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Guiding borrowers to the right decisions Protecting borrowers from mortgage predators |
You are a senior who finds an advertisement for reverse
mortgages appealing, except that you don’t trust ads to tell
the whole truth about anything. You have a well-justified
fear that if you respond to the ad, a glib sales person will
take over the process, perhaps seducing you into a deal that
you will later regret.
To avoid making a serious mistake, skeptical seniors should
learn about the mistakes they want to avoid, and position
themselves to avoid them. The purpose of this article is to
provide some guidance on mistake avoidance.
Selecting Inappropriate Draw
Options: Seniors exploring
a reverse mortgage are exposed to three kinds of mistakes.
One possible mistake is selecting inappropriate draw
options. Borrowers can draw cash up-front, a monthly payment
over a period of any pre-specified length, and/or an unused
credit line which grows over time when not used but which
can be drawn on at any time.
The most common draw option mistake is taking too much cash
upfront, with not enough left for the future. Unfortunately,
some loan providers encourage this because cash draws are
worth more in the secondary market. In connection with this
article, I had a senior colleague shop three major reverse
mortgage lenders for a credit line-only HECM – no upfront
cash. In all three cases the loan officer tried to persuade
him to draw some cash.
Seniors who use my Kosher HECM reverse mortgage calculator
can find the combination of draw options that works best for
them on their own. If they need help, they can get it from
experts who have no financial stake in their transaction.
Accepting an Above-Market Price
Quote: The second kind of
mistake some seniors make is accepting a high price quote
when a lower price quote is available. Except for my site
where a user can easily compare prices of multiple lenders,
price shopping by going from one lender to another is
extremely difficult. The lenders in this market have
developed a variety of strategies designed to convert
potentail shoppers into applicants. At a minimum, applicants
must pay an appraisal fee, which discourages further
shopping. The result is that the great majority of
applicants accept the price of the one lender they have
contacted.
The inevitable result is wide price spreads on identical
transactions. As an example, one of the three outside
lenders that we shopped quoted a rate of 4.611% on an
adjustable rate HECM that adjusts annually with a 5%
adjustment cap. On the same day, one of the lenders who
regularly reports prices to my site was charging 3.236% on
the same mortgage, or 1.375% lower.
Price disparities of this magnitude are obscene. To help
eliminate them, I have added a “Price Checker” to my Kosher
HECM reverse mortgage calculator. Price Checker allows a
user to enter a set of prices quoted by any lender or
broker, and compare them to the prices on the same
transaction quoted by the lenders who deliver their prices
directly to my site. This allows the user to determine
whether the external lender prices competitively or not.
In short, any borrower who has a price quote from a reverse
mortgage lender can check that quote for reasonableness on
my calculator. They will save money and avoid hassle if they
do it before submitting an application. A price quote
consists of an interest rate, maximum interest rate, and
origination fee.
Accepting an Unfavorable
Lock Price Adjustment:
The
price quotes referred
to above are not binding on the lender until they are
locked, which doesn’t happen until the house has been
appraised, the application has been processed, and the
prospective borrower has been counseled. In many cases, the
loan is not locked until the day before closing or the
closing day. During the period between the day of the
original quote and the lock day, the market may change,
which could result in a locked price different from the
price quoted earlier. And lenders can cheat, adjusting the
price in their own favor just because they can. Because the
draw amounts do not change with a lock price adjustment,
borrowers may give such adjustments little attention.
The lock price should be the price the lender is quoting on
an identical transaction to new shoppers on the lock day.
This is easy to check if the borrower is dealing with a
lender listed on my site, but the borrower who responded to
an advertisement has more of a challenge. To help them, my
colleagues and I intend to create a matrix of price changes
between weekly periods so that a borrower receiving a price
quote in period 1 whose loan was locked in period 4
can see at a glance the market price change between periods
1 and 4. Stay tuned.