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Guiding borrowers to the right decisions Protecting borrowers from mortgage predators |
Markets don’t
work well when one party in a transaction knows much more
than the other, and nowhere is the knowledge gap wider than
in HECM reverse mortgages. Borrowers typically know very
little because reverse mortgages work differently and are
much more complicated than the mortgages with which they
purchased their homes. The loan officers and brokers with
whom they deal, on the other hand, are experts in reverse
mortgages who make their living originating them.
The Federal
Government has attempted with very limited success to reduce
the vast differences in knowledge in this market through
mandatory disclosures and mandatory counseling. The
centerpiece of the mandated disclosures is a measure called
the “TALC,“ which is completely useless for reasons I
explained in an article some months ago. Mandatory
counseling, which is unique to reverse mortgages, is useful
but excessively limited in its coverage.
Under Federal
law, lenders cannot accept applications for HECM reverse
mortgages until applicants deliver certificates attesting to
their having been successfully counseled by a third party
who is independent of the lender. While most of the
borrowers I have queried found their counseling experience
useful to some degree, it protects consumers only against
mistakes of commission: taking a reverse mortgage when they
would do better without one. In fact, very few seniors opt
out of the process as a result of counseling, suggesting
that there are very few mistakes of commission.
The big source
of mistakes, affecting untold millions of seniors, are
mistakes of omission, committed by those doing nothing,
because they never heard of reverse mortgages, or never
heard anything good about them, but might nonetheless
benefit from one.
The existing counseling system does not touch them.
Virtually all the seniors who are counseled have been to a
lender first, which means that they had already made at
least a tentative decision to proceed. What is needed is a
counseling facility directed to mistakes of omission by
seniors who don’t know whether a reverse mortgage would meet
their needs or not.
This facility now exists. The counselors are loan officers
and mortgage brokers with expertise in reverse mortgages,
but no financial interest in whether the seniors they
counsel borrow or not. For the time being, my colleagues and
I will manage the operation using my web site. Consumers can
make an appointment there for a counseling session on
whether a HECM reverse mortgage makes sense for them. We
will match each consumer with a counselor who is not
licensed to originate HECMs in the zip code in which the
property is located. For example, a consumer with a home in
New York might be linked to a loan officer licensed only in
California.
We call the counselor an “option expert” because most of
what he does is to identify the consumer’s options in a HECM
transaction.
·
The maximum
amount that can be drawn in cash upfront.
·
The maximum
amount that can be drawn monthly for as long as the consumer
lives in the house.
·
The maximum
amount that can be drawn monthly for any intermediate period
such as 5 or 10 years.
·
The maximum
amount of a credit line that can be reserved for future use,
which grows over time.
·
Any
combination of these options that fits the consumer’s
circumstances.
·
The
consumer’s future financial status in connection with any or
all of the above options.
·
The initial
and future cost to the borrower, as measured by the loss of
equity in the home, of any of the above options.
·
The
combination of interest rate and origination fee that
minimizes the cost of the HECM over the period the consumer
expects to have it.
The critical question is whether there is a combination of
these factors that would make the consumer better off? This
question is now off-limits to counselors whose goal is
preventing mistakes of commission.
Seniors who have been counseled by option experts and have
decided that a HECM is in their interest should not be
required to be counseled again. We are talking to HUD about
the possibility of providing them with a waiver, perhaps
subject to passing an examination on potential HECM
pitfalls.
The option
experts don’t get paid, they are satisfied to participate in
a program that will expand the size of the market, which
will benefit them indirectly, as it will all loan
originators. I don’t get paid either.