Price Transparency Is Key to Expanding Reverse Mortgage
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 home equity conversion mortgage 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 home equity conversion mortgage 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 builds distrust that strengthens seniors’ reluctance to become involved and retards market growth.
The number of firms jousting for home equity conversion mortgage 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 on price.
My colleagues and I looked at all the websites of loan providers who belong to association. 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.
Home equity conversion mortgage 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 home equity conversion mortgages is not as obvious, and it eludes many seniors. There is very little price shopping for home equity conversion mortgages.
Price shopping would not necessarily be effective in any case because home equity conversion mortgage 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, home equity conversion mortgage 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.
Price competition and protection against lock abuse could both be provided by third-party websites that I will call “independent HECM networks,” which would invite participation by lenders and brokers who agree to abide by its rules. The major rule would be to post complete prices on the network’s system.
Such sites would provide competitive pricing by calculating all draw amounts based on the best prices posted by participating loan providers, while identifying the low-price loan provider to the senior. The site would protect the senior against lock abuse by allowing the senior to access the loan provider’s posted price on the lock day.
The networks would have to make themselves known to seniors as places to get educated about home equity conversion mortgages, to determine the amounts they could draw under different payment arrangements, and, in the event that they decide that a home equity conversion mortgage is in their interest, to assure themselves of competitive prices and price protection. Since I already have much of this on my site, I plan to expand it into a full-fledged network.
My site, however, does not reach enough seniors to have a major impact, which is why I am proselytizing that organizations devoted to the welfare of seniors should do their own.
In particular, organizations such as Consumers Union and AARP, which have been ambivalent to home equity conversion mortgages if not critical, could remove themselves from the culture of distrust and become part of the solution. My colleagues and I are prepared to make any or all of the materials we have developed available to them.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.