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Assuring Price Integrity In a Dysfunctional Market: Introducing the HECM Price Checker
May 8, 2016, Reviewed March 8, 2017

You are a senior who finds an advertisement for reverse mortgages appealing, except that you don’t trust ads to tell the whole truth about anything. You have a well-justified fear that if you respond to the ad, a glib sales person will take over the process, perhaps seducing you into a deal that you will later regret.  

To avoid making a serious mistake, skeptical seniors should learn about the mistakes they want to avoid, and position themselves to avoid them. The purpose of this article is to provide some guidance on mistake avoidance.    

Selecting Inappropriate Draw Options: Seniors exploring a reverse mortgage are exposed to three kinds of mistakes. One possible mistake is selecting inappropriate draw options. Borrowers can draw cash up-front, a monthly payment over a period of any pre-specified length, and/or an unused credit line which grows over time when not used but which can be drawn on at any time.  

The most common draw option mistake is taking too much cash upfront, with not enough left for the future. Unfortunately, some loan providers encourage this because cash draws are worth more in the secondary market. In connection with this article, I had a senior colleague shop three major reverse mortgage lenders for a credit line-only HECM – no upfront cash. In all three cases the loan officer tried to persuade him to draw some cash.  

Seniors who use my Kosher HECM reverse mortgage calculator can find the combination of draw options that works best for them on their own. If they need help, they can get it from experts who have no financial stake in their transaction.   

Accepting an Above-Market Price Quote: The second kind of mistake some seniors make is  accepting a high price quote when a lower price quote is available. Except for my site where a user can easily compare prices of multiple lenders, price shopping by going from one lender to another is extremely difficult. The lenders in this market have developed a variety of strategies designed to convert potentail shoppers into applicants. At a minimum, applicants must pay an appraisal fee, which discourages further shopping. The result is that the great majority of applicants accept the price of the one lender they have contacted.   

The inevitable result is wide price spreads on identical transactions. As an example, one of the three outside lenders that we shopped quoted a rate of 4.611% on an adjustable rate HECM that adjusts annually with a 5% adjustment cap. On the same day, one of the lenders who regularly reports prices to my site was charging 3.236% on the same mortgage, or 1.375% lower.  

Price disparities of this magnitude are obscene. To help eliminate them, I have added a “Price Checker” to my Kosher HECM reverse mortgage calculator. Price Checker allows a user to enter a set of prices quoted by any lender or broker, and compare them to the prices on the same transaction quoted by the lenders who deliver their prices directly to my site. This allows the user to determine whether the external lender prices competitively or not.  

In short, any borrower who has a price quote from a reverse mortgage lender can check that quote for reasonableness on my calculator. They will save money and avoid hassle if they do it before submitting an application. A price quote consists of an interest rate, maximum interest rate, and origination fee.  

Accepting an Unfavorable Lock Price Adjustment:  The price quotes referred to above are not binding on the lender until they are locked, which doesn’t happen until the house has been appraised, the application has been processed, and the prospective borrower has been counseled. In many cases, the loan is not locked until the day before closing or the closing day. During the period between the day of the original quote and the lock day, the market may change, which could result in a locked price different from the price quoted earlier. And lenders can cheat, adjusting the price in their own favor just because they can. Because the draw amounts do not change with a lock price adjustment, borrowers may give such adjustments little attention.   

The lock price should be the price the lender is quoting on an identical transaction to new shoppers on the lock day. This is easy to check if the borrower is dealing with a lender listed on my site, but the borrower who responded to an advertisement has more of a challenge. To help them, my colleagues and I intend to create a matrix of price changes between weekly periods so that a borrower receiving a price quote  in period 1 whose loan was locked in period 4 can see at a glance the market price change between periods 1 and 4. Stay tuned.

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