work well when one party in a transaction knows much more
than the other, and nowhere is the knowledge gap wider than
in HECM reverse mortgages. Borrowers typically know very
little because reverse mortgages work differently and are
much more complicated than the mortgages with which they
purchased their homes. The loan officers and brokers with
whom they deal, on the other hand, are experts in reverse
mortgages who make their living originating them.
Government has attempted with very limited success to reduce
the vast differences in knowledge in this market through
mandatory disclosures and mandatory counseling. The
centerpiece of the mandated disclosures is a measure called
the “TALC,“ which is completely useless for reasons I
explained in an article some months ago. Mandatory
counseling, which is unique to reverse mortgages, is useful
but excessively limited in its coverage.
law, lenders cannot accept applications for HECM reverse
mortgages until applicants deliver certificates attesting to
their having been successfully counseled by a third party
who is independent of the lender. While most of the
borrowers I have queried found their counseling experience
useful to some degree, it protects consumers only against
mistakes of commission: taking a reverse mortgage when they
would do better without one. In fact, very few seniors opt
out of the process as a result of counseling, suggesting
that there are very few mistakes of commission.
The big source of mistakes, affecting untold millions of seniors, are mistakes of omission, committed by those doing nothing, because they never heard of reverse mortgages, or never heard anything good about them, but might nonetheless benefit from one. The existing counseling system does not touch them. Virtually all the seniors who are counseled have been to a lender first, which means that they had already made at least a tentative decision to proceed. What is needed is a counseling facility directed to mistakes of omission by seniors who don’t know whether a reverse mortgage would meet their needs or not.
This facility now exists. The counselors are loan officers and mortgage brokers with expertise in reverse mortgages, but no financial interest in whether the seniors they counsel borrow or not. For the time being, my colleagues and I will manage the operation using my web site. Consumers can make an appointment there for a counseling session on whether a HECM reverse mortgage makes sense for them. We will match each consumer with a counselor who is not licensed to originate HECMs in the zip code in which the property is located. For example, a consumer with a home in New York might be linked to a loan officer licensed only in California.
We call the counselor an “option expert” because most of what he does is to identify the consumer’s options in a HECM transaction.
· The maximum amount that can be drawn in cash upfront.
· The maximum amount that can be drawn monthly for as long as the consumer lives in the house.
· The maximum amount that can be drawn monthly for any intermediate period such as 5 or 10 years.
· The maximum amount of a credit line that can be reserved for future use, which grows over time.
· Any combination of these options that fits the consumer’s circumstances.
· The consumer’s future financial status in connection with any or all of the above options.
· The initial and future cost to the borrower, as measured by the loss of equity in the home, of any of the above options.
· The combination of interest rate and origination fee that minimizes the cost of the HECM over the period the consumer expects to have it.
The critical question is whether there is a combination of these factors that would make the consumer better off? This question is now off-limits to counselors whose goal is preventing mistakes of commission.
Seniors who have been counseled by option experts and have decided that a HECM is in their interest should not be required to be counseled again. We are talking to HUD about the possibility of providing them with a waiver, perhaps subject to passing an examination on potential HECM pitfalls.
The option experts don’t get paid, they are satisfied to participate in a program that will expand the size of the market, which will benefit them indirectly, as it will all loan originators. I don’t get paid either.