Reverse Mortgages are Subprime Loans?

“A lot of these activities are illegal. We have a high rate of senior citizens and immigrants here, and these lenders are preying on the elderly with reverse mortgages that are really subprime loans.”

         – Leroy Comrie, City Councilman (D-Queens).

In today’s New York Daily News there is an article that discusses how subprime loans are leading to record amounts of foreclosures in the city’s poorest neighborhoods.  Councilman Leroy Comrie states that, “these lenders are preying on the elderly with reverse mortgages that are really subprime loans.”  While the article goes into detail about the large increase in foreclosures there is no mention of how a reverse mortgage can help seniors avoid there house being foreclosed on.  Its articles like this that give the public such a negative opinion on reverse mortgages and it’s sad that Councilman Comrie is “bashing” a product that could really help the problem he is complaining about.

Feel free to form your own opinion by reading the link below.

Subprime mortgages lead to record foreclosures in the city’s poorest nabes

Technorati tags: Reverse Mortgage, Senior Finance, Foreclosure, HECM

Reverse Mortgages: Government Sponsored & Insured Payday Loans?

The next looming crisis is on the horizon and has started to trickle into the marketplace for the Reverse Mortgage industry. The coming crisis is the public perception that the rates and fees for Reverses are too high and that the government, regulators, investors, industry trade groups and others should establish standards on the origination fee charged when originating a Reverse Mortgage. It presents a larger and more challenging problem beyond educating seniors and the public and dissuading the myths with our products. The Reverse Mortgage industry may be on its way to being compared to the Payday Loan industry because of common characteristics exhibited by their products and borrowers.

Generally, payday loans exhibit the following characteristics: short term maturity (possibly long term when rolled over), high rates & fees and borrower profiles with troubled credit histories. These loans are characterized to target the young and the poor who may not understand the concepts of the time value of money and other money management principles. Payday loan borrowers fail to demonstrate the discipline to plan and save money and are prone to file bankruptcy to discharge debts that they will never be able to repay. Using a payday loan to solve a short term personal emergency such as a medical procedure is one of the most common reasons for an individual to apply for a payday loan.

Similarly, Reverse Mortgages could be classified as financial products for those who did not adequately prepare for retirement. Others may characterize Reverse Mortgages as having predatory rates and fees, specifically in the first few years of the loan where the Annual Percentage Rate (APR) / Total Annual Loan Costs (TALC) may seem usurious. While these types of loans are only eligible for seniors, the themes of inadequate financial planning and the inability to fully understand complex financial products are classic characteristics used to describe Reverse Mortgage borrowers.

Reverse Mortgages and payday loans are commonly classified as bail out or emergency loans to provide a means to access cash when borrowers need money. Both products evoke a sense of failure to prepare for future events through a common thread: the failure to save enough money. Rolling a pay day loan over is a simple way to say negative amortization or tacking the fees and interest to the principal balance on the HECM. In both cases, these financial products are used to promote household welfare but are they creating more harm than good? Should our financial institutions create products to assist us with these short term emergencies other than a Reverse Mortgage or a payday loan with simpler disclosures and lower rates and fees?

These two financial products exist for the same reason: there is demand based upon the needs of the people; right, wrong, or otherwise. Both financial products are rate and price insensitive overall; both borrowers will pay the rates and fees if they need the money, almost no matter what the price as demand for both products is relatively inelastic. Just because there are thousands of outlets for payday loans, rates and fees have not decreased substantially as increased supply and competition should have driven down the costs using classic economic principles. Or will the unwritten standard of a 2.0% origination fee stand out as an unspoken, collusive, monopolistic charge associated with a government insured mortgage product?

Reverse Mortgages are not payday loans. However, the similarities raise questions that could lead an ignorant regulator, activist or politician to grandstand or put the brakes on HECMs which serve our client’s and their constituent’s needs. Once the subprime drama ends, all the press and politicians will look for a new sensationalist angle and this could be the next lightning rod.

- Commentary by M.B. Tackle

Technorati tags: Reverse Mortgage, HECM, Payday Loans, Senior Finance, Mortgage

Reverse Mortgages, not your Steak and Potatoes anymore

As an attendee of the National Reverse Mortgage Lenders Conference in Newport Beach, I noticed that many new wholesalers and large investors from the REIT world and Wall Street were perusing the grounds. Of course the 800 pound gorilla was there and a handful of new entrants with some big pockets backing those entrants along with some traditional, national mortgage lenders starting Reverse Mortgage divisions. It was eerily reminiscent of the “birth” of the subprime industry in the mid to late 90s when the money was there to deploy but the delivery mechanism (brokers) were still being educated and taught about the new products and how to sell them. Besides the 800 pound gorilla and the few step children that have been around for a number of years that have existing relationships, its seems as though an asset & relationship grab is underway with everyone trying to accumulate as many assets as possible and each wholesaler being slightly different from the next. The simple truth is there is short supply and high demand right now for any Reverse Mortgage product.

It seems that with the rapidly declining subprime and real estate market, Wall Street is looking elsewhere for higher yields than traditional conventional paper and has found that Reverse Mortgages not only carry higher yields, they carry Insurance AND an equity cushion! At first blush, it sounds too good to be true but to have an asset that generally does not prepay (based on data from its short historical life) within 5 to 6 years, an adjustable rate yield resetting annually or monthly and the ability to take a monthly servicing fee off of the top means there is some substantial intrinsic value. You can just see those Fixed Income traders salivating over the characteristics and how much money they can sell the asset for to their institutional investors in a rush to higher quality with slightly less yield than their current non-prime offerings.

Currently, the above characteristics represent the current FHA HECM product and the new variant with a sliding scale on the giving the originator the ability to price their fees according to the borrower’s desires. In less than one month, the industry went from one fixed origination fee to having the ability to vary its upfront fees based upon compensation being placed on the back end like a traditional forward yield spread premium. One year ago, the mention of a back-side premium was blasphemous.

With new products, such as fixed and prime-plus rates, debuting every week this spring, I believe that this innovation will add some confusion initially to the marketplace. I believe that while the industry prides itself on innovation and catering to a Senior’s needs and desires, the plethora of options from different wholesalers is turning the Reverse market into a subset of the Forward market which is a morass of products and options, most of which even the most sophisticated borrowers never fully understand. The amount of time to educate the originators and provide them with the right sales tools will slow the deployment of some of these new products and it maybe 6-8 months before the true benefit of these products is passed onto the consumer.

One of the most beautiful aspects of the HECM is its simplicity, much in the way of the traditional 30 year fixed. Many years after its inception, we still see the 30 year fixed as a consistent staple that has evolved under agency regulation and guidance to continue to be a viable product along with the occasional investor variation. While there is no question that the current HECM product will adapt, how will other “prime” entrants bring a competitor to the HECM into the market and how will it be insured? Will the current HECM turn into the 30 year with all its flavors and subtle add-ons with a splash of Private Mortgage Insurance?

There are lots of new cooks in the kitchen working out their new recipes and providing limited samples to originators and let’s hope that the recipes for the new products are as good as the press releases and the hype that they’ve generated. While the HECM maybe the steak and potatoes, I’m looking forward to some filet mignon and lobster tail, just don’t overcook my food.

This is a commentary by M.B. Tackle

Technorati tags: Reverse Mortgage, HECM, Senior Finance, Mortgage Finance, Mortgage