Late last year, the House Financial Services Subcommittee on Housing, Community Development, and Insurance convened a hearing to discuss merits and possible areas of improvement in the federal Home Equity Conversion Mortgage (HECM) program. Featuring a panel of witnesses that included academic and government researchers along with the then-president of the National Reverse Mortgage Lenders Association (NRMLA), the overall tenor of the conversations had during the hearing were surprisingly cordial.
That’s not to say that legislators and witnesses couldn’t identify areas of possible improvement, however. In addition to detailing proposed legislation designed to answer some perceived shortcomings on the parts of lawmakers as it pertains to the HECM program, one housing researcher also opined that a perceived smattering of convoluted product options could be actively working against the interests of seniors who could otherwise potentially benefit from a reverse mortgage.
Members of the reverse mortgage industry weigh in on this premise in response to outreach from RMD.
‘Too many options’
When identifying issues that some reverse mortgage lenders may run into, Urban Institute VP of Housing Policy Laurie Goodman’s testimony offered a possible barrier for lenders when trying to appeal to a broader group of seniors.
“I think with reverse mortgage programs, [lenders have] perceived a great deal of reputational risk in terms of loans to senior borrowers,” she said during the hearing. “I think you have to realize that the HECM program is enormously complex. If I take out a forward mortgage, I have two choices: I can choose a fixed- or adjustable mortgage, and I can choose a mortgage term of 15- or 30-years, and that’s it.”
That relative simplicity in product offerings on the forward mortgage side has the potential to make a big difference in clarifying the messaging of what those kinds of products can provide borrowers, while the reverse mortgage side could be struggling to communicate the same thing due to the abundance – and perhaps overabundance – of HECM product options, Goodman said.
“In contrast, the HECM offers many more options,” she said. “I can do a fixed- or adjustable-rate, I can do a lump-sum distribution, line of credit, term annuity, tenure annuity or a combination of payment options. And, I can determine the timing and pace at which the funds can be withdrawn.”
While presenting more choices to the borrower, the fact that there are so many options could act as a potential barrier to the full comprehension of how a reverse mortgage can help that borrower, while also having possible consequences for the lenders themselves, she said.
“This plethora of options makes the product more difficult for the borrower to comprehend, and puts the institution making the loan at more risk. I actually think that program simplification – getting rid of some of the less-used options – would make a big difference.”
An abundance of options as flexibility
When taking Goodman’s specific ideas about product diversity as a barrier to comprehension to some in the reverse mortgage industry, responses were mixed. The ability for the industry and its product categories to be flexible in meeting the needs of senior borrowers necessitates a plethora of product options according to Dan Hultquist, VP of organizational development at Finance of America Reverse (FAR).
“Sadly, many people view mortgages as a commodity, like gas, and call to inquire about today’s rates,” he explains. “If everyone needs gas, then don’t confuse me with too many options. I’ll just take the mid-grade and be on my way. But mortgages are not like that.”
Having a more limited product catalog in the reverse mortgage space potentially serves to further limit the base of potential borrowers, Hultquist says.
“Imagine going into a grocery store and inquiring about the cost of food,” he explains. “What kind of food? Do you need milk, eggs, bread or chicken? Would you prefer organic or low-fat? Experienced mortgage originators know that giving them gas when they need low-fat milk and organic eggs is counterproductive and ultimately harms the consumer.”
That necessary flexibility expands the tools available for originators to solve their clients’ particular financial issues, according to Laurie MacNaughton, reverse mortgage consultant at Atlantic Coast Mortgage just outside Washington, D.C.
“In my kitchen is a blender, a mixer, a food processor, and a knife set,” she says. “Each has cutting blades and their basic function is to make food smaller. Yet, I would not use my blender to bone a chicken, nor would I use my knives to beat whipping cream; for a good outcome the nuances of the tool must fit the task.”
Describing three recent loan closings she oversaw – one which had Medicaid considerations and which was set up as a pure line of credit; one which had fixed in-home care costs being set up with a tenured payment; and another that stood as a purchase involving a lump-sum disbursal – flexibility that can be tailored to those very specific needs would potentially be lost if even little-used product options were trimmed, she says.
“One of the strongest features of the reverse mortgage products is their flexibility,” she says. “The nuanced options help meet the astounding variety of financial needs faced by those aging in place.”
Further alignment with the forward mortgage world
One core aspect of Goodman’s initial comparison was the relative ease of messaging what the need can be for the forward mortgage world. However, the objectives that are typically accomplished on the forward side are often much less specialized in comparison with reverse mortgages, Hultquist says.
“With most traditional mortgages, the objective is often rather simple – I don’t have $300,000 in cash, and so I will finance my house over a period of time,” he says. “To reduce risk I’ll opt for a 30-year term on a conventional fixed rate mortgage (FRM). That solution seems simple to many homeowners because the 30-year FRM has become the standard way to solve this problem.”
Still, more creative forward options do exist to try and solve a wider variety of issues for borrowers. On the fixed rate side alone, Home Equity Lines of Credit (HELOCs), home equity loans, cash-out refinances, government loans (USDA, VA and FHA), and non-prime are just some examples, Hultquist says, before getting into an abundance of adjustable rate options.
“To say that forward loans are basically two products ignores the more intricate problems an originator can solve,” Hultquist says. “Reverse mortgage originators must efficiently solve for the complexities of retirement cash flow and aging-in-place. The problems we solve require customization. If we limit the products and payout options, we’ll find that we can no longer solve such problems.”
However, considerations should still be made in an attempt to align the reverse mortgage world more along the lines of the forward mortgage world. This is according to Jamie Hopkins, director of retirement research at Carson Group.
“The reverse mortgage world needs to look at becoming closer and closer with the forward or traditional mortgage world,” Hopkins tells RMD. “Terminology and sales needs to be more similar. People learn about borrowing against the home through the traditional lending world of 30-year mortgages, so for reverse mortgages, the closer and better aligned they can be to this world but with different benefits and features is where growth and alignment can occur.”