Fixed Rate is Popular, but is it the Best Choice?
Tuesday, 08 June 2010 08:55
A few weeks ago, I had the privilege to speak to over one hundred originators and reverse mortgage professionals about the new no fee fixed rate HECM. My goal was to take a second look at how and why we make certain product recommendations to our customers.
While loan volume has been increasing in recent months, the market is considerably down from last year. The reasons abound, but chalk it up to last October’s 10% Principal Limit Factor cut and falling home values. We are scratching for every dollar we can find just to pay the existing mortgage balance. Enter the new “profit-sharing” of lenders eliminating service fees, loan origination and, in some cases, paying the FHA MIP insurance for the fixed rate HECM.
At first glance this is good news; a great opportunity to overcome the “too-expensive” objection of many while helping those who would not qualify just a few short months ago. Business should see some uptick in volume. Consumers love the word “free”.
But are we giving our customers the full picture when it comes to which HECM program they choose: Fixed or Adjustable? I mean, is it really worth it for the customer to save $10,000 or more in upfront costs if they have a low mortgage payoff or don’t have an immediate need or plans for the cash proceeds? The old saying “walking over a dollar to pick up a dime” comes to mind.
It comes down to the question of suitability and, quite frankly, liability. No one likes the word liability in any industry, however we are being held to ever increasing standards of conduct and suitability. Could selling a fixed rate loan with lower upfront costs come back to haunt you (or the customer’s heirs) if they really didn’t need a lump sum distribution? Absolutely. What if the loan officer did not ask if the customer is receiving public benefits (Medic Aide or SSI) and the lump sum causes them to lose their benefits? Not a pretty situation.
Then consider the amortization. Even with a modest and predictable fixed rate, the growth of the loan balance is impressive to say the least. What if that same customer with an adjustable rate loan kept most of their funds off the balance sheet in the line of credit? Even with higher interest rates (a possibility) they would be miles ahead in equity preservation and—even better—have access to more cash in the growing Line of Credit.
Next comes the question of YSP. Let me be clear, I am not against YSP. It is necessary for many institutions to operate at a modest profit. However, what if your loans are examined later and it is found that the vast majority are Fixed Rate HECMs with generous YSP payouts to you? We would want to document why the loan was recommended or chosen by the customer.
Reverse mortgage professionals need to fully appreciate the effects of negative amortization, leverage, managing equity consumption, and to ultimately understand which product better meets the needs of our customer in the long term. Consider documenting why a customer is choosing a particular loan and the circumstances. Keep it on file. Also, a suitability worksheet may be a great way to train and standardize your staff’s approach to product choice.
At some point the elimination of fixed rate fees will pass, but it is a great opportunity for us to examine (fees or not) our process, suitability, and commitment to our customers to provide the best information and education about product choice.
.gif)