of counseling has  been strictly forbidden since 2008.  You need to be careful about what you say.  If you got into trouble so be it.

      • Agreed.  That type of behavior is not tolerated in our business.  Although some of the regulations we are required to operate under may not make sense (I’m not referring to paying for the costs of counseling), we all must follow the rules closely or risk damaging the industry.

  •  Why is everyone avoiding the two most crucial issues in my comment above?  First, address how broker comp on adjustable rate HECMs has changed as a result of the Fed Comp Rule.  Second, address why brokers cannot negotiate lower upfront costs on all fixed rate HECMs with lenders so that all of the fixed rate borrowers going through the broker share in lower upfront costs, rather than just those for whom brokers want to “compete” or who will soon suffer foreclosure?
     
    Then there is the silly comment about my surprise if I just knew how much lenders make.  If the lenders are providing loans to brokers, then they are making something on the backend.  Yes, their retail operations result in no sharing origination (frontend and backend) revenues with anyone other than their own retail originators.  Why is that such a “deep dark secret?”  That is called capitalism.  If brokers negotiated their terms upfront with the lenders so that they make less but pass that savings on to borrowers, lenders would not be far behind. 
     
    Everyone loves to prove their points with a few anecdotes.  Our detractors do that all of the time.  There are two issues on the table asking for responses but despite many responses and critiques, they remain still unanswered.  Do I expect them to be answered? Not really.  Brokers are afraid to address those issues as is clear in the thread above.

  • Ricky,

    Please define YSP.  It literally means Yield Spread Premium.  The lender makes the premium and splits it with a broker because the note buyer is paying a premium for a rate higher than the market demands.  Are you a licensed NMLS MLO?  It is hard to believe you do not understand YSP basics. 

  • Richard William Young,

    What is a floor rate?  It seems you are referring to the highest expected interest rate at which maximum principal limit factors will be available for different ages.  We are not discussing expected interest rates.  They have nothing to do with YSP.  YSP is based on note interest rates. 

    It just so happens that HUD mandated that on fixed rate HECMs, expected interest rates equal note interest rates.  But there was no such mandate when lenders first came out with fixed rate HECMs and some did have different expected interest rates than note interest rates.  Mortgagee Letter 08-08 changed that.  It seems you do not know your MLs or their history; that is too bad.

    There is no rule that a lender cannot offer a fixed note interest rate on a HECM of 3%, no matter what the expected interest rate floor may be.  This is a HECM basic.

  • According to HUD’s reporting figures.  In December when the retail banks guys still had a 4.99% fixed rate program available there was at least one of the folks who posted on here that sold a couple 5.56% fixed rates on an over $600,000 property.  Was that done to be competitive or was it done to help defray the closing costs?  I guess we won’t know but it sure happened alot. 

    There’s a group on the east coast that absolutely BOMBARDS postcard after postcard and colorful brochures to the prospects to the point of getting uncomfortable- in the past 12 months they have originated 176 reverse mortgages in a particular state.  Guess how many LIBOR versions they did of that 176?  FOUR!  Only 4 folks benefitted from a credit line? or did 172 loans benefit from a higher commission?  In most of these cases there was NO waiving of fees.  This is on the HUD website- not made up numbers.

    • I’d also like to point out that the east coast lender you mentioned above may be directing their marketing efforts only to homeowners with large existing mortgage balances, in which case fixed rates may be in the homeowners’ best interests.

       

  • Lance,

    Even with a few hundred thousand borrowers who were glad to save costs does not take away from the issue as to why all did not save or have lower interest rates.  Then there is the issue of cost bidding taking away from what the real consideration should be, getting the reverse mortgage in the first place.

    I know people love to point to anecdotes but those anecdotes do not answer fundamental questions.  As to used car salespeople, at least one Democratic leader spoke of us far worse, saying a political opponet was “preying” on seniors like a “bogus reverse mortgage peddler.”   I was being polite.

    • You seem to promote capitalism when it’s convenient, but prefer socialism at other times.  Does everyone pay the same price for a home, pair of shoes, or bag of apples?  What’s wrong with a customer negotiating the price of what they purchase?

      I am aware of that Democrat and the comments made.  Politcal grandstanding.  Do you also agree with many of the things said in the press, those things that are clearly inaccurate?

      We have strict price controls over reverse mortgages, always have, and even more so now.   

      Are you aware of any reverse mortgage lenders “preying” on seniors?  I’m not, but they may be out there.  The large majority of people that I know in this business got into it becuase they like to help people, not to “prey on people” like their parents.

  • Lance,

    Wasn’t that in part what the Dodd-Frank Act was all about, government price fixing?  At the core I find the Act repulsive.  I just wish there was more Frank than Dodd expressed in the Act. 

  • Lance,
     
    While I appreciate much of what you write, I also believe that the rational for why brokers have cut costs when in competitive situations is not as benevolent as some brokers paint it.  By and large its source is greed plain and simple; otherwise, there would have been very little competitive discounting and all seniors would have enjoyed almost equal price cutting.  While there was some of that, in part that was because of what the lenders offered not what brokers created. 

    • Offering something to someone at a lower cost than someone else is greed?  It’s just competition for business, the customers benefit, and it’s good for society.  

  • My client called yesterday, he went to closing with me on Monday.  He said another broker he “was” working with before me just called him to see if he had closed yet, saying the rate was now 4.50% fixed.  Wants to rescind now, first time that’s happened to me.  Other than good looks and personality, I have nothing else to offer since I’m stuck at 5.06%.  Not sure what you brokers are complaining about- looks like you have tools the banks don’t.

    • We’re complaining about the fact that we can’t offer people an even BETTER deal.  Prohibiting us from picking up some of a borrower’s third-party costs is nothing short of government-controlled pricing, it makes no sense, it’s bad for society, and it flies in the face of capitalism and an open marketplace. 

      By the way, the note rate on our fixed rate Standard is even lower than that.

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