Ginnie Mae saw it coming. The experts predicted it. And it has finally arrived, with a vengeance. The entry costs reduction food-fight among home equity conversion mortgage (HECM) reverse mortgage lenders is on. Among the major players, MetLife Bank lobbed the first salvo on March 26, by discarding origination and servicing fees on its fixed-rate HECMs.
Others have since jumped in with their version. Wells Fargo spread it to its adjustable-rate HECMs. Bank of America stretched it to front-end mortgage insurance premiums (MIP), offering to pay 100 percent of the borrower’s MIP and erasing servicing fees. Other cost-reduction ideas are coming. One lender can easily match another’s offering. None has a cost-reduction competitive advantage. The HECM consumer is the winner. Call it spring sale in reverse country!
Jacking up volume is a driver of these lenders’ largesse. Volume is down 22 percent for the first half of fiscal 2010 from the same period a year ago. Volume projection for the remainder of the fiscal year is dismal. High secondary market premiums for fixed-rate HECMs is a second driver. A third is lenders’ guilt for making a bundle on the back-end.
What do these happenings mean for borrowers and the industry? For borrowers, it means more cash at a time of the Federal Housing Administration’s (FHA’s) cash-advance cutbacks and premium increases. If the trend continues, it could help change the perception of reverse mortgages as expensive loans. If it doesn’t, we are back where we started.
For the industry, it is a mixed blessing. It is a great public relations opportunity. Government is taking away cash from seniors. Presumed predators are giving it back. Forget the $100,000 plus industry “repositioning” PR campaign. Scream about the cost reduction revolution in reverse mortgages. Speak of the difference it is making for seniors, saving their homes from foreclosure. Sing about the extra cash in seniors’ pockets in these tough times.
So, what could go wrong?
►Suitability: Lenders must ensure that loan officers or brokers do not need the fixed-rate HECM more than seniors. With eye-popping premiums floating around for fully-funded fixed-rate HECMs, the risk exists that some may push fixed-rates on seniors who do not need them. If these seniors end up losing their lump sum in some post-reverse transaction situations, the industry gets the blame, canceling any PR gains.
►Complexity: The flood of cost-reduction and pricing options is creating another layer of complexity in reverse mortgages. While professionals may find these “new” options good and easy, consumers may find them bad and confusing. Industry should focus on simplifying these options:
• Tell consumers that zero origination and servicing fees mean slightly higher rates.
• Tell them that high front-end costs equals slightly lower rates.
• Tell them what investors are paying for their loans on the secondary market and how it affects their long-term loan costs.
• And tell them that ultimately, they are paying for the zeros.
►Disclosure: The conventionalization of reverse mortgage entry costs have begun. As lenders wrap costs and yields into rates similar to forward lenders, they need to disclose everything, beyond the letter of the law.
►Zero-fee conditioning: The industry has started training borrowers and the public to think origination and servicing fees are alien to reverse mortgage lending. When premium pricing disappears and it finds its non-variable operating costs are still present, reinstating these necessary fees after conditioning seniors, regulators, and the public to forget them will do lasting damage to industry veracity. It will keep feeding the PR beasts and “repositioning” the industry. It is short-term thinking.
Atare E. Agbamu, CRMS is author of Think Reverse! and more than 130 articles on reverse mortgages. Since 2002, he writes the nationally distributed column, Forward on Reverse. Through his advisory, ThinkReverse LLC, Agbamu advises financial professionals, institutions, and regulators across the country. In a 2007 national report on reverse mortgages, AARP cited Agbamu’s work. He can be reached by phone at (612) 203-9434 and e-mail at [email protected]