The Reverse Mortgage Industry is Lost. (Here’s why.)
It’s become abundantly clear that the reverse mortgage industry is LOST. The number of new originations fell dramatically over this past year, mostly as a result of changes made by HUD last October, but for other reasons as well.
Predictably, perhaps, the industry’s first reaction to HUD’s announcement was complete denial that anything was seriously wrong. Industry giant, AAG, immediately held a conference call in an attempt to reassure loan originators that the sky was not falling… but on that same call the CEO also threw in news that AAG would now also be offering forward mortgages… lol.
Don’t panic, was the message from AAG’s CEO… everything’s fine. But, by the way, we’re changing our business model. You shouldn’t though… you should hang in there. We’re leaving, but you should stay. (As to why AAG would choose this year to start originating forward mortgages… I have no idea. Maybe they thought refis were on the rise?)
It seemed to take several months before the industry realized that HUD’s changes would cause HECM originations to drop by half. Optimism is hard to let go of, I suppose. To me it seemed obvious what was happening… and that’s exactly what did happen.
HECM originations in 2018 fell to 48,385… in 2009 that number was 118,000.
Well, here we are looking at the end of 2018, and the industry has finally accepted that the deep decline is real. What they haven’t been able to accept is that there are real solutions to the problem. But, solving the problem does mean learning to operate differently and industries aren’t that good at learning new things.
So, today, the industry is fixated on two areas that they hope will bring relief to the downturn. The first is based on newly designed products and there are already a few of those available. The second involves training forward loan officers to market and originate reverse mortgages.
Neither will work.
Some quick background…
Most of today’s reverse mortgages are known by the acronym HECM, which stands for Home Equity Conversion Mortgage. These specialized mortgages are FHA-insured and only available to homeowners over age 62. They are also very poorly understood by most people (sorry, but that’s just a fact.)
As I mentioned above, there are now a few private versions of the HECM being offered… Finance of America has its HomeSafe product and there’s another from RMF called the Edge, I believe. They offer small variations on the same theme… and it’s a certainty that there will be more private versions of the HECM or reverse mortgage coming to market in the near future.
However, these new products, while admittedly nice to have, are not capable of turning around the industry… not even close.
All “reverse mortgages” have one thing in common that makes them special. With a reverse, you can make payments when you want to and skip payments when you don’t. You can decide to make interest only payments… or you can make principal and interest payments just like with a traditional mortgage… or you can make no payments at all… and if you do that, the interest simply gets tacked onto the back end.
Here’s a simplified example…
Let’s say you had a HECM with a $100,000 balance and you made no payments and the interest rate was 5%. At the end of the year you’d owe $105,000, because $5,000 is 5% interest on $100,000. That’s it. It’s so simple that it really makes one wonder why everyone doesn’t understand them.
Which mortgage would you prefer… let’s call them Type A and Type B.
Type A has a mandatory monthly mortgage payment of principal and interest. You have to make it every month without fail. If you don’t, your credit score will fall fast… letters will come and the phone will ring as your bank “reminds” you that your payment is late. And if you miss more than three or four payments you can find yourself in foreclosure and at risk of losing the home.
Or, you could have this other kind of mortgage… Type B.
With a Type B mortgage it is totally up to you as to how you repay the loan. You can make principal and interest payments every month, just like you would with a traditional mortgage, but you don’t have to. You can make interest only payments whenever you want… monthly, yearly… it’s all up to you.
Or, you can decide to make no monthly payments whatsoever, in which case the interest is added onto the loan balance, which gets paid someday when you sell the home or leave it to your heirs as part of your estate. (The interest goes up over time, but remember so does the value of your home.)
Which kind of mortgage would you prefer? Silly question, right? Who would ever choose the Type A mortgage over the Type B, if other factors were basically equal?
In other words, you might choose Type A over Type B if, for example, the interest rates on Type B mortgages were significantly higher than Type A loans… that could be a reason to choose the Type A mortgage… but that’s not the case here. The rates are all close and competitive.
So, why doesn’t every single homeowner over age 62 who can qualify for a HECM or other reverse mortgage switch their traditional mandatory monthly mortgage to one that allows them to skip payments whenever they want for as long as they want?
There are only two reasons. Either they don’t understand it. Or, they heard some rumors that aren’t true, because if they understood the facts, they all would.
Consider this… the reverse mortgage isn’t uniquely American by any means. Countries all over the world have similar mortgage programs for older homeowners… Canada, England, Australia, etc. etc. Everywhere else, these specialized mortgages are quite popular… we’re the only country that has found a way to take an FHA mortgage that doesn’t require you to make monthly payments and turn it into a bad thing.
So, why do so many people have a negative perception of the “reverse mortgage,” when it’s obvious that everyone would prefer the Type B mortgage over the Type A?
Well, the Media Hasn’t Helped…
To begin with, I’ve noticed that the reporters writing about the subject are often too young to understand the dynamics and realities of getting older. Young reporters are wonderful for some topics, but retirement isn’t one of them.
Understand, our children all think that we have a lot more money than we actually do. And it doesn’t matter what we tell them… they’ll still think that. If young people understood retirement realities they’d all be saving 25% of their income without fail and contributing the max to their 401(k) plans and IRAs. And we know that never happens.
If 50 year-olds understood retirement, they’d all have long-term care insurance… and we know that’s not even close to being true either.
The media is also only interested in writing stories that shock and inflame… they don’t write about things that go well. There are countless examples of newspaper articles about reverse mortgages that are misleading, incomplete or entirely inaccurate, but the press is not uninterested in correcting the mess that they’ve had a hand in making.
They’re only interested in covering the next crisis, whether real or imagined.
OKAY, HERE’S HOW WE GOT HERE…
The mortgage industry started recognizing the potential of the reverse mortgage back in the 1980s, a time when many aspects of mortgages were less than carefully regulated. As a result, some were good and some were not. You know what happens next, right?
The problem for the mortgage industry was that they needed to “scale” the reverse mortgage opportunity, meaning that they had to find ways to reach millions of homeowners over age 62, and get them to call an 800 number… and that means running television ads day and night.
And here’s the first problem… some things can’t be sold on an index card.
The industry quickly learned, as all advertisers do… that the only thing to say in 60 seconds that will make that homeowner call the 800 number is what we all hear every day and throughout the night… “If you’re strapped for cash, call the number on your screen.”
It sounds like an ad for a pawn shop, doesn’t it? Like, try this instead… “If you’re sitting in the dark and eating cat food, call the number on your screen and hock your house.”
As you would imagine, the people who are “strapped for cash” call in. The rest of the population learns that the product isn’t for them… and ignores the ads completely. I mean, if you advertise in laundromats you are going to get responses from people that don’t own washers or dryers, right?
The industry’s need to “scale” the opportunity did drive growth, but at a terrible cost. Their television ads have taught this entire country that reverse mortgages are a product for poor people. Some have even referred to HECMs as “the loan of last resort,” which is even worse advice. Nothing should be considered a last resort, except maybe hospice.
Today, and as a direct result, even borrowers that make the switch to HECM from a traditional mortgage, almost always choose to keep what they’ve done a secret from friends and family. They don’t want to admit they switched to the HECM because we all know the reverse mortgage is for poor people, so admitting you have one is like admitting you’re in bad financial trouble.
The industry’s television campaigns have turned the reverse mortgage into something that is now perceived as being one step above food stamps.
HOWEVER, THE TRUTH IS THAT REVERSE MORTGAGES AREN’T DESIGNED FOR POOR PEOPLE. AND IF THEY ARE GOOD FOR THOSE AT THE BOTTOM, WHY WOULD’T THEY BE EVEN BETTER IF USED TO PREVENT PEOPLE FROM HITTING THE BOTTOM?
REVERSE MORTGAGES ARE FOR HOMEOWNERS IN (OR APPROACHING) RETIREMENT… anyone who owns a home and is over 62 may be able to benefit in a huge way by switching to the HECM or other reverse mortgage. It has nothing to do with being poor. In fact, people at the low end of the economic ladder all-too-often can’t qualify for the HECM, either because they don’t have enough equity or sufficient income.
I have personally and routinely seen homeowners with $900,000 homes, $1 million or more in retirement accounts and incomes of $300,000 a year, choose to utilize the HECM or other reverse mortgage… for all sorts of reasons.
A reverse mortgage is just a tool… like a hammer. Is a hammer a good tool or a bad one? Depends on whether you have nails or screws, right?
BACK TO THE INDUSTRY…
So, the industry continues to “scale” everything it possibly can… that’s how the big money is made, after all. They continue running ads that target people who are strapped for cash and so people who are strapped for cash are the ones that call in.
Of course, these are also too often the people that can’t qualify in the first place or that end up in default as a result of not being able to keep up with their property taxes and other costs of living. And when HECMs default, which primarily happens because someone couldn’t pay their property taxes, FHA insures the loan and may take a loss… and no one wants to see older folks losing homes.
So… HUD changes the rules to make it harder for those most likely to default to qualify in the first place, and HECM originations promptly and predictably fall off a cliff… just as they did this past year. HUD changed rules last October and made it harder for people at the bottom to qualify and since that’s the industry’s only target audience… sales fell fast and have remained at or near the bottom…
… and that’s where they’ll stay until the industry changes its MO.
RETIREMENT IS DIFFERENT TODAY IN MANY WAYS, BUT THERE’S VERY LITTLE DIFFERENCE BETWEEN GROUPS OF RETIREES…
Some retirees have no assets to speak of… they pretty much survive on Social Security alone. This is the group that is “strapped for cash,” and the group most likely to default on whatever type of mortgage they have. Let’s call them the “NEEDS BASED BORROWERS,” because that is what they are already widely called by many in the industry.
Just above this group of low-income/low net worth retirees on the socio-economic ladder is another group that I call the MODERATES, because they are moderately prepared for retirement. These people are not solely dependent on Social Security, like the Needs Based Borrowers. This group has other assets to help support their retirement years.
This group has $300,000 to $1.2 million saved mostly in qualified retirement accounts, like the 401(k) and IRAs. The advantage to these types of retirement saving accounts is that the funds are deposited and grow on a tax deferred basis, meaning that you don’t pay the taxes until you take the money out, presumably after you’ve retired.
Tax deferral can be an important advantage as you are accumulating wealth, but retirees quickly come to the realization that taking money out of these accounts is expensive because your withdrawals are taxable as ordinary income… and once withdrawn, they no won’t earn returns on that money going forward.
In California, that can mean having to pay combined state and federal taxes in the 40% range, give or take, depending on individual circumstances.
That means that money that has accumulated inside a qualified retirement plan, like the 401(k) or IRA, should be the LAST MONEY YOU SPEND. Why? Because the longer it’s invested, the greater the potential for growth… and because it’s taxable as ordinary income, it’s expensive money.
For example, if you needed $5,000 a month from a 401(k) or IRA, you’ll likely need to withdraw $7500, if not more, to cover the taxes.
Can you imagine if you ever needed to pay your mortgage payment from a taxable account like the 401(k)… it would be like doubling your mortgage payment each month. If you had to pay for in-home care services that way, you’d effectively be doubling the cost of those in-home care services.
So, if you needed $6,000 a month for in-home care, you’d need to take over $10,000 a month from your 401(k) or IRA… that’s $120,000 a year. In that scenario your 401(k) could be running out of money far sooner than expected.
PEOPLE ARE PEOPLE…
People in the MODERATELY prepared group aren’t much different than the Needs Based Borrowers that are just below them on the preparedness ladder. In fact, they’re almost identical to those less prepared neighbors EXCEPT in one KEY way…
They ALL have trusted advisors they turn to when making financial decisions that impact their retirement years. Some rely on financial planners, others have family lawyers they depend on for advice, and some turn to a CPA.
Not every 40something couple has a financial advisor or a lawyer or a CPA, but EVERY single couple over age 62 that is moderately prepared or better for retirement… does.
These are people that can also benefit from the advantages offered by reverse mortgages. In fact, they can benefit just as much, if not more as those who aren’t as financially prepared.
THE PROBLEM IS that you won’t reach them by running ads all night long seeking people who are “strapped for cash.”
The moderately prepared retirees are not strapped for cash… today. They’re doing fine today, but that doesn’t mean they’re retirement years are secure or going to go according to plan.
When a plan falls apart in your 40s you can recover… even in your 50s you can probably find a way to bounce back from most financial setbacks. However, when plans fall apart in your 60s, 70s, 80s or beyond, recovering financially may not be an option. It’s not like you can just ask your boss for more overtime at work or find a part-time job. Later in life, it’s a “maybe you can and maybe you won’t be able to” sort of thing.
The Next Rung in the Ladder…
Right above the MODERATES are a group I call the “BETTER PREPARED.” These are people with homes worth at least $700,000… and depending on the state, up to maybe $1.5 million at the top end. These folks generally have multiple sources of income in addition to Social Security. They’ve got $1 million plus in their 401(k) and IRA accounts and they may also have other accounts and/or assets, such as second homes or rentals.
NOTE: If a retiree is living in a $2 million home, they may still want to take advantage of what reverse mortgages can do for them in various situations, however they may also be members of the next category up on my demographic ladder… we can just refer to them as RICH FOLK or whatever you want. These are people with net worths over $3 million.
First of all, there are so few in this group that I pretty much ignore them. However, many are far less financially secure than they appear, which means they are really members of the BETTER PREPARED group… but they’re faking it as RICH FOLK.
If someone at age 65, has so much money that they couldn’t possibly run out in their lifetime no matter what happens… then they don’t need a reverse mortgage or any other kind of mortgage for that matter… just move on.
BUT, HOW SAFE ARE THE MODERATES or even the BETTER PREPARED? They’ve got money. Why would they need a reverse mortgage?
Well, the first fact is that reverse mortgages can be used for so many things and in so many ways that the list would go on page after page and perhaps never end. But, that’s not the question here.
Here’s a MODERATE. He is 74 and moderately prepared for retirement. His house is worth $700,000 and still owes $260,000 on the mortgage he refi’d in 2014. He’s also got $1.1 million in his qualified retirement accounts… and $50,000 in non-qualified accounts (which means withdrawals are not taxable.) His mortgage payment is $3,000 a month with taxes impounded and since he’s still working part time and so is his spouse… so, they’re doing okay, right?
Well, maybe they are… and maybe they’re not.
What happens if he has to stop working prematurely and/or unexpectedly? Where’s the money to pay the $3,000 monthly mortgage payment going to come from… remember, making a mortgage payment from a qualified account like a 401(k) can mean effectively doubling your mortgage payment. They’ve got $50,000 in a non qualified account, but that won’t last long.
What if this MODERATELY PREPARED husband fell badly, had a stroke or heart attack? What if he not only couldn’t keep working but in addition needed in-home care to assist with his recovery. Let’s ay the bill is $6,000 a month… plus another $3,000 to keep the mortgage current… add some miscellaneous living expenses and very quickly this couple could be needing $20,000 a month from their qualified accounts…
That’s $240,000 over the course of one year. How safe does the $1.1 million in his 401(k) look now? Not all that safe, right?
This MODERATELY PREPARED couple that seemed so far above the Needs Based Borrower on the economic ladder just went from looking safe and financially secure to possibly being forced to sell their home… or risk running out of money because of taking funds from qualified accounts to cover unexpected expenses.
The reality today is that none of us knows whether we’ll be leaving our homes to our kids. We might want to, but we’re just not in control of the situation. We like to think we are, but deep down we know we’re not.
The possibility that you will need significant long-term care and related services represents the largest threat to all of our estates. It’s the ticking time bomb in all of our lives. If we die young, we’ll probably leave a lot more to heirs… but since we’re living much longer overall, it’s truly just a crap shoot. Roll the dice and pray you don’t get snake eyes.
Even those in the MODERATELY and BETTER PREPARED groups of retirees, couples with net worths in the $1 million to $2 million range are nowhere near as retirement secure as they think. They might be okay if nothing goes wrong between age 65 and 85… but who wants to bet the farm (or house) on that?
SO, THE TWO REAL DIFFERENCES BETWEEN THE NEEDS BASED BORROWER AND THE MODERATES AND BETTER PREPAREDS ARE:
1. MODERATES AND BETTER PREPAREDS AREN’T STRAPPED FOR CASH… TODAY.
2. THEY ALL HAVE TRUSTED ADVISORS FOR ADVICE ON FINANCIAL MATTERS.
So, if you want to reach members of the MODERATES AND BETTER PREPARED groups, you need to learn to become a trusted advisor to trusted advisors, specifically, financial planners, attorneys and CPAs.
AN INDUSTRY LOST…
If you want to serve these kinds of clients instead of just Needs Based Borrowers, there is no other possible way you’re going to reach them… that should be obvious. But regardless, the industry remains LOST. Frankly, I’ve never seen an industry so obviously unsure over what to do to grow. It’s like they knew one trick and only one trick.
(Well, the reality is that their one trick hasn’t been working for a few years now, but it was hard to tell because volume was masked by HECM to HECM refis.)
Now it’s clear that the reverse mortgage industry leaders have finally recognized that the industry has been cut in half with no hope of being restored to its former glory anytime soon. If you’ve been existing in the NEEDS BASED BORROWER space, you can stay as long as you want, but it won’t be a growth area going forward. It’s not “coming back.”
The growth will only be found above, not below. The growth will be found in accessing the demographic groups like the MODERATES and BETTER PREPARED audiences. They can benefit from the same sort of advantages that NEEDS BASED BORROWERS enjoy, plus a whole slew of other advantages that only wealthier retirees can enjoy.
THE INDUSTRY IS BETTING ON TWO THINGS TO STIMULATE SALES. NEITHER HAS ANY CHANCE AT WORKING, but by all means, don’t take my word for it… try it and learn for yourself.
THING 1. The New Products Wagon Train – It’s long since left the station and it’s said to be loaded with all sorts of new proprietary products as it makes its way around the country.
Finance of America/Reverse came out with a jumbo reverse mortgage, RMF followed with it’s own private HECM, and I’m sure we’ll be seeing something from Liberty and who knows who else is going to throw their new product hat in the ring.
The point is that when this industry says new products, they’re not exactly talking about introducing an iPhone sort of new product. When this industry talks new products, they mean that last years’ car will now come in bronze metallic and you can order it with a sunroof starting in Spring… stuff like that.
I have seen or heard of nothing in the way of new reverse mortgage products that have the capacity to change anything in any meaningful way. It’s not that the products are bad by any means. Both RMF’s Edge and FAM’s jumbo are worth having around. But, they’re not going to bring back the sales numbers of a few years ago.
THING 2. Forwards, Ho! – The next imagined savior for the heavily hobbled reverse mortgage industry are FORWARD LOAN OFFICERS… and several big companies have already announced that they are already training forward loan officers to market reverse mortgages. I think Cherry Creek is one of the companies that thinks they can pull this off… I can’t wait to watch.
I just wish there was some way I could bet against these sorts of plans. I’d clean up in a matter of a few months and never work again. (Any takers, please reach out.)
What’s driving the idea is the decline in forward mortgage business. Refis are all but dead. There are still some around, but since over the last ten years, we’ve refinanced almost credit worthy homeowner in the country at 3-4%, it’s going to be some time before we see a refi market again.
Purchases are also slowing due to factors like higher interest rates and a younger generation in no hurry to join the homeowner class.
That’s the life saving plan… forward loan officers are going to be trained to market reverse mortgages. If it ever gets made into a movie, I think we might consider calling it “Deaf and Deafer.”
Forwards vs. Reverses are like Apples vs. Bicycles.
- Forward loan officers don’t sell mortgages, because forward mortgages NEVER need to be “sold.” People want mortgages because they want homes or lower payments. No forward loan officer ever had to sit around a kitchen table for two hours trying to persuade a couple as to the wonderful benefits of having a Fannie Mae 30-year loan… as opposed to one from Freddie Mac.
- HECMs and all reverse mortgages are true financial planning tools and as such, they have to be applied to specific circumstances and in all cases they must be “sold.” I have seen at least 100 HECMs get originated over the last three years and I have never walked into a home or office where the borrower was already sold on the HECM or reverse mortgage. (In fact, it’s always the opposite. You walk in and they hate it before you begin, is a lot closer to the truth.)
However, I’ve only been around this industry since 2008, give or take… and there are many out there who have been around since MetLife was a big player, as I’ve heard. The problem is that I don’t think experience from 2005 is going to come in all that handy in 2018. Actually, based on what I’ve seen from the industry this past year, I’m sure it won’t.
How to Approach Financial Advisors, Attorneys and CPAs… and How Not to.
I realize that there are a few so-called experts running around trying to tell you how to present the HECM to financial planners so that they’ll refer their clients to you. Some say that what you need to do is to recruit financial planners to attend a webinar to see a very fancy presentation on Sequence Risk and how the HECM Line of Credit could make a portfolio of assets last longer… maybe… it really depends, but it might.
The basic idea is that you open a HECM Line of Credit and let it sit there… growing. Then, when the stock market crashes, instead of taking money from that account, you borrow the funds you need from your HECM Line of Credit.
Let’s say you have $1 million in your account invested in the markets. And you planned to withdraw $50,000 this year for living expenses. But, the market goes down by 20% that year, so your balance drops to $800,000.
Well, instead of taking the $50,000 out of your account that year, you borrow $50,000 from your HECM Line of Credit. That way, you only lost $200,000 that year instead of $250,000.
Well, the sequence risk idea is basically that by doing that, your portfolio will last longer… and maybe it will and maybe it won’t. It really depends on many factors falling into place.
The theory is based on research conducted by Barry Sacks and his brother… over 10 years ago. I love Barry. He was a guest on my podcast a couple of years back when we discussed the whole sequence risk approach. He’s got a PhD in Physics from MIT and he’s an ERISA attorney as well. (ERISA governs qualified retirement plans.)
Barry’s research is interesting. However, I’ve asked originators all over the country and I don’t think it has ever led to the sale of a single HECM. (If I’m wrong about that, please contact me with specifics. I want to talk to the borrower, though, because I don’t believe you.)
If you’ve been told that the sequence risk approach will work, and you’re not sure… go ahead and try it. I’ve learned many things in life the hard way and I’ve never regretted it, so why would I deprive you of that same sort of learning opportunity. It won’t take long to realize that it won’t result in anything, except maybe an academic debate on hedging strategies.
Or, don’t waste your time and just believe me when I tell you that the sequence risk approach WON’T WORK. EVER. At best it’s academically interesting, at worst it’s a rabbit hole, but either way, it is not the best way to approach financial advisors if your goal is to generate reverse mortgages.
There are many, many applications for reverse mortgages that you can use to get financial planners interested in referring clients, but if I had to make a list, avoiding sequence risk by using a line of credit would be at or near the bottom.
(And in the future, try not to take sales advice from a college professor of any kind ever. They are often lovely and smart people but they are not sales strategists. My parents were college professors by the way, and they should hold the title: Vice Presidents of Sales Prevention.)
Picture a financial advisor making the following call:
FA: Hello, Mr. Smith. I wanted to talk to you about something. Just in case, when the market crashes, I haven’t done a very good job protecting your invested assets through diversification, I was thinking that it might be a good idea to borrow money out of your house instead of taking funds from your decimated 401(k) or IRA.
Mr. Smith: Excuse me? Did you say the market is crashing? What’s happening? Get us out now. Move us into cash…
FA: No, no… calm down, the market is fine. I’m saying that the next time it does crash, you could borrow money from your house instead of taking funds from your account while prices are down. That way, your assets will last longer.
Mr. Smith: Well, if you think the market is going to crash anytime soon, I think we should move to safer investments now. We don’t want to relive 2008. We’d rather play it safer this time.
FA: No, I don’t think the market is going to crash, I was just saying, in case it does you could borrow on your house instead of…
Mr. Smith: But, what about the required minimum distributions? Don’t we have to take those now that we’re over 70? And how would we repay the loan? Wouldn’t we have to take money from our 401(k) to pay it back… and wouldn’t that be taxable? I don’t know about this… I think we’d be more comfortable moving out of stocks and into cash.
FA: Well, I don’t think you should do that now… the market is doing just fine. I’ll let you know if anything changes. Just wanted to bring up the idea of borrowing on your house to… oh, never mind.
Okay, so I’m being funny to make a point. And if you’re a salesperson, I assume you got the point, right? The sequence risk idea is simply not the best way to get a financial planner interested in referring clients to reverse mortgages.
Even if you were successful in selling the idea of using a line of credit to reduce sequence risk, then there’s the question of why not use a HELOC for the same purpose? Why pay $20k in MIP to get the line of credit if the only purpose is to reduce sequence risk?
Like I said, if the goal is to generate reverse mortgage clients… it’s a rabbit hole.
The reverse mortgage industry is LOST. (I’m NOT.)
I almost used the word “broken,” to describe the industry but that would have been wrong. The industry is actually working just fine. The products are fine… they do exactly what they promise to do. And with volume way down those still originating are getting faster turnarounds, so maybe I shouldn’t even be trying to fix the problem… lol.
It’s not that the industry is broken, but it most definitely LOST. Originations of reverse mortgages, depending on the comparison point, are down by something like half and nothing the industry is doing has the potential to change that fact.
New products, at least those we’ve seen to-date won’t do it… and the idea that sales will come back as a result of teaching forward mortgage loan originators about reverse mortgages is close to laughable. Forward and reverse might both be mortgages, but other than the word “mortgages,” the two have nothing in common.
Think about it… does a forward loan originator EVER have to explain to the borrower how a mortgage works or why they should want one? Never. You can go online and get a forward from Quicken… has there ever been a reverse mortgage originated that way? Never.
What can you use a traditional 30-year mortgage for? Let’s make a list. Buying a house, lowering a payment on a house, or… well, actually that’s about it.
What can you use a reverse mortgage for? Good Lord, I could easily list 100 different reasons that someone could use a reverse mortgage, and someone else could probably add another 100 possibilities that I didn’t consider.
As a practical matter, a forward mortgage is the only way to buy a home or lower the payment on an existing mortgage. You either get a forward mortgage or you don’t get the house. You either refinance your forward mortgage or the payments don’t go down.
Not a lot of options involved in that discussion. You want the house… you need the mortgage. Now it’s all about whether one interest rate or costs are better than another.
My wife and I refinanced our traditional mortgage a few years ago. I remember the rate… 3%. I remember the costs didn’t seem objectionable compared with what we paid in the past. And I remember we had a loan officer help us, but for the life of me I can’t even remember what his name was or what he looked like.
I don’t think I could pick him out of a line-up today… and I don’t even care.
That’s never true when originating a reverse mortgage. By the time you close a reverse mortgage, you’ve made a friend for life in many cases. Sometimes you’ve met the kids, or their CPA, or their neighbors. You know everything about them and why they chose the reverse mortgage… and you feel great after the closing… not just because you earned a commission, but because of the lasting impact your work will have on your client’s lives.
THE ANSWER IS…
Now that the Needs Based Borrower is no longer going to be the market that dependably drives growth for the industry, it should be obvious that he reverse mortgage industry has to change how it operates.
Running ads looking for the “strapped for cash” audience isn’t going to cut it going forward.
The answer is that reverse mortgage originators must learn to become trusted advisors to trusted advisors, because the borrowers above the Needs Based, like the MODERATES and BETTER PREPAREDS are ALL going to turn to their trusted advisors for advice.
If their advisor says not to do it… they won’t. And the reverse is also true, no pun attended.
So, if you want to be successful in the reverse mortgage space going forward, it’s either learn to operate effectively with trusted advisors to build networks of referral partners… or just keep hoping to bump into a older homeowner who is “strapped for cash.”
Martin Andelman
P.S. Stay tuned for more… and look for our Webinars and full-day training programs. You can change your own business today, even if the industry can’t.