As more alternative home equity tapping tools like sale leasebacks and shared equity products begin to enter conversations about retirement, more traditional reverse mortgage products are finding themselves in a more competitive environment. Originators don’t tend to see these products as threatening, but more traditional reverse mortgages may have another key advantage: borrower safety.
The exclusive features of a Home Equity Conversion Mortgage constitute their most attractive elements, says Rich Pinnell, a reverse mortgage originator with Guild Mortgage in Redding, Calif. In fact, while reverse mortgage safety has historically been a criticism of the product, the protections in place relative to these new alternatives could actually position the product as a much safer option for a senior looking for ways to unlock the equity in their home.
Open-ended time frame versus a hard limit
“If you understand what you’re doing [with alternative equity tapping], that’s fine. But, [with some of those products] it appears that there is a period of time at which you would be obligated to pay them back/sell the home, so they could have their equity position pulled back to them and their profit margins. That’s probably the part that concerned me the most,” he says.
The open-ended nature of the HECM, Pinnell says, is better suited for seniors who want to age in place without a time limit built into the product.
“You get to stay in the house as long as you are able to and want to [with the HECM]. And, that’s a huge deal for people that are taking a reverse mortgage,” he says.
Potentially having a customer’s later years interrupted by a time limit if they haven’t yet moved out of the home or expired there would be an immensely unsettling disruption, Pinnell believes.
“They do not want to find out at 92 years old – three years away from their impending death, let’s say – that they’re going to have to sell their house and move someplace else,” he says. “That’s not something that an 85 or 90-year old is interested in doing, in most cases.”
The fact that the HECM is also insured by the federal government acts to further give borrowers peace of mind, says Mike Peerless, reverse mortgage director at Holland Financial Services in Ormond Beach, Fla. Peerless also believes that features unique to the HECM give it a general edge in the home equity space when compared with alternative equity tapping tools, like sale leasebacks or shared equity arrangements.
“The fact that [the HECM] is FHA-insured may have an effect on a borrower’s decision on which product to use, all things being equal,” he said. “But I think that will not necessarily be a concern until when and if a proprietary product is unable to meet its initial promised obligations, if ever the case.”
“Every one of my conversations with potential clients, at some point, touches [the non-recourse feature],” added Pinnell. “They all want to know, are their kids going to be responsible if the house is upside down? I don’t think we would have even 50 percent of the reverses we have now if that component was not in place.”
Without the non-recourse feature, borrowers may end up feeling there are too many questions surrounding the financial safety of their heirs, something clients simply don’t want to complicate, Pinnell feels.
“If it was not a non-recourse product, you would just find the generation that we’re talking about saying they don’t want to saddle their estate or their kids with potential losses.”
Time-honored and market-crafted
Another advantage for more traditional reverse mortgage products lies in the history of the HECM program itself, according to Scott Harmes, national manager of the C2 Reverse Mortgage Division of C2 Financial Corp. Tracking public opinion concerning reverse mortgages shows an increasingly positive trajectory for the product’s sentiment over time, which gives a traditional reverse mortgage a distinct advantage over alternative equity tapping products.
“The reverse mortgage wasn’t originally generated based on market forces, but instead by an act of Congress creating an FHA benefit for senior homeowners,” Harmes told RMD. “It took about 30 years to carve the rough edges off of it, and there have been a lot of changes to it in the last five years, for two purposes: one is to make the program sustainable within FHA, and the second is to assure it is a sustainable solution for homeowners.”
The three decades that have elapsed between the program’s founding and the current form of the HECM program have been invaluable in shaping reverse mortgages into what they are today, Harmes feels.
“We now have 30 years of product testing and market revision to get to what is, today, an exceptional and unique financial product when used in the right application,” he said. “Over the last five years we’ve seen equity conversion methods come and go, because they’re not market-proven or market refined long-term. That long history of HECM refinement is why we have such a viable product today.”
This makes alternative equity tapping products less comparable with reverse mortgages, not just because they’re relatively unproven by both market forces and by the fullness of time, but also because there is no standardization between the ways the products operate. This is not the case with the HECM or even with proprietary reverse mortgages, Harmes says.
“Alternative equity tapping tools are not proven in the market by the test of time. And, there’s not a standardized version. On the reverse, even proprietary, they’re standardized off of the FHA HECM model. They’re working on a time proven, market-effective model that’s standardized,” he said. “Every time a new equity conversion tool comes out, C2 Reverse looks at them, and I’ve yet to see one that gets me excited as a broadly applicable alternative to the reverse. Maybe there are times where a reverse isn’t an ideal solution, but it’s hard to judge these alternative tools because of the lack of standardization.”
A self-policing industry
The National Reverse Mortgage Lenders Association (NRMLA) is a pivotal factor to include in the comparison between more traditional reverse mortgages and alternative equity tapping tools, Harmes says, because NRMLA is dedicated to stamping out misinformation and product misrepresentation among both its members and consumers.
“NRMLA plays a huge role in stewardship of the reverse mortgage as a sustainable program,” he said. “They’re the source and enforcer of the Code of Ethics and Professional Responsibility. That’s important because the bulk of the loans in the industry are generated by NRMLA members, and we police each other as members.”
If he observes an advertisement that misrepresents a reverse mortgage product, Harmes has access to a very easy mechanism in which he can contact the trade association and report that ad to make sure it’s ultimately taken care of.
“Our members are very assertive in doing that, and that works further to protect the seniors,” he said.