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Guiding borrowers to the right decisions Protecting borrowers from mortgage predators |
Effective August 31, 2015, Kosher HECM reverse mortgages became available on this site.
The kosher stamp
on a food means that it has been certified as fit for human
consumption. We have long needed a comparable certification
process applicable to financial instruments sold to
consumers, with the need most pronounced for the more
complex instruments. HECM reverse mortgages are at the top
of that list. They are extremely complex, and markedly
different from the standard mortgages that many seniors
learned about when they took one earlier in their lives to
purchase homes.
This article
summarizes the dysfunctional features of the existing
non-kosher market, and describes the major features of the
kosher version.
The mainstream
HECM market may be the most dysfunctional of all the major
financial service markets. Lenders don’t display their
prices anywhere, and borrowers don’t price shop. Many if not
most
originators always charge the maximum origination fee
allowed by law, regardless of how much they are making on
the transaction. Markups are 2.5 to 3 times larger than in
the standard mortgage market, though the work load is much
the same. The details are set out in my Wharton
working paper
HECM Reverse Mortgages: Is Market
Failure Fixable?
The
Kosher HECM is designed to maximize the benefits a senior
receives from a reverse mortgage, and avoid the hazards
inherent in a very complicated transaction. The following
are its major features as compared to the non-kosher
alternatives.
Optimizing
the Selection of HECM Options With the Kosher Calculator:
A major positive feature of HECMs is the wide range of
options available to seniors for withdrawing funds. They can
draw cash up front, get a monthly payment for a specified
period, take a credit line, or combinations of two or three
of these. In addition, they can alter these combinations in
the future. But this introduces enormous complexity, and a
danger that the borrower may make poor choices.
To reduce this
risk, we created a Kosher HECM calculator that allows a
senior to see exactly what the options are in the sense of,
e.g., “If I take less of this, how much more can I draw of
that?” The calculator determines option amounts using the
lowest of the competitive prices posted by participating
lenders. It also shows the combination of interest rate and
origination fee that generates the lowest cost over the
borrower’s time horizon. In addition, the calculator shows
the changes in the senior’s future finances that would
result from any combination of draw options taken now.
The
Non-Kosher Alternative: No
existing calculator shows users the tradeoffs between
different draw options, or the consequences for their future
finances. Part of our game plan is an offer to license and
maintain the Kosher HECM calculator at no charge for HUD,
the Consumer Financial Protection Bureau, and perhaps
others.
Optimizing
the Selection of HECM Options With Disinterested Option
Experts: Because not all seniors
can navigate the Kosher HECM calculator on their own, we
have created a group of “option experts” to offer seniors
free and disinterested help in assessing Kosher HECM options
when they are in an exploration stage. In addition to my
staff, the option experts are a select group of reverse
mortgage brokers and loan officers who are proficient in the
use of the calculator, who will advise on how best to
integrate an HECM into a longer-range retirement plan, and
who provide their services pro bono.
Seniors will be
assigned to an expert who is not licensed to originate loans
in the senior’s state. This eliminates any financial
inducement to steer a session in one or another direction.
The experts have no financial interest in whether or not the
senior ends up with a HECM.
The
Non-Kosher Alternative: Draw
option decisions are often made haphazardly, usually to meet
pressing financial needs. There are no financial tools that
balance one type of draw against others or project results
over future years.
The loan officers
or brokers involved in a transaction may be competent and
conscientious, but they also have a financial interest in a
deal getting done, and an even bigger interest in writing a
deal with a large initial loan amount. Selecting a loan
advisor is a crap shoot, and borrowers have no chance to
learn from their mistakes.
While HUD requires
seniors to consult independent counselors before applying
for a HECM, these counselors do not involve themselves in
whether or not the senior is making the right decisions
regarding HECM options. Under HUD protocols, that is not
viewed as part of a counselor’s charge.
Obtaining
Competitive Prices:
Participating loan providers post their interest rates and
origination fees on
www.mtgprofessor.com and
www.kosher-reverse-mortgage.com using
a pricing widget we designed to assure all price bases are
covered. Seniors can select the loan provider offering the
best price on their desired options package. Since the price
consists of both an interest rate and an origination fee,
the Kosher HECM calculator shows the rate/fee combination
that generates the lowest debt over a future period
specified by the senior.
The
Non-Kosher Alternative:
Borrowers do not price shop because there are no prices to
shop. There are no published data on HECM prices, and very
few lenders post prices on their websites. NRMLA, the trade
association of reverse mortgage lenders, lists over 200
members with websites. We found only one that posted both
rates and origination fees.
Price sheets
distributed by lenders to their loan officers show a wide
range of acceptable prices, and a corresponding range of
markups. This indicates an extraordinary amount of
discretion and indeterminacy in the prices.
Price Lock
Protection: The Kosher HECM
pricing system assures that the price that is locked shortly
before the closing is identical to the price that would be
quoted to the senior’s identical sibling pricing the
identical transaction. This is the “twin sibling rule.” The
senior can always verify that their lock price is correct by
checking it on the site as a shopper.
The
Non-Kosher Alternative: Seniors
are highly vulnerable to lock abuse because the mortgage
price is not locked until shortly before closing, while the
expected rate used to calculate draw amounts is locked at
time of application. With the draw amounts fixed, seniors
may pay little attention to the mortgage price when it is
locked, especially if the market rate falls prior to the
lock date. Under those circumstances, the lender should
reduce the rate, but there is no one around to question a
decision to do nothing.
Multiple
Price Combinations: Loan
providers who post prices on the Kosher HECM network offer
multiple combinations of interest rates and upfront
origination fees. This meets the needs of seniors with
different expectations regarding how long they will have the
reverse mortgage -- including seniors with short time
horizons who seek HECMs with low or no upfront costs.
The
Non-Kosher Alternative: While it
has long been commonplace in the standard mortgage market to
offer a variety of price combinations, it is very uncommon
in the reverse mortgage market.
Availability
of Ombudsmen: The built-in
protections notwithstanding, something may go wrong. If it
does, I or my designee will act as an ombudsman for the
senior.
The
Non-Kosher Alternative: There is
none.
Availability
of Market Data: A
well-functioning market generates the operating data that
participants need to make rational decisions. We developed
data on Kosher HECM prices and draw amounts in a series of
tables that are updated as needed. The tables, shown
here,
are available at no
charge and with free maintenance for anyone who wants to
repost them.
The
Non-Kosher Alternative: There is
none.
To explore the
Kosher HECM, on your own or with the help of a disinterested
expert, go to
Kosher HECM.