Just a few months ago I wrote an article stating that the HECM for Purchase, or “H4P” as many have come to call it, was the “sleeping giant” of both the reverse mortgage and the real estate industries. I have believed in this product since its inception, although its performance these last few years has been anything but impressive.
There is no way to deny that the limited volume of H4Ps is entirely dominated by the traditional fixed-rate product. By definition, the Purchase product demands the entire lump sum up-front to close the transaction.
So, now that we know the traditional fixed-rate will soon become a thing of the past, the question becomes: Is this a knockout punch to this sleeping giant? Is it a gut punch that really hurts, or is it just like my favorite boxer, Rocky Balboa, said: “It ain’t about how hard you’re hit, it’s about how hard you can get hit and keep moving forward”?
So as surprised as many will be, here is the answer: We are going to keep moving forward! The elimination of the traditional fixed-rate HECM will have little to no effect on the growth potential of the H4P product. And while I’m at it, take this: The elimination of the traditional fixed-rate HECM will have little to no effect on the entire reverse mortgage industry!
Remember, we still have a fixed-rate option with the Saver product, and with today’s record low rates, which are expected to be around for quite a long time, the difference between the principal limit on the traditional fixed-rate and the LIBOR product is either zero or negligible.
The truth is, the client will probably not be affected as far as the amount of money received up-front goes, and if rates do remain low (as they are projected to), the senior will ultimately save a considerable amount of interest over the life of the loan.
Make no mistake about the long-term benefits of the LIBOR program versus the traditional fixed. In addition to the lower rate, all of our clients will now have an automatic increase in the availability of their credit line. This option, which was created as an “inflation hedge,” is truly a staggering addition to this loan and has never really been given the right amount of attention from our industry or from our adoring friends in the press.
Sometimes an industry excels because it chooses to, and sometimes it does because it is forced. In this case, it seems to be a little of both.
The option between a traditional LIBOR program and the fixed-rate Saver product will help ensure that our senior clients meet their financial goals and are still able to keep up with other obligations like taxes and insurance.
We’re being told that statistics prove borrowers who secured the fixed rate are much more likely to default. Removing the traditional fixed-rate HECM from the equation should cut the default rate greatly. In addition, if a borrower chooses the only fixed-rate option available, the Saver, they are probably a more affluent borrower and much less apt to default.
I guess the problem is solved… Yeah, right!
Until this industry stops portraying its product as a needs-based product of last resort, we will always be looked at as the bottom rung of the financial ladder. We will always be the industry to blame.
Now, in all fairness, we have come a very long way in a very short time. The Financial Planning Association now recognizes a reverse mortgage as a valid option when considering a comprehensive retirement plan. The product has been endorsed by the National Long Term Care Network, and Realtor University and The Learning Library, the National Association of Realtor’s online education platforms, are now marketing my H4P class on a national level.
The fact that these large organizations are recognizing the reverse mortgage as a viable option is a great sign that this industry is joining mainstream America’s financial community. But, admittedly, we still have a long way to go.
By the time you read this, it is very possible that the traditional fixed-rate HECM has already been deemed a thing of the past. It’s time to expand your knowledge of the LIBOR index; you’ll see how stable it has been over the last 25 years. It’s also time to educate the consumer about the stability of the LIBOR and the huge advantage of a growing line of credit.
With the traditional LIBOR product, the LIBOR Saver and fixed-rate Saver, we truly have a menu of offerings that can satisfy the needs of a wide variety of senior consumers. The traditional product is a fine option for the needs-based segment, and the Saver products can be an excellent fit for the more affluent client.
Every time we take a step toward making this great product safer for seniors, regardless of whether or not we all agree with that step, we make great strides in guaranteeing the longevity of the reverse mortgage.
And make no mistake about it: The HECM is needed. Many would say I am heavily biased in this opinion, as I make my primary living from this industry and, well, there really is no way to argue that point. But quite frankly, like so many of you, I did pretty well in life before I entered the reverse mortgage industry. This is the way I have chosen to make my living and, also like so many of you, it has become my passion.
Today, longer life spans and record low return rates on the financial vehicles have been compounded by one of the most volatile market environments this country has seen in decades. The current economic climate demands that home equity be an option for the great majority of retirees.
It’s amazing how longer life spans have presented us with a double-edged sword. We get to be on this earth a lot longer, but now we have to figure out how to pay for it. I think time will show that a reverse mortgage can be a very large part of the answer.