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."
Price Differences Do Not Necessarily Reflect Over-Pricing
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.
Price Differences on HECM Reverse Mortgages
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.
HECM Price Differences Reflect Over-Pricing
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.
Protecting Yourself In a Dysfunctional Market
Here is how I would do it:
1. Clarify the type of HECM you want with a volunteer HECM option expert.
2. Find the mainstream price of your HECM on www.nrmlaonline.org.
3. Find competitive prices of your transaction at www.mtgprofessor.com.
4. Select the 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.
For more information on reverse mortgages, mortgages in general, or to compare mortgage offerings from multiple lenders in a fair, unbiased environment please visit my website The Mortgage Professor
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Price Differences Do Not Necessarily Reflect Over-Pricing
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.
Price Differences on HECM Reverse Mortgages
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.
HECM Price Differences Reflect Over-Pricing
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.
Protecting Yourself In a Dysfunctional Market
Here is how I would do it:
1. Clarify the type of HECM you want with a volunteer HECM option expert.
2. Find the mainstream price of your HECM on www.nrmlaonline.org.
3. Find competitive prices of your transaction at www.mtgprofessor.com.
4. Select the 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.
For more information on reverse mortgages, mortgages in general, or to compare mortgage offerings from multiple lenders in a fair, unbiased environment please visit my website The Mortgage Professor
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