Mortgage Professor: Lump Sum Reverse Mortgages Not For Everyone

In the new series on reverse mortgages, Jack Guttentag, also known as “The Mortgage Professor,” writes for Inman news about the effectiveness of lump sum HECMs for seniors. 

Guttentag addresses the problems seniors can run  into when they choose to borrow  maximum  funds in a one-time sum at the loan’s outset and cites seniors’ lack of understanding when it comes to HECMs as the main cause of the problems. 

Advice seniors receive while shopping for a HECM can greatly influence whether they decide to receive funds in a lump sum or not, and Guttentag examines how lenders and counselors could do a better job in helping seniors determine which borrowing options are best for their situation. 

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Underlying the mistakes that seniors make is the complexity of HECMs and the fact that few seniors understand them. The new options increase the complexity. While there is no way to make HECMs simpler, or to raise the IQs of senior borrowers, the likelihood of bad decisions can be reduced by improving the quality of advice that they receive, and the quality of the information to which they have access.

Every HECM borrower must be counseled by a Department of Housing and Urban Development-approved HECM counselor, but counselors are not preventing borrowers from making serious mistakes. Even if counselors were financial planners qualified to advise seniors on how a HECM fits into a retirement plan, which most are not, under HUD rules, counselors are not supposed to recommend one HECM option over another. Many HECM borrowers, furthermore, turn off their hearing aids during their counseling session.

HUD limits the origination fees that borrowers can be charged to 2 percent of the first $200,000 of property value, plus 1 percent of the amount above $200,000 but with a cap of $6,000. In addition, lenders collect a premium paid by the wholesalers to whom they sell the HECMs.

The bottom line is that lenders have a strong incentive to encourage borrowers to withdraw cash upfront. Unfortunately, in many cases, borrowers don’t need much if any encouragement.

Most senior homeowners had one or more forward mortgages during their life, from which experience many emerged with a bias against ARMs. They may not have had one, but they heard about them and knew that they were risky. So when offered a choice of fixed- or adjustable-rate HECMs, they opt for the fixed, which requires that the full value of the HECM be taken in cash.

The tools available to HECM borrowers, however, are a sorry lot. The existing calculators focus entirely on how much the borrower can draw, without any supporting information on the future consequences of a given selection. So I decided to develop my own. Keep tuned.

View the original article at Inman News or the Mortgage Professor’s website

Written by Erin Hegarty

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  • While not opposed to the fixed rate products, they lack sophistication. With fixed rate products there is little opportunity to expand the alternatives available to seniors to plan their future and absolutely no opportunity to pay down the balance due and retrieve the payment or any part of it in the future if necessary or desirable.
     
    Many believe that there is a disproportionate number of fixed rate products going into default for nonpayment of taxes and insurance and most of those are subject to Ginnie Mae guarantees.  The logic goes that most HECM borrowers lack the experience of handling large amounts of money in a competent and responsible manner so that when taxes and insurance become payable, they have spent the amounts, acquired assets with a high propensity for loss, or have tied up the monies in non-liquid assets; thus when it comes time to pay property charges, they simply lack the necessary funds.

    Many also believe that a significant part of what is commonly referred to as educating seniors is nothing more than providing them with assurances as to why the fixed rate product should be selected over adjustable rate products.  It would be truly sad if that is actually what is going on.  The odd thing is few want to discuss the content of the education being provided, only the alleged methodology, “educating.”

    We need a hybrid product where seniors can select the percentage of the HECM they want to be fixed rate, not to exceed the percentage of the unpaid balance of the loan at funding to the original principal principal limit.  This would give seniors maximum flexibility as to retirement planning.

  • The fixed rate product has and will “ruin” the reverse mortgage industry.  We have seen “those” originators enter the HECM business because of the great amount of money that can be made.  Way too often, an originator would ask which product made them the most money as opposed to which was the better loan for their borrower.  This comes from the top, down as owners of retail origination shops who make money on the spread when they sell the loan, need larger disbursements so they can make more.  and so on.

    although a hybrid product would be nice, I feel the best thing the industry can do is to get rid of the fixed rate and get rid of the expected rate – in other words, all HECM ARM’s use the same rate of 5% to determine the principal limit – so that the ARM product always delivers maximum benefit to the borrower.  And HUD should allow origination fees to go back to 2% of value.  bring back the annual HECM for those who feel they need that extra security.

    the originators will still make good money and I’m sure there will be premium available.  We will get back to helping the client first and will still make a good living as opposed to originators making $15,000 per loan.

    IMHO

    • The problem we face today is that we have a different secondary market.  The reason why the annually adjusting HECM is no longer with us is that it cannot be originated at a profit to the lenders.  

      I hear those who are discouraged about the way things are now but how can they be “reversed?”  All we can do is change things which will work in today’s market.

  • The fixed rate product serves a purpose but is not for everyone. The individual with a lot of equity in there home or no lien at all on there home may not be a candidate for the fixed rate product.

    I disagree with Mtgebroker that the fixed rate product will destroy our industry, greed will do that!

    Just maybe the fixed rate product offers to much temptation for the originator to over sell the senior, instead of selling the senior what fits their need! Many seniors want a fixed rate loan because of thier fears of the ARM product and where interest rates could go. Seniors always have been more confortable with a fixed rate.

    The market is what the market is and when live pricing was introduced by FNMA it put our industry favoring the characteristics of the forward world. I truly believe this created the opportunity to make more money on a reverse mortgage and most definitely raised the antennas on greed!!

    John A. Smaldone

  • I am a little surprised all all the negativity torwards the fixed rated loan? Besides all the money that can be made (what’s wrong with that) I have found it very useful when I am working with a borrower that will be using most if not all of the proceeds available to payoff the existing mortgage.
    Getting rid of the fixed rate because of the money to be made and all the bad LO’s and shops pushing them? This sounds like the CFPB and more regulation to me! Everyone is always focusing on the negatives and the bad. The fixed rate is wonderful for the “Right” borrower just like a Reverse Mortgage is great for the “Right” person. There is always going to be bad people and unethical people in any industry where there is money to be made, you think all insurance agents, Life agents, Financial Planners, ATTORNEYS, are ethical?? They all have the potential to make tons of money, but there industries do the best that they can to make sure they are all licensed and follow regulations and thats it. Why is our industry always feel the need to be high and mighty and sqeaky clean? Complaining about the ability to make lot’s of money on a product, that’s rediculous!!! There is boat loads of money to be made on a Life insurance policy, should they take them away? Long Term Annuities, get rid of them. Please, do not give our naysayers anymore ammo than they have and don’t give them anymore ideas about how to limit our income!!!

  • Coming into this segment of the mortgage industry when there were no fixed rate products for several years, we learned to sell the adjustable rate HECMs by pointing to its historic interest stability and emphasized its means of limiting the balance due.  

    There were no Boomers over 62 until several years later.  Robert Wagner had never appeared in a single ad for reverse mortgages.  We had to explain how a servicing fee set aside was not an upfront cost.  We had to explain why the monthly servicing fee ranged from between $30 to $35 in most cases.  Yet we managed to originate more HECMs then we do today.  We also began developing a proprietary reverse mortgage adjustable rate market.  We had no Saver or HECM for purchase.  Our lending limit was under $370,000 in all counties and much lower in many places.  Financial advisors rarely had anything good to say about our products.

    When B of A, Met Life, and FNB of Layton, Utah were NOT even in our industry we were rapidly heading to 100,000 endorsements per year.  In the last year of having over 100,000 endorsements we saw our first year of substantial endorsements of fixed rate HECMs but even then total fixed rate endorsements were less than 12% of all HECMs endorsed.

    To read this thread one would assume that this industry grew because it had fixed rate products from day one.  I am a short-timer in this industry.  I did not come into it in 1989 or even 1999.  I came into the industry less than eight years ago.

    So please forgive me if I do not relate much to all this praise for fixed rate HECMs.  They are useful in some cases but their origination percentage versus all HECMs today seems too high.    

    • James,

      I am like you in the fact I am not a long-timer and came in with the same scenario you described above. I want to be clear that I am not so much praising the fixed rate HECM’s as much as I am saying that they are not evil or the ruin of our industry. Whether or not they pay to much (again, this is a bad thing?) or they make up too high a percentage of the loans being generated is not a reason to go back to the old way or get rid of them or invite more regulations from our government. Education is the key, for both the LO’s and the borrowers.
      I want to wish you and everyone here a Wonderful and Safe Labor Day Weekend!

      • EricSD,

        It is too bad your response was not posted sooner.  I hope you and yours had a great Labor Day.

        The fixed rate problems could be somewhat alleviated with a hybrid product.  The fixed rate HECM is not a sophisticate product and should not be the product of first choice although that is the product which seems to be pushed.

        The problem is the product is the richest for lenders and many times originators.  It will not die but we should be paying a lot of attention to the high percentage of fixed rate HECMs we are originating because others are!  Worst of all the rate is still growing.

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