The next looming crisis is on the horizon and has started to trickle into the marketplace for the Reverse Mortgage industry. The coming crisis is the public perception that the rates and fees for Reverses are too high and that the government, regulators, investors, industry trade groups and others should establish standards on the origination fee charged when originating a Reverse Mortgage. It presents a larger and more challenging problem beyond educating seniors and the public and dissuading the myths with our products. The Reverse Mortgage industry may be on its way to being compared to the Payday Loan industry because of common characteristics exhibited by their products and borrowers.
Generally, payday loans exhibit the following characteristics: short term maturity (possibly long term when rolled over), high rates & fees and borrower profiles with troubled credit histories. These loans are characterized to target the young and the poor who may not understand the concepts of the time value of money and other money management principles. Payday loan borrowers fail to demonstrate the discipline to plan and save money and are prone to file bankruptcy to discharge debts that they will never be able to repay. Using a payday loan to solve a short term personal emergency such as a medical procedure is one of the most common reasons for an individual to apply for a payday loan.
Similarly, Reverse Mortgages could be classified as financial products for those who did not adequately prepare for retirement. Others may characterize Reverse Mortgages as having predatory rates and fees, specifically in the first few years of the loan where the Annual Percentage Rate (APR) / Total Annual Loan Costs (TALC) may seem usurious. While these types of loans are only eligible for seniors, the themes of inadequate financial planning and the inability to fully understand complex financial products are classic characteristics used to describe Reverse Mortgage borrowers.
Reverse Mortgages and payday loans are commonly classified as bail out or emergency loans to provide a means to access cash when borrowers need money. Both products evoke a sense of failure to prepare for future events through a common thread: the failure to save enough money. Rolling a pay day loan over is a simple way to say negative amortization or tacking the fees and interest to the principal balance on the HECM. In both cases, these financial products are used to promote household welfare but are they creating more harm than good? Should our financial institutions create products to assist us with these short term emergencies other than a Reverse Mortgage or a payday loan with simpler disclosures and lower rates and fees?
These two financial products exist for the same reason: there is demand based upon the needs of the people; right, wrong, or otherwise. Both financial products are rate and price insensitive overall; both borrowers will pay the rates and fees if they need the money, almost no matter what the price as demand for both products is relatively inelastic. Just because there are thousands of outlets for payday loans, rates and fees have not decreased substantially as increased supply and competition should have driven down the costs using classic economic principles. Or will the unwritten standard of a 2.0% origination fee stand out as an unspoken, collusive, monopolistic charge associated with a government insured mortgage product?
Reverse Mortgages are not payday loans. However, the similarities raise questions that could lead an ignorant regulator, activist or politician to grandstand or put the brakes on HECMs which serve our client’s and their constituent’s needs. Once the subprime drama ends, all the press and politicians will look for a new sensationalist angle and this could be the next lightning rod.
– Commentary by M.B. Tackle
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Reverse Mortgages: Government Sponsored & Insured Payday Loans?