It’s July, and the last of the HECM fixed Standard loans have been closed. Early indications suggest that our industry is taking this latest change in stride and is making the transition back to an adjustable-rate mortgage (ARM) market. Change can be difficult, but I truly believe that this change will lead to a healthier, more sustainable HECM program, which will lead to more business opportunities for those of us who weather the storm.
To compete and be successful in this new ARM-dominated HECM market, it’s crucial for reverse mortgage professionals to understand and master the features of the ARM product. If you are new to the industry, or have not done many ARM HECMs in the past several years, there is no better time to make sure you and your staff are fully conversant in the product and its benefits.
The Features of an ARM Loan An important feature of the adjustable-rate HECM is an open-ended line of credit. This means that funds may be drawn, paid back and then redrawn at a later date. This differs from fixed-rate HECMs, which are generally offered as closed-end credit, where prepaid funds may not be redrawn. This is an important distinction, because the adjustable-rate HECMs owe much of its flexibility—and, ultimately, its market appeal—to the fact that it functions as a revolving line of credit.
Another important feature of the ARM HECM is the availability of different payment plan options, which include a growing line of credit, tenure payments (monthly payments for life), term payments (monthly payments for a set number of months), modified tenure or modified term payments (a combination of monthly payments with a credit line). These payment options add to the utility and appeal for borrowers who are considering the HECM as a financial planning tool, as well as their trusted advisors.
When selling the ARM loan, it is crucial to understand how expected rates determine principal limit. While expected rates on fixed HECM are set by the investor and are typically the same as the note rate, ARM expected rates are based on the average 10-year swap rate, plus the applicable margin. The ARM note rate, meanwhile, is based on the average one-month LIBOR, plus the applicable margin.
Anytime the expected rate is at or below 5.06 percent, the borrower will receive the maximum principal limit. When the expected rates are above 5.06 percent, principal limits begin to drop off. Since expected rates fluctuate, remember that the quote you give a prospective borrower today could be different next week. The good news is, upon application, most lenders will lock in the principal limit for 120 days. Check with your manager or account executive for details.
Sales Ideas The adjustable-rate HECM is really a much more flexible financial planning tool than the fixed-rate product. The different payment plan options and open-end credit features make the product highly adaptable, allowing you to customize a solution for the individual borrower’s situation. At the same time, all of these options can be confusing to borrowers. Because of this, it’s important to know your client and fully understand their individual situation, biases, wants and needs before discussing loan features. If you don’t take the time to find out what is motivating the borrower before making a recommendation, you run the risk of confusing the client. At worst, you may lose the sale, as people tend to not act when they are confused.
The HELOC Alternative Let’s face it, it isn’t rocket science, but HECMs can be daunting to the average homeowner. Much of the mystery surrounding the program is based on a lack of understanding or, worse yet, misinformation from the media or some other trusted source. It’s going to be necessary in most cases to spend some time demystifying the product for your client.
Back when I was still originating HECMs, I found it enormously helpful to compare the HECM ARM to a Home Equity Line of Credit. Both are open-end credit, both are mortgages secured by liens against the property, and both allow borrowers considerable flexibility in how and when to use their proceeds. Explaining the product in these terms helped demystify the product for borrowers who, in most cases, had favorable opinions of the HELOC.
Once borrowers are more comfortable with the HECM ARM concept, it is easy to show the many ways that a HECM is superior to a HELOC. Features such as the growing credit line, the FHA insurance, the life-term and the fact that the loan is not callable, should all elevate the borrower’s comfort level. And don’t forget: HECM borrowers may make a prepayment, at any time, in any amount, without penalty. For those concerned about the negatively amortizing loan balance, sell them on the ability to make payments, along with the flexibility of being able to skip whenever they want.
Personally, I believe that the greatest feature of the HECM ARM is the growing line of credit, but it never ceases to amaze me how unknown and underappreciated this feature really is. Especially in the current economy, where seniors on a fixed income are looking for yield, the growth rates will astound people. Find a CPA who caters to retirees and tell them you can offer a credit line with a growth rate in the 3 to 4 percent range. You will have a referral source for life.
Speaking of fixed income, the most easily sold feature of the ARM is the monthly tenure or term payment plan. If you are still working, it might be hard to conceptualize, but for folks on a fixed income, cash flow is everything. You can show a borrower who is barely scraping by on Social Security a way to safely add hundreds (or more) per month to their cash flow. At that point, your biggest problem will likely be explaining to them and their children how this is not a gimmick.
Conclusion There are a lot of reasons to be excited about the future of both the HECM ARM program and reverse mortgage products in general. The demographics are undeniable and, going forward, retirees will tap home equity in greater numbers to help maintain their standard of living. The recent and upcoming changes to the HECM will ensure that there is a healthy, sustainable program for years to come. It is incumbent upon those of us on the production side to make sure that we fully understand all of the tools at our disposal so that we can consistently offer the most appropriate loan to our borrowers. This will in turn make you more competitive in your marketplace and further cement the reverse mortgage as a legitimate, mainstream financial planning tool. X