How the ‘New’ Reverse Mortgage Stacks Up Against HELOCs

The Department of Housing and Urban Development’s latest changes to the reverse mortgage program have given rise to yet another “new” reverse mortgage — one with lower interest rates and ongoing insurance premiums that enable borrowers to preserve more of the equity in their homes.

Some originators say the revised program amounts to a better deal for consumers, and that reverse mortgages will now align better with traditional mortgage offerings, like the home equity line of credit. But the new rules will likely drive closing costs higher, creating a stumbling block for consumers that originators will need to overcome.

Attracting HELOC borrowers

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Compared with the Home Equity Conversion Mortgage, which had just 56,864 endorsements in calendar 2017, the HELOC market is massive and is expected to grow as home prices continue to rise. TransUnion predicts that approximately 10 million people will take out HELOCs in the next five years — more than double the number originated from 2012 to 2016.

Reverse originators have long discussed how the industry can attract would-be HELOC borrowers, educating them on how a HECM can be a far better deal for the over-62 set. With new rules driving down interest rates and lowering ongoing costs, some say the HECM is better poised than ever to make its case. 

Still, HECMs have traditionally been more expensive than HELOCs, and the latest changes will likely push closing costs even higher by instituting a flat 2% upfront mortgage insurance premium — diminishing a lender’s ability to offer credits and encouraging the return of origination fees.

Unmatched benefits for the long term

With the upfront expense involved, the HECM makes the most sense for those seeking long-term financing.

Jim Cory with Live Well Financial says the cost of taking the loan is nominal if you consider the benefits over time.

“I look at it as a long-term program and closing costs over time aren’t that much… 10 years into it, $15,000 in closing costs is nothing. And, under the new program, you’re going to be in a much, much better equity position than before even though you’ve been using it,” Cory says.

Patty Wills of Open Mortgage says highlighting the unique benefits of the HECM can help overcome concerns about the initial expense.

“For a forward thinker, it’s worth the additional upfront cost of the HECM line of credit, because of the security the HECM offers,” Wills says. “That line of credit is going to increase over time, creating a larger source of funds for the future. And the HECM line of credit can’t be withdrawn or frozen by a lender because of credit, income, or because their home value went down. That actually happens with standard HELOCs all the time, and it can create a crisis.”

Sue Haviland with TowneBank Mortgage also points to several features of the HECM line of credit that aren’t available with a HELOC.

“Even though the rate of growth is not what it was in the recent past, the growth is still there on a HECM line of credit, unlike a regular HELOC. And there’s no set draw period, whereas on a traditional HELOC the borrower can generally draw for a number of years and then it automatically converts to a repayment status,” she says. “I think it’s a superior choice for the borrower who is planning for the long term.”

Wills says the HECM provides an unmatched sense of security, and this makes it an excellent product for those seeking financing in retirement.

“The HECM is designed for people over 62. It’s designed for security and for use when income is not necessarily going up. The HELOC is designed for someone whose income will increase in the future, so they’re going to borrow a little now, and as their income goes up, they’ll pay more and pay off their line of credit,” Willis says. “But that’s not what you need in retirement; what you need in retirement is the HECM, because the HECM gives you the security moving forward.”

Spreading the word

Originators agree that getting consumers to understand how a HECM could be a better choice will take considerable effort.

“The key is to continue to educate the public in whatever way we can,” Haviland says. “I personally still think that face-to-face meetings are key when explaining the benefits of the product, especially when you’re comparing it to something else. You’ve got to address the borrowers’ questions directly and help them see the benefits over the long term.”

Wills says the industry needs to change its message, moving away from the HECM as a solution to a specific problem and instead highlighting its importance for anyone considering a loan in their later years.

“Our message needs to be, ‘If you’re over 62 and you’re looking at any kind of home financing, you need to look at the HECM.’”

Written by Jessica Guerin

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  • Jessica has once again brought us a picture of the industry as it is.

    For example, Jim believes that a borrower will only look at the original cost of that $15,000 but in 10 years even at an average interest rate of 5%, those costs will be about $34 short of $26,000. That ain’t as cheap and selling it as $15,000 with a 10 year view probably is less than factual.

    He also makes comparisons. It seems we use comparisons where they favor us and call them negative information if they don’t. My complaint is not about making comparisons but rather limiting them primarily to “positive” ones.

    While problem solving presentations still work, for marketing purposes, the problem solving view is far too limited. Patty hits it on the head; in general marketing a general message is needed.

  • I agree with most of the above statements. Jim Cory’s statement of $15,000 in closing costs may apply to his area but in NY with home values of $500,000 plus closing costs are 20 to 25K. That is a very hard sell to open a LOC.

  • The philosophy of using a HECM to pay off a HELOC died on October 2nd 2017. Please, call the time of death so we can start the grieving process.
    That being said, if the client has a sizeable first mortgage and a HELOC behind it, then the elimination of his first mortgage monthly payment and the HELOC may very well make sense. But only with the elimination of a first mortgage, and it’s corresponding monthly payment, can we start to justify the high upfront cost of securing a reverse mortgage.
    This industry must STOP making up scenarios, that fit the new guidelines. It does not serve us well. In fact it makes us look very bad to the consumer and the mainstream financial community, which are the exact groups we are trying to penetrate.

    • Yes, it would seem much better to just present the program as is, without always qualifying it with a: “The HECM is not what it used to be, but don’t worry because…” Ya know, prospective borrowers probably aren’t worried, until you tell them not to worry.

      The attractive “fundamentals” still exist, only the terms have changed. The fundamentals, meaning, the HECM is a loan with special, government protections as the non-recourse aspects, a set contract with the lender, and the HECM being government insured so the program “won’t go bankrupt on them.”

      The significant Line Of Credit growth-potential is a “bonus” that, clearly, usually comes as a surprise to most borrowers after the fact (after closing); It’s doubtful that borrowers would view the now higher amounts of closing costs as “not worth paying a premium just to open a Line Of Credit.”

      Borrowers needs haven’t changed: if they want an HECM because of cash flow considerations, higher closing costs won’t change that situation, one way or the other.

      • Ed,

        Your “don’t worry” quotation seems more than a little over the top but if a consumer hears that then your paragraph is right on. I just doubt if consumers hear that.

        Historically, the PLFs mean a lot to borrowers. Since September 30, 2013, it is not as readily seen as it was before that date due to the 60% first year disbursements limitation rule.

        If you read your loan documents, you will find that the lender is the one who guarantees non-recourse, not HUD. What HUD document do you have that says it is a government guarantee? It is not. The insurance merely reimburses specific losses of the lender but not others.

        As to the closing costs of the HECM in order to sell the HECM as a line of credit, it is clear you have not sold HECMs. Several important financial advising academic and practitioner voices advocating the Saver as a new cash flow product were stilled when HUD stopped insuring the Saver. Demand is telling us that the same is true today.

        Instead of merely supplying relevant opinion alone, it would be even better if you would cit relevant data showing us how you arrived at your opinion.

      • George Owen wrote:

        “If you read your loan documents, you will find that the lender is the one who guarantees non-recourse, not HUD. What HUD document do you have that says it is a government guarantee?”

        I wrote:
        If you could read, you’d know that I didn’t use the word “guaranteed.” Apparently, you’ve assigned this term to my comments to bolster your misleading premise.

        It’s the government that requires the lender to present a non-recourse agreement. So, you really have no point.

        My point is that “government protections” is a fundamentally, attractive feature for borrowers.

        A guarantee is only as good as the service provider. If borrowers know that the non-recourse isn’t, just backed by the lender, standalone, but is a government mandate, they have a much “safer feeling” about the HECM; and rightly so. Why you would want to mislead borrowers by obfuscating this fact, is unknown.

        George Owen wrote:
        “As to the closing costs of the HECM in order to sell the HECM as a line of credit, it is clear you have not sold HECMs.

        I wrote:
        As I’ve stated since my first post on RMD, I’m an HECM recipient, and not working in the HECM industry.

        One would think that HECM recipients have at least as much vested interest in HECM-news as originators, and the perspective they bring, not somehow inferior because of it.

        There was an excellent focus group/study conducted and subsequently reported, that showed a significant majority of prospective borrowers of HECM loans and/or HELOC loans, did not realize the impressive extent to which the HECM Line Of Credit was a benefit to them, especially v. the HELOC loan.

        There’s your “cite of relevant data.”

      • Ed,

        So I get it. You state: “…government protections as the non-recourse aspects….” and that means that these protections are not “guaranteed.”

        So now you add: “It’s the government that requires the lender to present a non-recourse agreement.” Yet that is true of HECMs as well as any proprietary reverse mortgage where there is no FHA insurance.

        Unbelievably you go on to declare: “If borrowers know that the non-recourse isn’t, just backed by the lender, standalone, but is a government mandate, they have a much ‘safer feeling’ about the HECM; and rightly so.” Yet since non-recourse is required in all reverse mortgages, why would a borrower feel safer about a HECM? So is this “safer feeling” talk nothing more than false and misleading especially when you cannot point to a single statement where HUD states it guarantees or protects the non-recourse nature of a HECM anywhere in your loan documents?

        You write:

        “I wrote:
        If you could read, you’d know that I didn’t use the word “guaranteed.” Apparently, you’ve assigned this term to my comments to bolster your misleading premise.”

        I cannot find you ever wrote that EXCEPT in the your last comment. This is the childish act of someone who is afraid to admit they misstated or overstated anything.

        Then you claim:

        I wrote:

        “As I’ve stated since my first post on RMD, I’m an HECM recipient, and not working in the HECM industry.” Yet where did you write that in this thread?

        So if borrowers believe the information presented in a study (actually focus) group that you have no access as to completeness and accuracy, you want RMD readers to believe that is somehow relevant data. Ed, you really are like a poor HECM salesperson who carelessly cites anecdote as if empirical fact or accurate data.

      • George Owen wrote:

        “So if borrowers believe the information presented in a study (actually focus) group that you have no access as to completeness and accuracy, you want RMD readers to believe that is somehow relevant data. Ed, you really are like a poor HECM salesperson who carelessly cites anecdote as if empirical fact or accurate data.”

        I wrote:
        Oh but I do have access to its “completeness and accuracy,” as you put it (and so does everyone else who has read these reports on RMD); and they’re obviously quite relevant.

        Here they are, 5 (five) reports of experts’ findings with multiple links within, of further detail (see link):
        https://tinyurl.com/y856oq7b

        As for other points made that you’ve failed to credibly dispute (you need to reread, not rewrite my statements), they still stand without a need for alteration or clarification; by a “reasonable person” standard that is.

      • Ed,

        You never wrote the following until your last comment:

        “I wrote:
        Oh but I do have access to its ‘completeness and accuracy,’ as you put it (and so does everyone else who has read these reports on RMD); and they’re obviously quite relevant.”

        You are citing very summarized anecdotal information contained in RMD articles which do not claim to be complete. As to accuracy, the highest accuracy they could have is what they report and no more. These focus groups go on for hours with back and forth questions and answers and you are trying to persuade us that the articles are anything other than anecdotal.

        As to the five experts, the RMD article is OK but certainly does not pretend to be complete. RMD provides a link to the article for completeness sake. BUT how do they relate to focus groups? Are you saying that the RMD article where all five are linked makes the article a study group?

        This article is about HECMs versus HELOCs not about study (or better said focus) groups. Are you saying that the growth in the line of credit is the only thing that makes the HECM superior or do you have anything to add to that?

      • Focus groups have been found to be very accurate, and are used heavily in major, political elections-campaigns. They’re, in fact, used to fine tune internal polls.

        As to whatever else you wrote, it’s doubtful at this point that anyone can make any sense of it at all.

      • Ed,

        You seem to love to change topics. You now find accuracy in focus groups in politics? Do you remember the results of the 2016 election? They hardly followed in any polling or surveys.

        Yet you fail to deal with the topic at hand which is that even the reporting in RMD does state it is complete in describing focus groups. As to accuracy it responsibly claims it is only accurate as to what the article presents, not for it omits.

        You would love to be slippery but you are more like a dried bark.

      • No, I didn’t change the subject, you did. I gave proof that the concept of focus groups is a widely accepted method, regardless of topic-application.

        It’s you (read your own statements) who wrongly asserts that focus groups aren’t a legitimate source of reliable information. You couldn’t be more wrong.

    • Mr. Banner,

      That is a rather extreme view yet nationwide HECM demand is down and some financial planning strategies have certainly become less appealing.

      When it comes to the Standby HECM, how deep is the support at a 2% upfront MIP level? When the Saver was eliminated, the voice of some supporters were greatly lowered (particularly those of Mr. Michael Kitces and, most importantly, Mr. Harold Evensky, the creator and promoter of this strategy) especially since the lowest MIP upfront cost rose by 4900% from 0.01% to 0.5% after September 29, 2013. Now the minimum upfront MIP rate is 199 times higher than for Savers.

      For example on a Saver, the upfront MIP cost on a home valued at $600,000 was just $60 which in cases was waived. Today that same Standby HECM strategy would cost $12,000 just in upfront MIP costs which at an average effective note interest rate of 5.5% would grow to $21,832 in 10 years if financed at closing. Justifying the upfront cost of a Standby HECM has become far more difficult than in March 2013, just five years ago.

      Yet in most cases the total upfront costs for a Standby HECM is now over $21,000 in most cases for that $600,000 home. That borders on the ridiculous. Again if after five years using the same note interest rate as before, the financed cost of the Standby HECM is over $38,200. As a CPA, I have a hard time recommending the Standby HECM at those costs.

      As upfront costs move up, some financial planning strategies using HECMs lose their luster; the Standby HECM is just the most obvious.

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