HECM reverse mortgages are reputed to carry high upfront
fees, which raises two questions addressed here.
First, are seniors getting real value in exchange for the
high fees? The answer in most cases is “no”. Second, can a
senior who knows the ropes avoid paying excessive fees? The
answer in every case is “yes.”
In the early part of the previous century, when Coney Island
was a playground for both the rich and famous and those who
were neither, there were two restaurants that specialized in
hot dogs. One was Nathans which charged 5 cents, the other
was Feldmans which charged 10 cents. My father, who is the
source of this information on Coney Island history, dealt
only with Nathans. But Feldman had better furnishings and
the clientele were better dressed, which induced many to pay
the higher price for the hot dog.
The Feldman hot dog was not over-priced, at least for many
years, because the information consumers needed to make a
decision between a 5 cent dog delivered in cheap
surroundings and a 10 cent dog delivered in elegant
surroundings was available at no cost at the moment it was
needed. The market worked. Ultimately, consumers reacted
against paying for the elegance of a hot dog vendor, and
Feldmans failed, while Nathans survived to this day.
The price differences that prevail on HECM reverse mortgages are enormous by any standard. For example, consider the borrower of 70 with a home worth $600,000 and an existing mortgage balance of $200,000 who is looking to pay off that balance in order to rid himself of the required monthly payment. If on August 14 he responded to an advertisement on TV or on the internet, in all likelihood he would be offered a fixed-rate mortgage at 5.06% with a $6,000 origination fee. This is the market price on that day estimated by NRMLA, the trade association of reverse mortgage lenders, as quoted on www.nrmlaonline.org. If instead he shopped for the same HECM among a group of competitive lenders, he would have found the same loan available at 3.99% with a zero origination fee.
Unlike the hot dog case, there is no way that the price
differences cited above could reflect a difference in the
value that some borrowers attach to the different HECM
delivery systems. While the hot dog buyer had all the
information needed to decide between the 5 cent and 10 cent
dogs, the HECM borrower does not for a variety of reasons.
One-Time Versus Recurring
Transactions: In contrast
to the purchase of a hot dog, a HECM transaction is a big
one and the borrower has no opportunity to learn from
repeated exposures. Very few HECMs are refinanced.
Multiple Price Dimensions:
Where a hot dog has a single price, HECMs have two prices,
the interest rate and origination fee, which can complicate
the decision process.
The Focus of Consumers on Draw
Amounts Allows Lenders to Obfuscate the Price:
The major focus of most consumers is the amount they can
draw on a HECM. Much of the advertising has this focus,
especially the on-line advertising which invites the
consumer to fill out a form on the basis of which the
consumer is told how much they can draw. If the consumer
does not ask for the price used in the calculation of the
draw amount, she may not see it until receiving the various
documents that require her signature.
The Maximum Origination Fees Set
by HUD Make it Especially Easy to Overcharge on Fees:
HECM reverse mortgages are the
only financial instrument offered in the US on which maximum
origination fees are specified by law. The presumed purpose
is to protect consumers against over-charges in a
dysfunctional non-competitive market. In fact, the maximums
have increased overcharges because they have become the de
facto standard charges for most lenders. The origination
fees displayed in NRMLA’s estimate of market prices are the
HUD maximums in every case.
Borrowers responding to on-line ads who are rude enough to
ask about the origination fee probably will be told that the
fee is set by the Government, which is true but irrelevant.
Government does not prevent lenders from charging less than
the maximum, which is exactly what competitive lenders do on
transactions that generate high premium income. I have seen
transactions on which a competitive lender will pay a rebate
of over $8,000 while a mainstream lender will charge the
maximum fee of $6,000.
Here is how I would do it.
Clarify the type
of HECM you want with a volunteer HECM option expert.
Find the mainstream
price of your HECM on
prices of your transaction at
lender, who probably will be the source of the best
competitive price, unless you have a reason to select
another lender, in which case you will know exactly how much
your preference will cost you.