In ongoing efforts to bring more transparency to the reverse mortgage shopping process, one online loan network released a new tool this week that aims to help prospective borrowers shop for the best possible terms on a Home Equity Conversion Mortgage (HECM).
The new HECM Shopper’s Assistant (HSA) is the latest resource offering from Jack “The Mortgage Professor” Guttentag to aid homeowners aged 62 with navigating the reverse mortgage marketplace. Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania.
The HSA is a one-page summary of all the information a lender who is being shopped needs to price a HECM, including personal data on property value and zip code, existing liens and the borrower’s birth date; desired mortgage type, whether fixed or adjustable rate; draw amounts, covering upfront cash draws, monthly payments, the monthly payment period and credit line; the price the borrower is looking to beat, including interest rate, lender fees and upfront mortgage insurance premium.
To use the HSA as a shopping tool, Guttentag said the borrower only needs to present this information to the loan provider being shopped, and ask whether or not the loan provider can offer either a lower rate on the same mortgage type without a higher fee, or a lower fee without a higher rate.
Creating this new resource for prospective borrowers addresses a major gap in the HECM market, which Guttentag bisects into two segments: mainstream and alternative markets.
“In the mainstream segment, there is virtually now shopping,” Guttentag writes. “Few seniors can define the product precisely enough to shop effectively, and lenders do not post their prices. While lenders compete intensely to be the one contacted by potential borrowers, because that lender usually gets the loan, they don’t compete in terms of price. The result is high marketing costs and large markups—the typical features of a dysfunctional market.”
The Mortgage Professor’s “Kosher HECM” network fits into the alternative market segment. Currently, 10 lenders post their prices allowing seniors, either on their own or with the help of an expert, to find the HECM that best meets their needs, and find the lender offering the best price for that HECM.
Prices in the mainstream market are substantially higher than those in the Kosher network. For example, on December 3, 2015, a borrower aged 70 years old with a home worth $600,000 and an existing mortgage balance of $200,000 would have paid an interest rate of 5.06% on a fixed-rate HECM, and an origination fee of $6,000 in the mainstream market.
In the Kosher network, which consists of the 10 participating lenders who deliver their prices daily to The Mortgage Professor’s webpage, this same loan was available at a 3.99% interest rate and no origination fee.
The mainstream prices, on the other hand, are estimates from the National Reverse Mortgage Lenders Association’s reverse mortgage calculator.
“The new HSA is an attempt to bring some of the price competitiveness of the professor’s site to bear on the mainstream market,” Guttentag said. “It will do that by empowering a type of intelligent shopper that mainstream lenders have never seen before.”
Written by Jason Oliva