PHILADELPHIA, PA--(Marketwired - December 14, 2015) - Effective immediately, homeowners aged 62 or over can employ the new HECM Shopper's Assistant (HSA) to shop for the best possible terms on a reverse mortgage. This fills a major gap in the HECM market structure.
The HSA is a one-page summary of all the information a lender who is being shopped needs to price a HECM. This includes:
- Personal data including property value and zip code, existing liens and the borrower's birth date.
- Desired mortgage type, whether fixed or adjustable rate, if adjustable the maximum rate increase.
- Draw amounts, covering upfront cash draws, monthly payments, the monthly payment period, and credit line.
- The price the borrower is looking to beat, including interest rate, lender fees and upfront mortgage insurance premium.
To use the HSA as a shopping tool, the borrower needs only to present the information shown above to the loan provider being shopped, and ask whether or not the loan provider can offer either a) a lower rate on the same mortgage type without a higher fee or b) a lower fee without a higher rate.
The HECM reverse mortgage market now has two segments. In the mainstream segment, there is virtually no shopping. Few seniors can define the product precisely enough to shop effectively, and lenders do not post their prices. While lenders compete intensely to be the one contacted by potential borrowers, because that lender usually gets the loan, they don't compete in terms of price. The result is high marketing costs and large markups -- the typical features of a dysfunctional market.
The alternative segment is the professor's Kosher HECM network, on which 10 lenders now post their prices. Seniors on their own or with the help of an expert can find the HECM that best meets their needs, and can find the lender offering the best price for that HECM.
Prices in the mainstream market are substantially higher than those in the professor's Kosher HECM network. For example, on Dec, 3, 2015 a borrower of 70 with a home worth $600,000 and an existing mortgage balance of $200,000 would have paid an interest rate of 5.06% on a fixed-rate HECM, and an origination fee of $6,000 in the mainstream market. These are estimates of NRMLA, the trade association of reverse mortgage lenders. The same loan on the professor's site was available at 3.99% and a zero origination fee. [For a more complete set of comparisons, see Table 1 of HECM Reverse Mortgage Tables.]
The new HSA is an attempt to bring some of the price competitiveness of the professor's site to bear on the mainstream market. It will do that by empowering a type of intelligent shopper that mainstream lenders have never seen before.
Shoppers off the site do have to be careful of "low-ballers," who quote low prices they have no intention of delivering. There is no low-balling on the professor's site because the loan providers are monitored, but off the site there is no monitoring. Low-ballers bet that the borrower who has invested time and effort in the transaction, only to find that the price has increased, will be satisfied with the lender's explanation of why that happened. The HSA includes tips for dealing with low-ballers.
Jack M. Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. He served as chief of the Domestic Research Division of the Federal Reserve Bank of New York; was a member of the senior staff of the National Bureau of Economic Research; and was managing editor of both The Journal of Finance and The Housing Finance Review. Prof. Guttentag has been advising consumers and the media on mortgage-related issues since assuming emeritus status in 1996.