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HECM Reverse Mortgages: Is Market Failure Fixable?
By Jack Guttentag
Introduction
People reaching retirement age are living longer than ever, and retiring with less capacity to
maintain their living standards. The Center for Retirement Research at Boston College
estimates that more than half of the households entering retirement “may be unable to maintain
their standard of living in retirement.”
Yet a sizeable segment of retirees have equity in a home that could generate additional funding
through the use of a HECM reverse mortgage. The HECM program is well-designed and
provides options for meeting a wide variety of retiree needs. Yet very few seniors use it. At
current rates only about 60,000 reverse mortgages will be written in 2015, which is a drop in the
bucket of need. To put this in perspective, about 3 million homeowners turn 65 every year.
The premise of this article is that the stunted growth of the HECM program mainly reflects
market failure, as opposed to a considered preference by senior homeowners not to participate.
This article will present the indicators of market failure, the causes of market failure, the
“remedies” that have not worked, and a new set of measures that will create a new distribution
channel. Stripped of the baggage that has bedeviled the existing program, reverse mortgages
originated through this new channel will be termed “kosher HECMs”, signifying that there are
major differences between them and HECMs originated in what I will call the “mainstream
market.” The central difference is that the kosher channel is competitive and the mainstream
channel is not.
Indicators of Market Failure
Markups Are High: Statistical data on markups by loan originators is viewed as highly
proprietary, but I have discussed it with lenders who operate in both the standard and the
reverse mortgage markets. They report that on average the markups on HECMs originated in
the mainstream channel are 2.5-3 times larger, though the workload is much the same. This is a
high price/low volume industry.
Borrowers Do Not Price-Shop: There are no published price data on reverse mortgages
originated in the mainstream market, and most lenders do not post prices on their web sites. My
colleagues and I looked at the web sites of over 200 members of NRMLA, the trade association,
most of them lenders. Only 8 posted prices, and only one of those posted complete prices --
both interest rates and origination fees. That lender is one of the handful of maverick lenders
who price HECMs as if they are operating in a competitive market. They provide the most
convincing evidence that the mainstream is non-competitive, and they are key players in the
alternative kosher channel.