The Best Path For Reverse Mortgages: Private vs. HECM Loans

The reverse mortgage market has long awaited the return of private products to a HECM-heavy market. Now that several products are making inroads across the lending landscape, a question arises concerning what constitutes the right balance of HECM and proprietary loans.

There’s no shortage of originators who would like to see a viable private alternative to the HECM enter the market, but the practicality of introducing such an offering – especially after the October 2, 2017 program changes – could keep the HECM in the game longer than some people may realize.

The supposed industry salvation that could come from greater reliance on private products is not a universal opinion, however.

A flip of the landscape

“I do think there is a strong possibility that the reverse mortgage landscape that we know now will flip in the next few years,” said Jennifer Cosentini, housing director at Cambridge Credit Counseling Corp in an email to RMD. “I think the proprietary products have the potential to evolve and change to fit the consumer’s needs much faster than the HECM can.”

The increasing prevalence of different kinds of proprietary products can also potentially do the same job as the HECM but at with a lower price tag for the consumer, Cosentini says.

“Right now these products have all of the positive features of a HECM with much lower cost, so yes they are extremely popular with borrowers who live in states that can offer these loans alongside a HECM,” she says.

One of the ways that the reverse mortgage industry is similar to its forward counterpart is that the reverse side tends to follow trends that affect the traditional mortgage sector, but in a loose way. This is according to Christina Harmes, assistant manager of the C2 Reverse division of C2 Financial Corp in San Diego, Calif. in an email to RMD.

“The recent expansion of the jumbo and proprietary reverse mortgages opens up new markets that weren’t available before. I haven’t heard of a private mortgage insurance provider ready to enter the reverse space, but it would be a great addition, and hopefully in the future that does happen as it will create even more revere mortgage options,” she says. “In the forward market, there is Private Mortgage Insurance to cover conventional loans. It didn’t replace FHA Insurance, but [introducing PMI] created additional product options to meet borrowers’ needs.”

The creation of new products to fulfill the needs of different borrowers will ultimately help them to find a loan that works for them from a wider pool of available options, Harmes says.

“I’m a believer in the free market, and the more options available to a consumer the better they are able to find a fit for their specific needs and goals,” she says.

HECM death ‘greatly exaggerated’

The growing availability of more proprietary options could make some people think that the HECM’s days are numbered, but that’s certainly not the case for Laurie MacNaughton, reverse mortgage specialist at Atlantic Coast Mortgage in Fairfax, Virginia.

“I personally think rumors of the HECM’s death have been greatly exaggerated,” MacNaughton tells RMD in an email.

There are several reasons that the HECM will continue to exist alongside proprietary products for some time to come, MacNaughton says.

“[First], the jumbo products are not available in Maryland, and currently there is no serious movement afoot to change the state legislation that bars non-HECM loans. [Second,] the jumbo line-of-credit offerings are not yet available in the high property-value areas where I do business. [Third,] many of my clients are in their early 60’s, and the HECM’s principal limit factor (PLF) is significantly higher for this group. [Finally,] the higher interest rates on jumbos are a turn-off for some of my prospective jumbo borrowers.”

This isn’t to say that proprietary products are detrimental in any sense. There are just several shortcomings identified by MacNaughton that tell her that the HECM will be around for a long time to come, she explains.

“I am very happy to have the jumbo products, but they’re simply not the right choice for every borrower,” MacNaughton says. “That may well change as the offerings mature. Furthermore, if PMI is indeed introduced and PLFs increase, we may well see the jumbo become more suitable – but that time is not yet at hand.”

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