In the new series on reverse mortgages, Jack Guttentag, also known as “The Mortgage Professor,” writes for Inman news about the effectiveness of lump sum HECMs for seniors.
Guttentag addresses the problems seniors can run into when they choose to borrow maximum funds in a one-time sum at the loan’s outset and cites seniors’ lack of understanding when it comes to HECMs as the main cause of the problems.
Advice seniors receive while shopping for a HECM can greatly influence whether they decide to receive funds in a lump sum or not, and Guttentag examines how lenders and counselors could do a better job in helping seniors determine which borrowing options are best for their situation.
Underlying the mistakes that seniors make is the complexity of HECMs and the fact that few seniors understand them. The new options increase the complexity. While there is no way to make HECMs simpler, or to raise the IQs of senior borrowers, the likelihood of bad decisions can be reduced by improving the quality of advice that they receive, and the quality of the information to which they have access.
Every HECM borrower must be counseled by a Department of Housing and Urban Development-approved HECM counselor, but counselors are not preventing borrowers from making serious mistakes. Even if counselors were financial planners qualified to advise seniors on how a HECM fits into a retirement plan, which most are not, under HUD rules, counselors are not supposed to recommend one HECM option over another. Many HECM borrowers, furthermore, turn off their hearing aids during their counseling session.
HUD limits the origination fees that borrowers can be charged to 2 percent of the first $200,000 of property value, plus 1 percent of the amount above $200,000 but with a cap of $6,000. In addition, lenders collect a premium paid by the wholesalers to whom they sell the HECMs.
The bottom line is that lenders have a strong incentive to encourage borrowers to withdraw cash upfront. Unfortunately, in many cases, borrowers don’t need much if any encouragement.
Most senior homeowners had one or more forward mortgages during their life, from which experience many emerged with a bias against ARMs. They may not have had one, but they heard about them and knew that they were risky. So when offered a choice of fixed- or adjustable-rate HECMs, they opt for the fixed, which requires that the full value of the HECM be taken in cash.
The tools available to HECM borrowers, however, are a sorry lot. The existing calculators focus entirely on how much the borrower can draw, without any supporting information on the future consequences of a given selection. So I decided to develop my own. Keep tuned.
Written by Erin Hegarty