The Times, They Are a Changing...

Last Updated on Friday, 30 April 2010 11:23 Friday, 30 April 2010 11:20

Articles - Pot Luck

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If at any time over the last 12 months, any of us were asked to create a list of what this industry needed, it probably would have looked something like this: (1) a drastic reduction in upfront costs, (2) increased benefits for the clients, (3) getting the correct and positive message to the public about how a reverse mortgage really works, and (4) dare we even think about it—a little more profit. Just a month ago, this would have been the classic definition of a “wish list.”

But, last month it happened; the entire landscape of the reverse mortgage industry changed. Originations fees were slashed, the set aside fees were totally eliminated and the extra funds have been given to the client. NRMLA has started a public relations campaign to get a positive message to the public, and, last but certainly not least,
we have a price war going on between the major wholesalers.

Now, let’s look at these major changes one by one.

The Reduction in Origination Fees and Elimination of Set Aside Fees

I don’t think many would disagree that the upfront costs of securing a reverse mortgage have always been the #1 obstacle in our path. It gives pause for thought with every client that does not have an “immediate need for a reverse mortgage”, and has always been the first negative comment out of every financial advisor’s mouth regarding “why he doesn’t suggest his clients use a reverse mortgage.”

The upside – Make no mistake about it—cutting the origination fees and totally eliminating the set aside fees brings the cost of a reverse mortgage to almost exactly the same as a forward FHA mortgage. This is a great thing on two levels. First, it saves our clients money and gives them more proceeds at closing. Second, it removes the #1 obstacle in building referral relationships with other segments of the financial industry.

The downside – There isn’t one!

Increased Premiums Paid to Correspondents

The upside – I may be a little biased, but between declining property values, decreased principal limits, caps on origination fees, and all the misinformation on the reverse mortgage that seems to never end, it’s about time the professionals of this industry got a break.

The downside – Unfortunately, there is a downside and anyone not willing to take a serious look at it should give it additional thought.

Now, before we go any further, fixed rates have always paid correspondents more than adjustables, this is nothing new. But, with current pricing ranging from 103-105+, the disparity has never been so large.
 
The temptation to “urge” a client into a fixed rate when a credit line might serve them better continues to exist—it always has—but the new improved pricing on the fixed product will bring this sensitive and volatile subject up more often than before.

We’re not talking legality here—we’re talking morality!

Nobody ever wants to say it, but I’m going to! The difference between half of a point on the back (pricing on an adjustable) and 5 points on the back (pricing on a fixed) is thousands, and, in some cases, between 10 & 20 thousand dollars.
Isn’t a fixed rate better? Doesn’t the client always get significantly more money? Really, shouldn’t everybody get a fixed rate? No, they should not!

Our critics will say that the problem is worse than before. The ignorant ones will continue with the ludicrous claim that we are all in this business for the big money. (They should look at my P&L). But the truth is no different than it has ever been. It’s about identifying the needs of the client and doing what is right. It’s about SUITABILITY! —It always has been and always will be, in this industry and every other…

So lets do it right!

NRMLA’s Landmark Public Affairs Campaign to Improve the Image of Reverse Mortgages

This is what they are calling it, but in order for this one to be a “landmark campaign”, there would have to have been campaigns before this, and there hasn’t been! Our noble industry has been sliced, diced, and insulted for several years. The information that has been put forth by government officials and national publications has been as false and as damaging to us, as an industry, as the recession. And not a peep from NRMLA...

I am happy to see this finally happening, but it is way overdue!

The upside – It can do nothing but help.

The downside – Who is going to pay for it?

The Price War Between the Wholesalers

Well, of all the unexpected changes in the industry, this has got to be the one that makes us smile. Suddenly they all want our business. Premiums are through the roof and service has never been better. It’s just amazing what a volume that is 50% less than it was 12 months ago will do to a wholesaler’s way of thinking!

The upside – We’re finally making respectable money again. This is the first time this has happened since the end of 2008 and it feels good—we should feel good about it!
 
The downside – It’s not going to last and there are going to be many causalities.

Don’t get used to these margins, and don’t project your future earnings on them. Certainly enjoy them while they are here and repair some damage that has been done over the last 18 months, but the price of 105 will disappear after the price war is over and the victors are clearly defined.

What the “standard” pricing will be by the end of this year is anybody’s guess, but my best advice is to be prepared for a substantial reduction.

What will happen when the victors are clearly defined? Will the smaller independents be able to compete with the larger players? Will the larger players be able to compete with the mega giants?

If this truly is a price war, who really can compete with the balance sheets of Met Life, Bank of America and Wells Fargo? Is this the future of our industry? Are the mega giants going to be the only ones left standing?

And if so, with applications 50% off, how many additional people will be losing their jobs as the smaller wholesalers fall? Where will they go?

So, here we are. It seems that every few months, over the last year and a half, the world of reverse mortgages underwent major changes. Every time we take a deep breath and adjust, more changes happen. These last few weeks have brought us some of our biggest and, in my opinion, some of the most positive changes we have experienced. But still, we must adjust.

My advice is to stay steadfast, and continue to spread the good word. The reverse mortgage industry is still in its infancy and it is going through the same growing pains that every other major industry has experienced in its early years.

There is no doubt in my mind that this is our year. This is the year of education. This is the year that the public and the other segments of the financial planning world will recognize the true strengths and many options that this great product offers to the seniors of this country.

So let’s get out there and help as many seniors as we possibly can!