Last week's article indicated that the HECM market is not a shoppers market because the product is not well-defined, the prices charged are obscure, and HECM borrowers have no reason to be confident that the product selected will be delivered at the agreed-upon price. HECMs are offered in a gotcha market.
Characteristics of a Gotcha Market
The objective of HECM lenders is to attract potential borrowers into making contact with them, then collecting the information needed to entangle the prospect in a process that discourages them from looking elsewhere - "gotcha!" Prices are disclosed only after a senior discloses the property address, their email address and in some cases their social security number. Such disclosures often consist of hard copy exhibits that illustrate various HECM options available to that borrower from that lender. The formats of these exhibits are unique to each lender, defying easy comparison to those of other lenders. These exhibits can also make the borrower who wants to contact another lender feel like an ingrate.
Few Borrowers Try to Shop
Very few prospective HECM borrowers contact more than one lender. Shopping lenders for the "best deal" in the way that I shopped for a camera is not possible because very few lenders post their prices for shoppers to see. Furthermore, even if lenders did post prices, very few borrowers would be able to use the information effectively. The price of a HECM, consisting of the interest rate and origination fee, is important to the borrower only because it affects draw amounts, the amount they will owe in the future, and their available credit line in the future. While lenders disclose draw amounts if the prospect provides the information requested, aside from the 7 lenders who deliver prices to my site, they do not provide data on how a HECM credit line and debt will evolve in the future.
Counselors Don't Help
HECM reverse mortgages are unique in that the law requires that every borrower must be counseled by an independent expert before submitting an application to a lender. These counselors could easily advise borrowers on the HECM draw options that best meet the borrower's needs, and whether the price shown in the lender exhibit that most borrowers bring to the counseling session, is competitive, but they don't. For one thing, that would be against HUD rules, which states that "The job of the counselor is not to steer or direct you towards a specific solution, a specific product, or a specific lender."
Even if the HUD rule was removed, counselors would not provide advice on pricing because it could cost them referrals of business from lenders. Almost all borrowers select a lender before getting counselled, and select a counselor from a list provided by that lender. The counselor who identifies a lender to a borrower as a "high-priced source" would not receive any more referrals from that lender.
Converting a Gotcha Market Into a Shoppers Market
Perhaps the best way to unleash the potential of the HECM reverse mortgage is to convert the existing gotcha market into an online "HECM Shoppers Market". My Kosher HECM Reverse Mortgage lends itself to this objective, with some additions. My plan is to create an initial version of a HECM Shoppers Market covering 7 lenders who already submit pricing to my web site, and then offer the model to a third party who is better positioned than me to encourage participation by all or most HECM lenders.
Step 1 is to develop a program that allows a typical senior with no prior HECM knowledge to define the HECM draw option or options that they want. As I noted earlier, a shoppers market is not workable unless the product can be accurately specified. My colleagues and I are building this capacity into the Kosher HECM; it will be available on my web site in a few weeks.
Step 2 is to develop a program that generates the set of future scenarios that are relevant to any particular draw option or combination of options. For a given borrower, differences in these scenarios can be used in choosing between different lenders. This is what makes it a "shoppers market". The Kosher HECM has that feature now.
Step 3 is to induce lenders to define their pricing rules in a way that matches the ways in which seniors select their draw options. The Kosher HECM already has that feature as well. The 7 lenders that provide their pricing to my site will do the same on the forthcoming HECM shoppers market.
Step 4 is to persuade one or more third parties with high visibility and credibility to adopt the model (there would be no charge for it) and to invite all HECM lenders to participate. Our first choice is HUD because developing a shoppers market will reduce interest rates and origination fees, which will result in smaller claims against the insurance reserve fund. Arguably, HUD's role as HECM insurer requires that it promote a shoppers market. HUD is also well positioned to obtain 100% participation by lenders.
Our second choice is the Consumer Financial Protection Bureau (CFPB). Creating a shoppers market in HECMs will result in much greater "consumer protection" than lawsuits against malefactors and a complaint hotline.
Other possibilities include a prominent university, a well-regarded consumer organization, and a major newspaper with a credible web presence. Stay tuned.
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