Will the Fixed Rate Reverse Mortgage Ever Become the Minority?

In the life of the fixed rate reverse mortgage, the industry has seen the product go from a small percentage of the reverse mortgages done annually to the vast majority over the last two years. Today, at nearly 70% of total reverse mortgages, lenders say most borrowers are choosing a fixed rate product where they can borrow the largest amount of money upfront. Saver market share still hovers around 10% as borrowers gravitate to products where they can borrow the greatest amount of money.

But the economy and the current need for seniors to borrow a large amount isn’t the only factor in today’s product mix, says John Lunde, co-founder and president of Reverse Market Insight.

The population of borrowers with the highest home values are far more likely to choose the Saver product and are less likely to choose a fixed rate reverse mortgage, RMI’s analysis shows.

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The 25% of borrowers with the highest home values choose the fixed rate product 60% of the time, while the lowest quarter of borrowers opt for the fixed rate 80% of the time, the data shows. Similarly, the highest home values are most likely to use the Saver product versus the standard, and vice versa. The trend holds along the home value scale, Lunde says.

But home values aren’t the only clue.

The No. 1 factor is that the borrower is incentivized by the principal limit floor in the calculation, Lunde says. Additionally, on the lender side, a fully drawn loan gives a higher premium when the lender sells or securitizes the loan, as the industry moves toward HMBS.

“It really depends on what the borrower values most,” Lunde says. “What has driven the change from historically almost entirely an ARM product to a majority fixed-rate product is the gap between where interest rates are today and the principal limit floor that FHA has in place.”

As for what will shift the product mix back in favor of the adjustable rate product, several changes would likely need to be in place.

“Two important things we’ll see in terms of where the fixed, variable and Saver, Standard mixes go is one, interest rates and rates relative to the principal limit floor. Two, how effective the industry is marketing to consumers who don’t need as much money as possible.”

Written by Elizabeth Ecker

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  • It is great that RMD and RMI have worked together in presenting these findings.

    “Today, at nearly 70% of total reverse mortgages, lenders say most borrowers are choosing a fixed rate product where they can borrower the largest amount of money upfront.”  Yet why is this statement true?  Currently most adjustable rate Standards are yielding the same principal limit as standards.

    The primary difference is no doubt in the net principal limits.  Most lenders charge an origination fee for adjustable rate Standards while some others do not.    Lenders are doing the right thing on fixed rate products by passing along some of the higher profits to borrowers.  That is the smart and right thing to do.  Only a few lenders have the asset base and thus the profit structure to do the same with adjustable rate products.

    In the instances where most available proceeds will be tied up for years, the issue should be focused on the risk of rising interest rates.  Perhaps in those cases the fixed rate product should be selected despite the 2% or so difference in the current initial accrual rates.

    The real issue arises when substantial cash available is taken and put into conservative investments (for many a suitable choice) not earning at anything close to the fixed interest rate, especially when there is no immediate need for that cash.  What is causing borrowers to choose fixed rate HECMs in these situations?  

    Is the difference in upfront costs driving these decisions?  Is it a belief that the borrower is actually selling the home?  Is it a belief that the balance due will exceed the value of the home no matter what at termination?  Is it a fear that something could happen to the line of credit so that it will not be available when they need it?  Do borrowers realize that the credit line will generally “grow?”  Is it what our detractors call steering to the fixed rate product?   

    The facts gathered by RMI show that affluence is a significant factor.  Until we understand the factors driving the fixed rate decision among the less affluent, it seems they will continue to select the fixed rate Standard as their primary choice.  Perhaps some of the reason can be attributed to less experience and education about financial matters among the less affluent but since that data was not provided, one can only guess.  Counseling should take this into account in the financial risk assessment which transpires in counseling but since FIT does not cover this issue….

  • In my experience as a reverse mortgage counselor, it seems like the people with the smaller value homes take the fixed rate option to pay off a mortgage balance.  After paying off the mortgage balance, there might not be much left over to even bother with a line of credit.  The people with higher value homes may also be paying off a mortgage balance, but since their homes are worth more, they have more options for payouts.

    • Thank you for going to the heart of the matter. We can rationalize the disturbing fixed-rate gold rush all we want, but time will show that we are neither helping seniors nor the industry.

      • Atare,

        I know you support FIT.

        If FIT is a preferred method of providing financial risk assessment to seniors, why is the fixed rate issue not covered in even one of its questions?  No FIT question or flag deals with this very important issue.

        This is but one of the glaring flaws in FIT.  What FIT is not is a holistic financial risk assessment tool.  What it is holistic for is still a “riddle wrapped in a mystery inside an enigma.”

        Both of us agree that the overuse of the Fixed Rate product could result in more seniors ending up defaulting on their property charge obligations.  HUD findings have identified this as a factor in early defaults for failure to pay taxes and insurance.  Yet FIT ignores the issue altogether.

        What is telling is that the percentage of Standards which end up fixed rate has not gone down or plateaued since FIT was implemented but is definitely still on the rise.  So where is FIT helping other than discouraging seniors from getting HECMs if someone believes that to be help?

        In summer 2010 it was obvious the impact of FIT on origination.  Yet back then we were told such pessimism was wrong.  We were told it would not reduce originations but rather give more conviction to the decision of seniors.  Today the reduction to originations is being excused as seniors are making better decisions.  But FIT results in confusion not clarity as can be seen in the rise of the percentage of those getting fixed rate Standards.  It seems most FIT supporters such as NCOA are in denial.

      • Jim,

        Thank you very much for your thoughtful comment. My expectation is that the FIT questions and risk factors will be updated to reflect the default risk of fixed-rate HECMs. We saw it coming, we pointed it out, and now HUD’s own findings have confirmed it. FIT is a work-in-progress.

      • Atare,

        I know that is what you and I have been specifically told.  But what I have yet to see is the “progress.”

  • Good points, I would add that older borrowers impression of any adjustable rate is so negative that they can’t get past the fact that it “could” increase.  Someone recently backed out of an adjustable with me and went Fixed after realizing the cap on the LIBOR could climb to over 12%.  They only really needed a relatively small cash amount to pay off some debt so the Fixed rate and its soon to be quickly growing balance didn’t really make sense for them.  Sure we make a bit more money on the Fixed rate RMs but I think the creditline feature and the ability to make payments on the adjustable and still have access to that money later are often greater functions than a Fixed rate.  Caveat being where a large mortgage balance is paid off and a small amount is left in cash.

    But its ultimately the clients decision after consultation with logically thinking advisors- meaning not hairdressers or the guy at the post office (where I lost a deal as they were mailing back their counseling cert to me).

  • ” or the guy at the post office (where I lost a deal as they were mailing back their counseling cert to me).”
    And, I thought accountants killed more of my insurance sales.  LOL.

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