Recent changes to the reverse mortgage program have many lamenting the fact that fewer people will now qualify. And while a decline in profitability isn’t exactly a win for the industry, there are some who have found a silver lining inside their shrinking wallets.
A number of industry professionals assert that even though the adjustment will be tough, the new rules amount to a better deal for consumers in many cases. If the program changes make the loan more appealing from a consumer standpoint, the thinking goes, they might improve public acceptance over time.
First and foremost, the loan will be less expensive than it used to be. With lenders now competing on margin, consumers will have access to better interest rates. Coupled with a reduction in annual mortgage insurance premiums, pursuing a HECM will be much cheaper, even with the possible return of origination fees and the possible loss of closing cost credits.
Michael McCully of New View Advisors says the overall cost reduction outweighs any initial upfront fees.
“No borrower likes paying upfront closing costs. That said, lower margins and/or lower fixed rates mean lower overall cost — a much bigger savings over the life of the loan than the incremental upfront closing costs,” McCully says. “And, if the HECM interest rate is lower than a [home equity line of credit], more borrowers are bound to start choosing HECM, despite its upfront fees.”
Working in the reverse mortgage space is going to require more dedication and grit than before, and perhaps only those who are motivated by good intentions will stay on board.
“Marginally competent loan officers are going to abandon the space because it’s no longer ‘easy money,’” Kent Kopen of United American Mortgage says. “The remaining loan officers will stay in the space to make money and because they care about the clients.”
Better stewards for the product will be better for the industry and better for its clients.
Less aggressive marketing
With profit margins shrinking, firms with more expensive marketing models may have to trade in old tactics for less invasive, relationship-based strategies. Kopen says leaving behind aggressive marketing practices that have sullied the product’s reputation and turned off borrowers will be a win.
“Low-conversion direct mail and telemarketing business models are no longer economically viable because the revenue per loan is lower. And, internet marketing lead-generation firms, who pose as reverse mortgage lenders, could also give up because their clients cannot afford to pay for low-conversion leads,” Kopen says.
“Companies with low-conversion-rate marketing models will disappear or adapt by putting more effort into relational sales practices; alternative channels, such as real estate agents and financial advisors; or attraction marketing initiatives,” he predicted.
More equity preservation
Some point out that lower principal limits help borrowers preserve more of the equity in their house, allowing them to use their equity but not drain it. Others say the preservation of more equity isn’t really the point.
“Theoretically, they’ll be gone. The fact that there will be a smaller balance on the loan may help their estate, but it doesn’t help them today when they need the money most,” says Neil Sweren of Atlantic Coast Mortgage. “It’s great to say, ‘Well, they’ll have more equity when they pass away,’ but who’s that helping? That’s not really the point.”
While Kopen agrees that lower principal limits are a net-negative for retirees trying to bridge the cash-flow gap, he points out that it may be advantageous for taxpayers.
“Lower principal limits mean less-levered assets,” Kopen says. “Hence, a lower probability of underwater assets if house values drop in a future recession.”
Bob Tranchell of The Federal Savings Bank says whether or not this amounts to a benefit for the borrower depends on the actual borrower and their goals.
“For those looking to lower their monthly spending by eliminating a payment, and at the same time want to leave a legacy, the new PLFs, assuming they qualify, will be a benefit,” Tranchell says. “Overall, the new PLFs actually protect the equity left in the home. Who’s to say that is not the point? It is for some of my borrowers, not for others.”
Many assert that the October 2 changes will encourage the growth of a stronger proprietary market, a win for consumers who will benefit from more options.
Scott Norman of Finance of America Reverse says he sees major growth in this area as a result of the changes.
“I think this is an opportunity for FAR to continue product development and it would not only be beneficial to the HECM market, but to the overall mortgage market and to consumers,” Norman says. “We think there is a great appetite for additional equity release-style products.”
FAR last year introduced improvements to its proprietary HomeSafe product, boosting the principal limit from $2.25 million to $4 million, and increasing the loan-to-value ratio.
It still exists!
In releasing the latest round of changes, the Department of Housing and Urban Development has reaffirmed its commitment to the product and belief in its importance. The fact that tweaks have been made to ensure that reverse mortgages remain an option for seniors is a bonus. Essentially, consumers are winning simply because the product continues to exist.
“People only talk about whether the product better or worse. Well, we have the product. I think the important part is that it’s still available,” says Norman. “I think we are in the middle of a long-term dialogue with HUD to make sure this product is not only safe for the consumers, but also safe for the taxpayers.”
Tranchell echoes this idea: “The bottom line is that the changes will keep FHA in the game, and that is the best benefit of all.”
Written by Jessica Guerin