Ten years ago, I went to my first NRMLA meeting. At the conference, I met a number of folks in the industry who had weathered the early adoption of the product. I could tell by talking to the attendees that there was a great deal of care in the room for the general plight of the reverse mortgage borrower. The stories about how borrowers’ lives were positively changed and improved were numerous.
At that time, there was really only one product available: the FHA adjustable-rate reverse mortgage. It came in two flavors, monthly adjustable or annual adjustable. There was a fixed program from Fannie Mae, but it carried a much higher interest rate and also much lower loan amounts. I don’t believe there was ever much production with this product.
The industry was just starting to take off and the big player at the time was Financial Freedom. Proprietary reverse mortgage programs were first introduced by Financial Freedom and it helped fill a need in high-cost areas. We considered the proprietary programs to be jumbo reverse mortgages—they provided higher loan amounts based on higher lending limits.
Soon, more proprietary loans followed. Some even lowered the eligible borrower age to 60. But the thought on everyone’s mind was, “When will we get a decent fixed-rate reverse mortgage?” The thinking was that if the fixed rate comes into being, seniors will sign up for the program in droves. One of the key complaints voiced by seniors at that time was they wanted to have a fixed rate; they didn’t want an adjustable-rate loan.
Well, we got our wish. The FHA came forth with guidelines for a new fixed-rate HECM and the industry believed we were off to much higher volumes. Oddly, coinciding with the new program was a drop in reverse mortgage volume, from which we have not yet recovered. On the bright side, due to high investor interest in HECMs in general, we could make more money per loan. In particular, we could make a lot more per loan when it was a fixed-rate HECM.
Fixed-rate HECM production grew to become 70 percent of all reverse loans produced. In our production, the fixed-rate product was roughly one-third of all loans originated. Was something that different about our clients, or was something else going on in the industry? Could it be that earning higher profits in the short run was more important, or that the best interests of the borrower were to take a full-draw, fixed-rate loan? Did originators even understand the ramifications of not choosing the right product for the client’s situation?
Despite whatever factors may have contributed to its rise, the fact is that the fixed-rate Standard HECM is now officially gone. HUD saw that its portfolio was in trouble from full-draw HECMs and ordered a halt to the Standard fixed-rate reverse mortgage. Now, the only choice for a fixed-rate HECM is the Saver fixed. Early anecdotal evidence suggests that the adjustable loan is now making up 90 percent of all production. Seniors and their loan officers are apparently not flocking to the Saver fixed.
So where does my unease lie in all of this? Did we do right as an industry by helping so many seniors take fixed-rate loans? I asked a similar question when too many folks were sold the option-ARM loans, loans with ultra-low starting payments that would eventually escalate into an unaffordable and much higher mortgage payment. The last mortgage crash was fueled by greed at all levels of the mortgage business. This greed ran from the loan originator to the secondary market to the rating agencies blessing the portfolios. To use a gambling term, the mortgage industry went all in on a very bad bet.
I would say that we were fortunate that the FHA stopped us in our tracks at this point. The FHA took the judicious step to halt a product that was worrisome. This program jeopardized the entire HECM program and could have created much larger losses for the agency if left running in its current form. Fortunately, we didn’t kill the goose, but we did lose one of the golden eggs.
It is not my intent to point fingers in this article. Rather, let’s learn some lessons from the past. The reverse mortgage is more than just another loan program. It is a financial tool that can help folks live out their lives with greater financial certainty. I don’t think there would be many financial advisors who would recommend that a client withdraw all of their savings from their retirement accounts. If all HECM funds are withdrawn at closing, the result will be a diminution of the full financial protection made available by the product.
Ideally, it would be best for senior borrowers and their heirs if the HECM was structured to provide income streams over the long term through the use of a line of credit. Generation Mortgage Company has developed a tool to demonstrate the future capability of an untapped line of credit. Examples show that folks taking a line of credit early in their 60s could have $1 million available to use in their early 80s. That, my friends, is a decent cushion to have available at that point in life.
The future of the reverse mortgage market will depend on how well senior customers are treated today. If we shortchange folks today for fast profits now, we will be destroying any industry goodwill we might have in the future.
I am going to take a stab at suggesting some commonsense rules that might help us keep this program on the right track so that we can better serve the senior demographic.
ONE || Look carefully at the borrower’s financial picture. If a lifetime income stream or a line of credit will provide substantial long-term benefits, point this out to the borrower.
TWO || If the payoffs on existing mortgages are less than 70 percent, provide examples on how the reverse mortgage can be used without taking all of the funds at closing.
THREE || Put yourself in the borrower’s shoes. Ask yourself, “What would be best if I were the one taking out this loan?” How might you like the loan to be set up?
FOUR || If the reverse is an adjustable loan, discuss with the borrower how making periodic payments on the loan could work to their advantage in the long run.
Frankly, I like reverse mortgages and their ability to help folks. I feel like I am doing good and important things for society. By working ethically, we can do the right thing for our clients and their families and still earn a good living. The choice is ours to make or break. I would be interested in knowing where you stand.