Reverse Mortgage Competition Intensifies Under New Program Rules

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. 

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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

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  • Charging an origination fee does in fact effect net proceeds despite what is said above. There are no magic rules, each loan is a fact and circumstances situation highly dependent it upon the terms and its resulting math.

    It is very clear today’s LIBOR and CMT index environments create a different interest rate environment when the floor is lowered by 2.5%. In the past the total expected interest rate was generally under 5.5% so making changes that raised it to the floor were not as meaningful as when any significant decrease in the expected interest rate will impact the margin and reduce closed loan revenues.

  • There is no doubt the changes made in October were major as far as effecting the industry adversely.

    I am surprised we have not had more action taken by NRMLA or AARP and other groups to appeal the ruling!

    Lowering the PLF/Floor had more impact than anything, on the borrowers and companies originating the HECM.

    As Jim Veal stated, “It is clear today’s LIBOR and CMT index environments create a different interest rate environment when the floor is lowered by 2.5%”. He is right on target with that statement.

    Forget the leveling off of the MIP to 2%, that was not the major factor, in fact, it really was not significant when you look at the previous procedure of 1/2% versus 2.5% if the 60% rule was exceeded.

    Then within the same ruling, they came back and lowered the annual MIP to 1/2% from 1.25%, this all balanced out in the end.

    We know what the real culprit is, that is why I said, in the beginning, “Why has there not been more action taken by NRMLA or AARP and other groups to appeal the ruling or at least the PLF portion”?

    The last point I want to make is that continually competing with one another is a loosing battle.

    To survive we as an industry need to learn how to deal with the professional sector, such as, financial planners, advisors, elder law attorneys, long term health care providers and others!

    Even small community banks and small credit unions. When you are able to create a relationship and bond with these professionals, their clients that come to you have a built in automatic trust for you! That simply means, they are not shopping you all over town!

    Trust is the number one important factor in our business, getting the senior to trust you and feel confident in you! If their attorney or financial planer or bank sends them to you, “Bingo, half the battle is won my friends!!

    John A. Smaldone
    http://www.hanover-financial.com

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