Product Suitability: The Choice Is Not Yours

Tuesday, 08 June 2010 08:58

After months of little to no change in our products, the reverse mortgage market has suddenly exploded with change!  Everywhere you turn, you can see various product changes, which include either reduced fees or, in some instances, no fees.  All lenders, big and small, are making adjustments and fighting to get business in their doors.  Press coverage of these changes has led borrowers to seek out the best deal they can get, often focused on cost.  It’s easy to understand why a borrower would be focused on cost, aside from outside influences; it has been the most common objection we have faced for years when selling reverse mortgages.  The increase in competitive situations on our sales floor has literally doubled over the past 60 days.  Everyone is talking about the fixed HECM and the increased benefit it provides for the borrowers; it has truly become the product of the moment.  Without question, there has been a major migration to the fixed HECM product; with HECM volume down, companies are looking for the best path to survive in this market.  Despite the attractiveness of the reduced fees, is the fixed HECM always the best option for our clients?  Has the adjustable product lost its place in our industry?  Let’s take a look.

     When I started in the reverse mortgage industry, the fixed product wasn’t an option for clients.  As someone who came from the forward industry, it took time for me to understand the benefits and advantages of how a senior could utilize a reverse mortgage and truly change their life.  As time went by, I learned that by providing seniors with money that they needed today and money for the future via a credit line, we were able to dramatically improve their quality of life and give them the ability to stay in their home for as long as they chose.  The fact that there was no fixed option became a non factor in the sale of a reverse mortgage.  Sure, there were people that wanted the security of a fixed rate, but when explained properly, the benefits of the adjustable far outweighed their concerns.  The focus of our sale was always about how to properly distribute and utilize the proceeds of the reverse mortgage.  If the loan didn’t make sense, we didn’t sell the product.  It was pretty straightforward.

    When the fixed product became an option, it provided yet another powerful tool for those clients that wanted the comfort of a fixed rate.  In my eyes, it was meant for very specific clients: those that were paying off significant debt.  If a client owned their property free and clear, we still sold the adjustable product on a consistent basis unless the client was making a major purchase and needed the funds immediately.  We taught our sales team to make sure they did a true financial snapshot with the client, to understand what the client wanted to accomplish, to determine if a reverse mortgage could help them accomplish their goals, and to ultimately help them decide whether a fixed or an adjustable was the right choice, if any.  Product suitability was a big part of what we believed in and really helped seniors in making the proper choice for their financial future. 

     I vividly recall a day in my old office when a colleague of mine met with a client who was signing initial disclosures to take a reverse mortgage.  The client had chosen a fixed loan and had owned her property free and clear.  She was receiving a large sum of money upfront and my colleague rightfully asked what her plans were with the proceeds.  Our client, in her late 80s, did not know what she planned on doing with all the money.  She needed a small sum of money to do some upgrades to her home but for the most part, she needed money in reserve because she had depleted her savings accounts.  As it turns out, her son was the person pushing for all the funds upfront and he could never articulate why they needed the money.  This was an obvious red flag and led to a serious discussion with our client and proper guidance to help her decide what to do in her situation.  To make a long story short, she closed with an adjustable HECM and took $25,000 upfront to take care of her immediate needs.  The rest of the proceeds were put in a line of credit for her to utilize when she needed.  My point in this example is that, as reverse mortgage originators, it is our job to try to learn what the borrower’s situation is and most importantly, help determine which product makes the most sense, regardless of outside influences.

     Today we provide a tremendous benefit to our clients by having reduced fees or no fees on fixed loans.  It is great that a client has access to more money than before, due to these changes, but there are still many scenarios where an adjustable makes more sense than a fixed loan.  With LIBOR margins improving, borrowers are able to receive similar proceeds to a fixed loan, and for those that don’t need all of the money upfront, this is a huge benefit.  These loans need to be offered to clients just as often as we offer fixed loans.  The facts haven’t changed, if you have a borrower with a free and clear property, an adjustable HECM still may be the best choice for them, even if the fees are higher than a fixed loan.  We cannot lose sight of this.

     The art of the reverse mortgage sale is in the details.  Learning about what makes your borrower tick and what they hope to accomplish with a reverse mortgage provides the opportunity to present the proper product choices to them.  This will ultimately help them decide which product makes the most sense.  Profitability is a huge factor in whether a company can sustain itself or not; fixed loans are more attractive in this sense.  One can argue, however, that many loans are left on the table by loan originators that don’t properly present all options to a client.  This also affects profitability.  I have personally seen clients that have chosen us instead of a competitor solely because they didn’t have a huge need for a large upfront sum of money—they were never presented an option besides the fixed loan.  Yes, there was no origination fee or service fee, but the borrower didn’t want all the money and became nervous.  By just giving them the option of an adjustable mortgage, we were able to alleviate their fears of getting too much money upfront and could still accomplish their goals of having access to money and knowing that they had security for their future. 
 
    The more options we provide to our seniors, the more loans we will write, and the better off we will all be as an industry.  HECM volume is down, yet more and more seniors turn 62 every day—something doesn’t add up.  The opportunity in the reverse mortgage space is vast; seniors need help and financial stability at a time during which they are concerned for their pensions and social security.  We give ourselves the best opportunity for capturing this market by doing what is right for them and presenting all the options that they have with a reverse mortgage.  We have a great product with many options to help many people, so let’s make sure we help as many as we can.  Fixed or adjustable?  Present the options thoroughly and let the borrower choose based on what makes the most sense for them.  The choice is theirs.