By Jack Guttentag
(MCT)—My last column discussed some modest initiatives my colleagues and I have taken to help enlarge the market for home equity conversion mortgages, or HECMs. These included a monograph on matching HECM options to senior needs, a senior-friendly calculator showing the amounts seniors can draw under different payment options, and free personalized guidance on selecting the right options.
But there is another, more formidable log contributing to the HECM logjam. It is a poorly functioning market, with little price competition and no protection against “lock abuse” — inflating a price after a borrower is committed to the transaction. A fear of being overcharged is part of a climate of distrust that strengthens seniors’ reluctance to become involved and retards market growth.
The number of firms jousting for HECM clients is high. The National Reverse Mortgage Lenders Association trade group has 223 members, and all but a handful are loan providers — lenders or brokers. Further, there are at least that many, and probably many more, reverse mortgage brokers that are not members. Loan providers, however, don’t compete for clients in terms of price.
My colleagues and I looked at all the websites of loan providers who belong to NRMLA. Only eight posted prices, and of those, only one posted complete prices — both interest rates and origination fees. The maverick is All Reverse Mortgage Co., a firm in which I have no financial interest, but they do post their prices on my website.
HECM lenders obviously don’t believe that posting prices is a good way to attract clients, and they are probably right. Borrowers in the forward market understand that higher interest rates are associated with higher mortgage payments, which focuses their attention on rates. But the association of higher rates with lower draw amounts on HECMs is not as obvious, and it eludes many seniors. There is very little price shopping for HECMs.
Price shopping would not necessarily be effective in any case because HECM lenders are not bound by the prices they quote until the prices are locked, which in the typical case takes multiple weeks. Before the price is locked, the house must be appraised and the senior must be counseled by an independent counselor, both of which take time. Meanwhile, HECM prices are reset every week, which means that when the time comes to lock, the price quoted earlier has become obsolete. This opens the door to lock abuse, where the lender charges what he claims is the market price at the time, but which the borrower has no way to check.
Note that a loan provider who practices lock abuse will not post complete prices on its website, because that would enable a borrower whose price was being locked to compare the lock price against the current quoted price on the same transaction. I am sure that most loan providers play it straight and that those who practice lock abuse are a very small minority. But because they leave no trail, I can’t identify them, and neither can the trade association, the U.S. Department of Housing and Urban Development, the Consumer Financial Protection Bureau — or seniors.
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