Senior homeowners looking to shop the HECM reverse mortgage market for the best price, meaning the lowest interest rate and origination fee, have a major problem. Unlike the standard mortgage market, where price data are available from many sources, including third party multi-lender sites, in the reverse mortgage market prices are hard to find.
Only a few individual lenders have web sites containing complete and up-to-date reverse mortgage prices. One of the best of the few that do is All Reverse Mortgage Company.
There is one multi-lender site that allows users to compare the prices of different lenders: www.mtgprofessor.com, which is mine. The reverse mortgage calculator on my site identifies the best prices posted by All Reverse, Proficio Mortgage and Barrons Mortgage Group; several more lenders will soon be joining. Note that I have no financial interest in any of these firms, and do not charge borrowers or lenders.
The NRMLA Calculator
There is one other source of reverse mortgage price data, however, that seniors may be unfortunate enough to encounter. These prices are embedded in the web-based calculator provided by NRMLA, which is the trade association of reverse mortgage lenders, at www.reversemortgages.org. The prices are described as “estimates”, but the method of estimation is not explained and no individual lenders are identified.
Price Differences Between the NRMLA Calculator and Mine
The prices shown by the NRMLA calculator are consistently higher than the lowest prices shown on my calculator. Indeed, the NRLMA prices are even higher than the highest price posted on my site. The differences can be enormous.
Here is an example. On April 17, a senior of 75 with a $200,000 existing mortgage balance on a home worth $500,000 would have found the following prices on a HECM fixed-rate reverse mortgage. On the NRMLA site, the rate was 5.060% and the origination fee $6,000. On my site, the rate was 4.25% and the origination fee was minus $2015 – the lender would pay a rebate that would be credited against the mortgage insurance premium or other settlement costs.
Sources of the Price Differences
These large price differences are not due to any differences in investor risk, since all HECMs are insured against loss by FHA. There is no prime versus sub-prime distinction here.
Neither are the price differences due to differences in price integrity – the degree of confidence a borrower can have that the market price changes that occur while the loan is in process won’t be used to justify a price increase on the day the price is locked. On the contrary, the price quotes on my site have complete integrity because the lenders are identified by name and the borrower can verify that the price at which the loan is finally locked is the same price the lender is quoting on an identical transaction on that day. The NRMLA quotes have zero integrity because there is no identifiable lender behind them.
The conclusion is inescapable that the prices in the NRMLA calculator are well above competitive levels by design. The presumed purpose is to signal to members what the prices ought to be, and to convince borrowers that these prices are legitimate and acceptable.
In my view, this high-price policy is short sighted and part of the reason the HECM market is so small relative to its potential. A good illustration is how the high-price policy retards the growth of no-closing cost/low-closing cost reverse mortgage options.
The No-Closing Cost Reverse Mortgage
For a long time the reverse mortgage industry has been bedeviled by claims that origination costs were too high. Yet some lenders including those on my site make no-closing cost and low-closing cost reverse mortgage loans as a matter of course, and with some frequency.
Reverse mortgage originators make a profit on sale of the mortgage, the size of which depends on the size of the initial loan amount. If that profit is sufficiently large, a competitive lender will provide a negative origination fee or rebate that covers the upfront mortgage insurance premium and all other settlement costs: the result is a no-closing cost reverse mortgage.
If the profit on sale isn’t large enough to cover all the costs, it may be large enough to justify a rebate that will cover some of the costs. This would result in a “low-closing cost reverse mortgage”. Currently, more than half of all the transactions done by All Reverse qualify for no-closing cost or low-closing cost treatment.
But don’t look for either on the NRLMA site. The NRMLA calculator assumes that lenders always charge the highest origination fee allowed by law, which means that no-closing cost and low-closing cost reverse mortgages are not available from lenders who follow NRMLA pricing.
Shopping Implications For Seniors
The good news is that such loans are available from lenders who don’t follow NRMLA pricing. This includes the lenders who post prices on my site, but there are others as well. If you are attracted by a solicitation or an advertisement, you can check their price against those posted by the lenders on my site.
The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.
