Last week’s article indicated that the HECM market is not a
shoppers market because the product is not well-defined, the
prices charged are obscure, and HECM borrowers have no
reason to be confident that the product selected will be
delivered at the agreed-upon price. HECMs are offered in a
The objective of HECM lenders is to
attract potential borrowers into making contact with them,
then collecting the information needed to entangle the
prospect in a process that discourages them from looking
elsewhere – “gotcha!” Prices are disclosed only after a
senior discloses the property address, their email address
and in some cases their social security number. Such
disclosures often consist of hard copy exhibits that
illustrate various HECM options available to that borrower
from that lender. The formats of these exhibits are unique
to each lender, defying easy comparison to those of other
lenders. These exhibits can also make the borrower who wants
to contact another lender feel like an ingrate.
Very few prospective HECM borrowers
contact more than one lender. Shopping lenders for the “best
deal” in the way that I shopped for a camera is not possible
because very few lenders post their prices for shoppers to
see. Furthermore, even if lenders did post prices, very few
borrowers would be able to use the information effectively.
The price of a HECM, consisting of the interest rate and
origination fee, is important to the borrower only because
it affects draw amounts, the amount they will owe in the
future, and their available credit line in the future. While
lenders disclose draw amounts if the prospect provides the
information requested, aside from the 7 lenders who deliver
prices to my site, they do not provide data on how a HECM
credit line and debt will evolve in the future.
HECM reverse mortgages are unique in that the law requires that every borrower must be counseled by an independent expert before submitting an application to a lender. These counselors could easily advise borrowers on the HECM draw options that best meet the borrower’s needs, and whether the price shown in the lender exhibit that most borrowers bring to the counseling session, is competitive, but they don’t. For one thing, that would be against HUD rules, which states that “The job of the counselor is not to steer or direct you towards a specific solution, a specific product, or a specific lender.”
Even if the HUD rule was removed, counselors would not provide advice on pricing because it could cost them referrals of business from lenders. Almost all borrowers select a lender before getting counselled, and select a counselor from a list provided by that lender. The counselor who identifies a lender to a borrower as a “high-priced source” would not receive any more referrals from that lender.
Perhaps the best way to unleash the
potential of the HECM reverse mortgage is to convert the
existing gotcha market into an online "HECM Shoppers
Market". My Kosher HECM Reverse Mortgage lends itself to
this objective, with some additions. My plan is to create an
initial version of a HECM Shoppers Market covering 7 lenders
who already submit pricing to my web site, and then offer
the model to a third party who is better positioned than me
to encourage participation by all or most HECM lenders.
Step 1 is to develop a program that
allows a typical senior with no prior HECM knowledge to
define the HECM draw option or options that they want. As I
noted earlier, a shoppers market is not workable unless the
product can be accurately specified. My colleagues and I are
building this capacity into the Kosher HECM; it will be
available on my web site in a few weeks.
Step 2 is to develop a program that generates the set of future scenarios that are relevant to any particular draw option or combination of options. For a given borrower, differences in these scenarios can be used in choosing between different lenders. This is what makes it a “shoppers market”. The Kosher HECM has that feature now.
Step 3 is to induce lenders to define their pricing rules in a way that matches the ways in which seniors select their draw options. The Kosher HECM already has that feature as well. The 7 lenders that provide their pricing to my site will do the same on the forthcoming HECM shoppers market.
Step 4 is to persuade one or more third parties with high visibility and credibility to adopt the model, there would be no charge for it, and to invite all HECM lenders to participate. Our first choice is HUD because developing a shoppers market will reduce interest rates and origination fees, which will result in smaller claims against the insurance reserve fund. Arguably, HUD’s role as HECM insurer requires that it promote a shoppers market. HUD is also well positioned to obtain 100% participation by lenders.
Our second choice is the Consumer Financial Protection Bureau (CFPB). Creating a shoppers market in HECMs will result in much greater “consumer protection” than lawsuits against malefactors and a complaint hotline.
Other possibilities include a prominent university, a well-regarded consumer organization, and a major newspaper with a credible web presence. Keep tuned.