Those of you who thought that I would address the decision-making process of the recent HUD change to eliminate the fixed-rate Standard HECM, you have come to the wrong place. I will leave that examination to others.
Instead, I would like to discuss the thought process of potential reverse mortgage borrowers and their advisors—what were they thinking when they looked into a reverse mortgage, and what influenced their decision to either proceed with the loan or to not move forward? What factors are considered when borrowers choose between a fixed- and adjustable-rate HECM? If we can decipher what they were thinking, we can better determine effective marketing and sales approaches so that we can better serve potential borrowers who inquire about our products.
We often read about how to better market to our customers, or how to do a better job of selling the benefits to borrowers, their families and potential referral partners. Why have we not examined the question of what borrowers were thinking when they inquired? Why would someone choose to apply for a HECM? If we can better understand the answer to these questions, we will have more success in growing our own businesses and understanding of the overall benefits of the HECM product.
For this article, let’s set aside the needs-based borrower who is trying to get out from under an expensive mortgage payment, needs to pay credit card or medical bills, or is in a similar situation. We all understand that those situations give rise to an immediate need, and the only real question at that point pertains to preferences regarding the rate and terms of the HECM.
Let’s think instead of a borrower who may be interested in setting up a rainy day fund, using home equity to enhance lifestyle, or someone who would consider a HECM as a financial tool in planning for future disbursement of their retirement savings. If we can think in this manner, we can better advise potential borrowers of the power of a HECM when borrowers cement future access to home equity by leaving it to grow in a line of credit, negating risk of another home value decline by ensuring access to these funds.
Do you market the HECM as a way to ensure access to liquidity when needed for home or car repairs, unexpected bills, future homeowner’s insurance and property taxes without having to jump through hoops in getting a loan that is based upon someone’s credit profile and income? What happens when a spouse dies and Social Security income declines, preventing the surviving spouse from living in the manner and style to which they have become accustomed? We all know many seniors do not want to sell their homes and move. Setting up a rainy day fund now, locking in home equity at today’s value with the potential for growth in a HECM line of credit, ensures the ability to quickly access cash when it could be most needed.
When someone is living in their golden years and realizes that they don’t have the income to enjoy some of the things they thought they would enjoy during retirement, what is their thinking in using home equity as a way to fund those dreams and desires? I had a customer who lived in Guilford County, North Carolina, and served in World War II, the Korean War and Vietnam before retiring after more than 30 years in the Army. He enjoyed a good quality of life and had enough income to pay all his bills and even go on vacation to his timeshare in Florida every year. He called me because he and his wife wanted to travel to Europe, where they had many friends from his days in the military. He didn’t have the income necessary to make those trips, and it was a dream he and his wife thought would go unfulfilled. Both were approaching 80, and he knew the time was growing short when he and his wife could physically make the trip. His thinking was, and I quote him, “I don’t have any children to leave my estate to, so why not spend it on something I’ve always dreamed of doing but didn’t think I could afford?” He had no immediate need, only a dream and a desire. When we talked about his options, his thinking was that a line of credit, with credit-line growth potential, was ideal for him to use his equity and have it last long enough to see all the places he wanted to see one more time before leaving this earth.
I had another couple who also wanted to enjoy a more robust retirement. Their thinking was to use the fixed-rate loan and take all the cash immediately for two main reasons. The first was that they feared rates would climb soon due to the state of our economy. They didn’t trust that their home value would remain as high as it was and they wanted to lock in access today. Secondly, they wanted to use the money now to purchase a vehicle, do some home repairs and put some cash in the bank. The potential for negative arbitrage was of no concern to them as their heirs were doing fine and ensuring a legacy was unimportant to them.
The last customer I’ll talk about decided not to pursue a HECM. He inquired because he had a mortgage payment and was curious about how his life would be altered if he eliminated this payment through the use of a HECM loan. After investigating his options, he chose not to move forward because he was thinking about his heirs and he had a strong desire to leave them a legacy. He even went so far as to tell me years later that he had discussed the HECM with many of his fellow seniors, and he found that the desire to leave a legacy to heirs is a strong and compelling reason many seniors don’t take advantage of a HECM, even if there would likely still be something left over. Incidentally, even though this customer didn’t take a HECM with me, he has referred many others to me over the past 10 years.
If we can understand what our borrowers are thinking and what they are trying to accomplish, we can better serve their needs, regardless of whether they are a needs-based client or someone looking to improve their financial standing. Failure to find out “what the HECM they were thinking” may cause you to approach many borrowers the same, selling the same benefits and results, and missing out on an opportunity that your competitors will enjoy because they have broadened their idea of whom a HECM can help.