3 Problems Reverse Mortgage Lenders Can Solve for Borrowers Right Now

A reverse mortgage has never been a one-size-fits-all solution. For some borrowers it helps bridge a specific financial gap; for others its a means of eliminating a monthly mortgage payment. Still for others, it’s a rainy day fund that can cover unexpected expenses.

But there are other common problems a Home Equity Conversion Mortgage can solve, and there should be a strong value perceived among prospective borrowers, says Craig Barnes, corporate trainer for Reverse Mortgage Funding. This should lead borrowers to recognize the loan as a premium product.

“If we perceive value in something—a better brand of clothing, a type of car, food or cell phone plan—we are usually willing to pay more for it,” Barnes said during a presentation during the National Reverse Mortgage Lenders Association Western Annual Meeting in Huntington Beach, Calif. this week. “But have we ever thought about paying more for a mortgage product where the line of credit grows, monthly principal and interest payments are not required, you never have to pay back more than the home value and it’s government insured?”

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By selling HECMs as a solution and solving a specific need, originators can position reverse mortgages as a premium product for borrowers who might otherwise question the closing costs or other fees that are commonly associated with the loans.

Barnes points to several common problems and the solutions that a premium reverse mortgage product can provide.

Problem: Lingering credit card debt

“Baby boomers are much more comfortable with credit cards than their parents,” Barnes said. “They have had mortgages, they have refinanced, they have had installment debt and they have credit card debt. This is something they have right now.”

By allowing borrowers to withdraw cash from their home equity, a reverse mortgage can help pay off the debt in full, or it can provide monthly payments to help pay off the debt over time.

As an additional tip, Barnes recommends pulling all borrower credit early in the application process to get an understanding of what the debt looks like, and how a reverse mortgage may serve a purpose the prospect may not have considered initially.

“When you pull their credit, explain how [a reverse mortgage] can help pay off this card or that card and free up extra money every month,” he says.

Problem: Mortgage payments too high 

For borrowers who have mortgage payments that are unsustainable in retirement, Barnes recommends showing the comparison between a HECM and a traditional refinance transaction. While the closing costs may be comparably high for a HECM loan, the originator can look to the expected rate, origination fee or possible credits to reduce the costs.

“Maybe you can get it lowered, or reduced to zero,” Barnes says.

Problem: HELOC shock

Many baby boomers took out home equity lines of credits during the pre-recession era around 10 years ago. Many of those borrowers will see increased payments in the coming months and years.

“Does your potential borrower have an extra $385 per month?” Barnes says. That’s where the concern is.” Originators can look to this potential pain point as a place to provide a solution.

“If cash is available, it may be able to pay off the HELOC balance,” he says.

In some cases, a HECM can solve multiple problems at once. Barnes recounts the story of one borrower in his experience who had four needs resolved with a HECM. The 71-year-old borrower wanted to eliminate her monthly principal and interest payments, pay off credit card debt, get supplemental income and set up a nest egg.

“A HECM did it all,” Barnes says. “This was an actual borrower.”

Written by Elizabeth Ecker

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    • ClineC,
      You are so right!
      This industry continually gives our detractors, of which there are many, consumers and the mainstream financial community reasons to dislike and distrust us.
      That being said: “borrowing” money to consolidate your present mortgage, HELOC, revolving and installment debts may make perfect sense for many people. It may very well greatly decrease outgoing cash flow and enhance a seniors quality of life.
      Today’s reverse mortgage is in fact a “needs based product.” And there are millions of seniors out there with needs!
      (You only borrow money to payoff debts when there is a need!)
      Embrace the product for what it is and stop trying to convince the public its something else…

      • Mike,

        You are right on point when you talk about distrusting us. The biggest hurdle is not the product.

      • Exactly Michael Banner.
        When we can improve the cash flow for a financially strapped home owner that lives on a fixed income………….you can change a life. We can’t eliminate their debt, but we can restructure it to give them some control, some options and a little peace.

    • Ms. ClineC,

      We disagree.

      When a credit card or other debts are paid off using HECM proceeds they are paid off in full. After all HECM proceeds are fungible cash and legal tender which can be used to pay off an obligation. BUT it is true that HECMs cannot be used to pay off all debts of the borrower since any use of HECM proceeds also creates debt. (Perhaps the last sentence is what you intended.) New debt replaces old when paying off other debts with HECM proceeds. Sometimes the cost of these pay offs can be very high if that is the only reason for obtaining the HECM and thus HECM upfront costs are incurred. BUT as to whether that cost is reasonable, justifiable, and rational is all based on the facts and circumstances of the borrower especially in light of the duration of any increased cash flow the pay offs may produce. For example, using HECM proceeds to pay off a credit card that would be paid off in 90 days anyway produces increased cash flow but only for 90 days beyond what paying down the credit card would otherwise produce.

      One of the chief reasons I hate calling HECM proceeds income is that if it were income than saying one can pay off all of one’s debts using a HECM would be true. But HECM proceeds are debt proceeds and using them increases debt.

      • We agree. It’s just semantics. When a person thinks “paid off”, they usually think “done and over – no more debt”. I tell my clients that, by using the HECM, they are settling the debt with the credit card companies by moving it over to the house. I remind them that $10,000 in credit card debt will become $20,000 of debt against their home in 12 -15 years roughly. I ask them if the benefit they’ll receive, if they choose to pay off debt with the loan – emotional, financial, whatever – is worth the cost. Their decision. I never advise for or against it. We’re saying the same thing.

      • Ms. ClineC,

        I may be wrong but I believe you are a hard working HECM originator who tries to be both moral and ethical while following the law and related rulings but I am a senior who has a hard time believing that my fellow seniors understand what you misstated in the way you say they do. In writing my reply the way I did, I was trying to allow you a simple out but you did not take it.

        Your misstatement versus what you intended to say is not a simple matter of semantics. What it was, is a matter of not writing what you were thinking. I have apologized on RMD and LinkedIn for doing exactly that several times.

  • Mr. Barnes brings up three excellent examples even if I find his comparison of costs to be rather curious and less than reasonable. BUT then again his examples show how HECMs solve needs and can fulfill the goal of HECM legislation as found at 12 USC 1715z-20(a).

    RMD tells us in Alex’s article at the following webpage that financial advisers no longer look as favorably on HECMs as they did before Mortgagee Letter 2017-12 which is very rational and understandable:

    https://reversemortgagedaily.com/2018/03/19/reverse-mortgages-became-harder-sell-after-october-2/#more-27245

    The only thing premium about today’s HECM is its upfront cost even though Mr. Barnes proclaims: “If we perceive value in something—a better brand of clothing, a type of car, food or cell phone plan—we are usually willing to pay more for it…. But have we ever thought about paying more for a mortgage product where the line of credit grows, monthly principal and interest payments are not required, you never have to pay back more than the home value and it’s government insured?”

    While I am sure “the choir” and marketers loved that quotation, it is exactly the sentiment that I refuse to relay about this product. Its primary upfront cost quadrupled for most likely borrowers. Mr. Barnes is using comparisons but those comparisons are not the same. I buy the same shirt today as I did last year but if it even doubled in that period, I would be looking at other shirts. Upfront MIP quadrupled for most borrowers in one day. There was no gradual climb; it jumped. If seniors did not question the increase, they should only be allowed to get HECMs with the direct approval of their CPAs and attorneys. Right or wrong, the industry loves comparisons that enhance sales but eschewes those that do not.

    Amazingly, the upfront costs of a HECM are generally much proportionately lower than they were in 2006. With a 2% origination fee (not capped) and a 2% upfront MIP rate, HECMs were pricey for the small of amount of proceeds they provided. Even though PLFs were higher the maximum lending limit (a whole other topic) was less than $370,000 for all counties in the continental US.

  • The biggest take away from this article is that we never learned how to create demand with Savers when Standards were around but even without the Standard we still have not learned how to create demand with what is in many respects a Saver. The problem with the “NEW” Saver is that its upfront MIP cost is not 0.01% of the maximum claim amount but 2%.

    Those who were successful with Savers should have an easier time selling today’s HECM. Yet it seems that at least for awhile the financial advising community will be less prone to be as positive about HECMs as they were before 10/2/2017.

    HECMs have found their bottom as to demand but, hopefully, not its norm or its peak production. The product is important and the need has expanded especially in light of an increasing senior population.

    No one is saying that the current HECM is easy to sell but this HECM is not exactly new. Some say that it was our push to close more fixed rate Standards that got us into the mess we are in today. We can work our way out of this hole but it will take more effort and our common enemy, time.

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