The Department of Housing and Urban Development’s decision to cut principal limit factors for reverse mortgage originators has significantly changed the competitive landscape, multiple industry professionals told RMD.
Although not all the competition is over rates, they are one of the biggest factors brokers consider as they balance business costs and value to the customer.
“The new floor and current interest rate environment have adversely impacted revenues across the board, and we’re seeing fewer lender credits and more origination fees as lenders try to find the right balance of protecting revenue and offering the best terms to the borrower,” Jesse Brewer, a reverse mortgage specialist with Resolute Bank in Nevada, told RMD.
Malcolm Tennant, the president of Access Reverse Mortgage Corporation in Clearwater, Fla., said that lowering interest rates can be an effective tool to make the product more valuable to the borrower.
“There is no question interest rate competition has increased,” Tennant said. “Our clients tended to not be overly interest rate-sensitive in the past, since it really only impacted residual equity, but post-October 2nd rules have interest rates impacting available funds. Current PLFs are a disappointment to many prospects, so increasing them through lower rates can be compelling.”
Because of shrinking margins, originators are reassessing how to keep their businesses profitable, and in many cases this means charging an origination fee. Tim Linger, broker and owner of HECM Senior Home Financing in Orlando, Fla. said that he has recently begun charging this type of fee.
“The only thing we can really compete against is the margin, which keeps the interest rate down,” Linger said. “But when you lower the interest rate, the less the lender or broker makes on the yield spread premium, so we have to charge an origination fee. Even with the origination fee, it is still a better financial outcome for the borrower.”
In addition, his company has begun selling forward mortgages to keep his business afloat, Linger said.
Brewer said his firm is charging an origination fee more often, assessing each loan on a case-by-case basis.
Ellen Skaggs, the reverse national sales manager for New American Funding in Tustin, Calif., said that the changes have some lenders lowering their rates to a point that undercuts everyone in the industry, and that some lenders will cease to exist as a result.
“To be honest, dropping the floor has been the most negatively impactful thing HUD has ever done,” she said.
Her company does not charge an origination fee on about 90% of loans, and they streamline rates across the country.
“That way we’re consistent, fair, and making the profitability that we feel we have to make,” she said.
Despite the competition over interest rates, Linger said that low rates are not the first consideration of a prospective borrower.
“The first thing the borrower asks is, ‘How much money can I get?’ Then, ‘How much are the closing costs?’ Then, ‘What is the interest rate?’ In that order,” he said.
Brewer agreed that the increased competition is definitely focused on benefit more than interest rate.
“Homeowners are looking for the maximum available proceeds at the lowest acquisition cost, which are both functions of the interest rate,” Brewer said. “But we’re all pricing above the floor to some degree now, and the product and margin or interest rate has an impact on the total benefit available to the borrower.”
Written by Maggie Callahan