Eliminating Dysfunction in the HECM Reverse Mortgage Market
January 15, 2019
A major clue that the market in HECM reverse mortgages is dysfunctional is the absence of reliable market-wide data on the prices being charged and on the amounts that borrowers can draw. The absence of price data is the most critical deficiency because draw amounts depend on prices.
To fix this, my colleagues and I invited a set of lenders who we knew were prepared to price competitively to deliver their prices to our Kosher HECM calculator. This calculator is programmed to display the best prices available from the participating lenders, and use them to calculate and display the largest possible draw amounts. Then we designed a set of 7 tables that would show competitive prices, and draw amounts based on competitive prices for a variety of uses. We are committed to keeping this data current, ie., when the market changes we recalculate all the tables. Further, to obtain the largest possible distribution, we are offering the tables including automatic updates to any web site or hard copy media prepared to display them. The balance of this article summarizes the content of the tables.
Mainstream Prices Versus Competitive Kosher Prices:Table 1 is relevant to any HECM borrower, since all are benefited by obtaining lower prices, which increases draw amounts for any purpose and generates lower future debt. The table compares the competitive prices on our calculator with the prices of the identical transaction posted by the National Reverse Mortgage Lenders Association (NRMLA). The table terms these the "mainstream market" and the "Kosher market".
NRMLA estimates that a borrower of 70 with a home worth $600,000 and a mortgage balance of $200,000 could obtain a fixed-rate mortgage in the mainstream market at 5.06% with a $6,000 origination fee. In the competitive Kosher market, in contrast, the identical loan was available at 3.99% with a $0 origination fee.
See Table 1.
Components of Competitive Kosher Prices: Table 2 shows a more complete set of prices in the Kosher market, with emphasis on the tradeoff between the interest rate and the origination fee. The borrower of 70 in Table 2 could obtain a fixed rate mortgage at 3.99% and an origination fee of $2500, or could pay 4.99% and receive a rebate of $7,122. Which is better depends largely on how long the senior expects to have the mortgage.
See Table 2.
Comparison of Draw Options: The focus of Table 3 is the borrower who wants the additional funds available with a HECM, but is not sure how the funds are best drawn. The table shows the amounts available as a one-time cash draw, as a monthly payment for periods of varying length, and as a credit line that will grow over time and be available at anty time for any purpose. For example, a borrower of 70 with a house worth $200,000 could draw cash of $110,854, or a monthly payment of $2060 for 5 years, or $1192 for 10 years, or $659 for as long as she lives in the house (“tenure”). Alternatively, this borrower could elect to take a credit line that would amount to $115,150 after a year, $162,147 after 10 years if interest rates don’t change, and $243,814 in 10 years if rates increase to the maximum extent possible.
See Table 3.
Repaying an Existing Mortgage: The focus of Table 4 is the borrower who needs to repay an existing mortgage balance in order to terminate an obligatory monthly payment. The table shows how the largest existing mortgage balance that can be paid off with a Kosher HECM Reverse MortgageSM varies with the borrower’s age and the property value. For example, a borrower of 62 with a home worth $100,000 can pay off a mortgage balance of $48,283, whereas a borrower of 82 with a home worth $200,000 can pay off a balance of $131,498. Note that seniors using a HECM for this purpose have no borrowing power left for other purposes.
See Table 4.
Supplementing Monthly Income: The focus of Table 5 is the borrower who needs to supplement monthly income immediately. This is the traditional use of a reverse mortgage. The table shows the amounts available to borrowers of different age and with different property values to supplement their monthly income over periods of different length, It also shows how much the borrower will owe after 5 or 10 years if she elects a tenure payment which continues for as long as she resides in the house. The borrower of 70 with a house worth $200,000 who draws $645 indefinitely would owe $52,841 after 5 years, and $116,045 after 10 years.
See Table 5.
Purchasing a House: The focus of Table 6 is the senior who wants to purchase a house but does not want a mortgage payment and wants to limit asset depletion. The table shows how much can be drawn on the HECM and how much is needed from asset liquidation. The borrower of 70 purchasing a $200,000 home could raise $107,854 from the HECM and will need $92,147 from other sources.
See Table 6.
Growing a Credit Line For Future Use: The focus of Table 7 is the borrower whose standard of living in retirement is heavily dependent on liquidation of assets that were accumulated over a lifetime. Such borrowers have no immediate financial problems, but are concerned that they could outlive their money. They use a HECM primarily to protect themselves against that hazard, drawing as large a credit line as possible and letting it grow unused until such time as it is needed. For example, the borrower of 70 with a house worth $200,000 could obtain a line of $64,774 at closing, rising to $110,854 after a year, and to $195,136--$243,814 in 10 years, depending on future interest rates.
See Table 7.