When Do Brokers Lose to Banks? Competing for Adjustable Rate HECMs

In cases where a borrower is looking to obtain a reverse mortgage but decides not to withdraw any funds at closing, mortgage brokers are finding it increasingly difficult to compete with large national banks’ retail channels.

Since mortgage brokers are typically compensated on adjustable rate products based on the amount of money drawn at closing, the only revenue opportunity for brokers in instances where borrowers opt to leave the money in a line of credit is an origination fee charged to borrowers to cover costs associated with originating the loan. With a recent shift from some competitors such as MetLife and Wells Fargo toward offering borrowers an adjustable rate product with little to no origination fee, brokers say it’s impossible to compete.

“On the adjustable rate deals, our hands are tied with the origination fees,” one broker said. After lots of time, effort and expense on his part, often borrowers will ultimately go with the low-fee option, he said.

The way these institutions are able to offer such deals to consumers comes from their ability to issue securities through Ginnie Mae’s HMBS program. Those securities allow them to make money based on future draws the consumer will make over the life of the loan. Retail originators who work at the institutions say they’re still compensated by the bank.

“They pay their retail loan officers a commission now knowing that they will recoup it later from those secondary market transactions,” said one broker. “They’re not sharing that will us, but they’re sharing with the retail sales force.”

A handful of brokers confirmed that competing with major banks on adjustable rate loans is becoming increasingly difficult when borrowers choose not to take a draw at closing. Since they do business with some of these institutions’ wholesale channels, they asked asked to remain antonymous for fear of impacting their relationships with the large lenders.

“We have seen [large lenders] cutting origination fees to next to nothing,” one broker said. “It makes it tough.We have shaved our origination fees somewhat, but we’re not going to compete to where we give it all away.”

“The solution has got to come from wholesalers and pricing on that end,” another broker told RMD.

At least one industry analyst says that solution may not be too far off.  John Lunde, President of Reverse Market Insight, says he expects the shift to be short-term—calling it an evolution of how the market for adjustable rate products will develop, rather than a lasting trend.

“These are probably more of exploratory steps,” said Lunde. “It’s likely [the banks] are trying to get a better handle on the economics of offering adjustable rate products.”

As long as they can prove they’re able to pay an origination fee to loan officers without a draw at closing, Lunde believes things will change.

“At some point, once they feel comfortable those economics will hold true, they will likely migrate the same type of offer to their broker channel,” he said.

Written by Elizabeth Ecker

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