“The very loans that are supposed to help seniors stay in their homes are, in many cases, pushing them out.” Wow, what a doozy. After an unusually tough headline, the first sentence of the October 14, 2012, The New York Times article was a real stomach punch. Jessica Silver-Greenberg and her newspaper really went after the reverse mortgage with this article, conspicuously placed on the first page above the fold.
But her biting remarks didn’t stop at that. She continued with this: “Into the void left by the big banks have moved smaller mortgage brokers and lenders. Some of them steer seniors into expensive, risky loans with deceptive sales pitches and high-pressure tactics, according to regulators, housing counselors and elder-care advocates.” Yikes. Now the smaller independent mortgage brokers and lenders are in effect being lured by incentives to push seniors out of their homes.
Many in the industry were in San Antonio for the annual National Reverse Mortgage Lenders Association conference and were hardly in a place to assume the proper defense. While the industry regrouped, who was one of the first to rebut this piece of sensationalism? None other than Jack Guttentag, known fondly as the Mortgage Professor, who has authored a series of articles about the HECM product and its benefits. For those of you who are unfamiliar with Guttentag, he is a professor emeritus of finance and the former Jacob Safra Professor of International Banking at University of Pennsylvania’s Wharton School. He defended our industry valiantly, refuting Silver-Greenberg’s claims with salient points that echoed comments made by many in the industry.
However, our beloved Mortgage Professor never adequately addressed the issue of incentives. He also never addressed the attack made on smaller, independent companies, or the rampant misuse of the word “broker” and the accusation that our industry is basically being overrun by subprime originators.
I understand that the professor likely skipped over these points of contention because his main objective was to defend the product itself. So, with a thanks and a nod to the Mortgage Professor, I’m going to respond to the Times article to directly refute the claims made against the hardworking professionals in this industry.
First, let’s get on the same page when it comes to key definitions. Smaller, independent mortgage origination companies can be brokers or lenders. Brokers simply work with several lenders and perform all of the origination functions for a lender or bank. (I’m using simple terms here; bear with me if you’re an expert.) The loan is submitted to the lender’s underwriter for a decision. If it passes underwriting requirements, the lender then funds the loan and the broker moves on to another, often local, customer. This is small business with a local appeal at its best, and the broker/lender relationship has been going on since the dawn of the mortgage industry.
When a loan is not acquired through a broker, lenders then perform the necessary origination functions in-house, taking over the job of the broker. This is called retail origination. The vast majority of lenders in the reverse mortgage space only originate loans through their retail channel. In this case, the lender is performing the broker functions and also the lending functions. In either case, the incentives are remarkably similar.
Big banks operate in a similar manner, with the possible addition of a few more mortgage banking functions after the loan has been funded. In her article, Ms. Silver-Greenberg writes of a “mortgage broker from Wells Fargo,” which is, of course, incorrect, as brokers are independent and therefore not considered employees of any major bank or lender. (For the record, I’ve seen this error twice in broker-bashing articles this year.) But for convenience’s sake, and since most of the bashing is against the broker, let’s just lump the lenders into one category, which we’ll call “lenders.”
When a loan is originated by a lender without the help of a broker, the lender then earns the compensation that would otherwise go to the broker as well as the commission it earns for handling the lending aspect of the transaction. Herein lies the crux of my argument against the misuse of the term broker: The lender is incentivized in virtually the same manner as the broker, however they earn more per loan. If you’re speaking about brokers and lenders, it is thus disingenuous to write, “Brokers earn higher fees on these loans and even more money when they sell the loans into the secondary market,” because lenders, and not brokers, sell the loans to the secondary market, and they are
the ones who earn higher fees. In a sense though, I can’t really blame Ms. Silver-Greenberg, as the majority of writing on this subject, including the CFPB’s report, generally says the same thing that she did.
Ms. Silver-Greenberg ends the article by again calling out brokers whom she claims “steer seniors toward lump-sum loans, which carry a fixed interest rate.” What she fails to realize, as many who have opined on this subject do, is that
Furthermore, the author states that lump-sum loans are up 70 percent today from 3 percent in 2008, insinuating that mortgage brokers have caused this tremendous change. But she fails to mention that the fixed-rate reverse mortgage was only just introduced in 2008, and it had a much higher rate then than it does now.
Working with an admittedly limited data set, the August 2012 HECM endorsements as reported by HUD show that brokers originated a higher percentage of ARM reverse mortgages in that month than the industry as a whole, that being 28.1 percent compared to the industry average of 24.7 percent. To reach this number, one must extract the number of brokered loans that were originated by licensed lenders through sponsored “broker” relationships with other licensed lenders (basically lenders acting as brokers). While more data is clearly needed to substantiate this phenomenon, the takeaway here is that while brokers are being blamed for steering clients toward fixed rates, recent data shows the opposite appears to be the case.
Every lender and broker therefore has the same basic incentive structure, and instead of pointing a finger at one group or another, the industry as a whole can and should do a better job of making sure each client gets the best reverse mortgage for his or her situation.
It’s a shame that a newspaper with such a good name like The New York Times would print a hack job such as this. We can thank the good Mortgage Professor for his defense of reverse mortgages and we can only hope that next time there won’t be so much misinformation. Who knows, maybe the next article will be about a smaller, independent mortgage company that saved a local senior from foreclosure. But that will probably be lost with all of the other feel-good stories, somewhere in the middle of the “good news” section. Wait, they don’t even have that…