Is the ‘New’ Reverse Mortgage a Better Deal for Consumers?

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.

Less expensive

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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.”

Better stewards

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.”

More innovation

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

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  • The only sure thing about today’s HECM is the upfront costs are higher than those closing before 10/2. As to overall costs, that is a matter of how much the balance due is, how long it will be outstanding and how much the cost of interest and accrued MIP will be.

    It seems some do not understand that informed prospects cannot reliably project what total costs will be with an adjustable rate HECM. When upfront costs are this high, many seniors have no patience when being told that depending on future interest rates, here is approximately what the loan will cost. Most financially savvy seniors know that this kind of marketing is mostly smoke and mirrors, but upfront costs is a firm test of costs that will be incurred, here, NOW.

    Who says even with today’s PLFs, loans will not be underwater at termination? What does it matter if the loan is $45,000 underwater or $13,000 above water when selling costs will eat the equity up anyway?

    What we say matters. Making cavalier points on a variable rate product is a fascinating exercise when it is generally agreed that to be successful, the originator must establish a baseline of trust and build on it throughout the originating process.

  • Many consumers have been hurt due to the Ocr. 2nd changes. If you are a consumer focused loan officer there is no other conclusion. I am on the street in rural communities every day. Consumers were cut on both PLFs and by a hefty MI increase. Until we allow the heirs that choose to not retain the property to simply complete a deed in lieu and not deem these as foreclosures the numbers will always be wrong!

  • Let’s face it, the most important question for my clients is how much they are able to get to pay off the existing mortgage, set up a line of credit, or have monthly payments. Rates, heirs, upside down homes are all secondary or tertiary questions. Rates are seldom brought up. The current reduction of the PLF and increase in UMIP on lower utilization is having a deleterious effect on my clients. We simply are no longer able to assist as many folks as before. Bottom line.

    • True, true. In this age of “spin, spin, spin” there are those who can put lipstick on the 10/2 pig but I agree with those who say, “hmmm. A lot less money, larger upfront cost. Better for the consumer? Not most of them.”

  • As a loan originator for reverse mortgages, I see fewer seniors benefiting from a reverse today than a year ago. It is sad, especially when they need to tap the equity in their homes to help pay for at-home medical care. The point of a reverse is to use the equity in a home while one is alive, not to leave a larger estate.

  • Not to start-off on a negative fibe, but the silver-linings, outlined above, are a “real reach” of the sort that has come-out after every one of the recent changes to the HECM program.

    In fact, all the “new & improved” rationale presented by HUD/FHA for implementing these changes have been a real reach, so what can one expect.

    When the FA (Financial Assessment) change came, about three years ago, the best anyone seemed to be able prey out of it for something positive to say about this “squeeze play” without a realistic goal was: Well, it’ll help with “saving seniors from themselves;” if they’re (the seniors) not in a viable enough financial situation to carry-on with a HECM, the FA now will prevent them from qualifying in the first place.

    And here we are after the advent of the “October 2nd change” with articles-of-silver linings, again suggesting that a reduced value-to-loan rule is a good thing, because it will force seniors to increase home-equity because they can’t “get at it.”

    Problem: they want to get at it.

    It still seems that the best approach is to forget about the changes (unless you can “lobby-it-back”), and concentrate on what will always matter: Seniors need the cash flow. So, just display what they -can- do about that. They’re not going to need the cash flow any less because they can’t get at somewhat less cash than they could several years ago.

    The fundamental attractions of the HECM are: tax-free cash flow (or, “deferred,” for sticklers), government insured, the Line of Credit, non-recourse and retained-ownership. None of that’s changed: no silver lining required. And none of that you can get anywhere else, but through the HECM.

    Pitching to “What you can no longer do isn’t that bad because…” is just introducing pointless negativity. It’s not only a defensive approach, but at the same time condescending to seniors who’ll be surprised to learn just how irresponsible they can be without new HUD/FHA rules.

  • Agreed. The reduced ongoing MI does help to slow the growth, however the upfront increase, decreases avaliable cash to borrower as well as dissipation when needed. I see many consumers, that have incomes of 800 or less in rural communities that are good people and this product can have a positive impact on their life that are now unable to close. I credit as much as possible to help my clients.

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