Introducing the 'kosher' HECM reverse mortgage
The kosher stamp on a food means that it has been certified as fit for human consumption. We need a comparable certification process for financial instruments sold to consumers, with the need most pronounced for the more complex instruments.
When scaled by the need for certification, HECM reverse mortgages are at the top. They are extremely complex, and markedly different from the standard mortgages that many seniors learned about when they took one earlier in their lives to purchase homes.
This article describes the major features of a kosher HECM reverse mortgage. It does not yet exist, but it will soon. Meanwhile, knowing what a kosher HECM would look like may help some seniors navigate the existing non-kosher market.
While a kosher stamp on a food certifies only the food, there is often a carry-over to the food provider and the food preparation methods employed. A "kosher butcher," for example, is one who only sells kosher meat prepared using kosher processes. Similarly, a kosher HECM is one offered by a kosher HECM loan adviser using kosher HECM systems.
Kosher HECM loan advisers
All loan advisers (LA) take borrower loan applications and guide them through the lending process. A kosher HECM LA, in addition:
• Counters the common senior bias toward excessive cash withdrawals by stressing the importance of long-range planning.
• Develops a plan based on the best combination of cash withdrawal, monthly payment and credit line, taking into consideration the senior's other resources and obligations.
• Offers multiple combinations of upfront charges and interest rates. (This option has long been available on forward mortgages but is uncommon on HECMs.)
• Advises the senior on the combination of interest rate and settlement costs that has the greatest likelihood of minimizing costs over the period the senior has the HECM.
• Uses the kosher HECM system to 1) develop and demonstrate a unique plan for each applicant; 2) provide price transparency, so seniors can shop and monitor the prices on their transaction at any time; and 3) provide lock-price integrity, which means that the lock price is identical to the price that would be quoted to the senior's identical twin pricing the same transaction on the lock day.
Kosher HECM systems
A kosher HECM system has the following major features:
• It simplifies comparisons of available options. A senior's borrowing power under a HECM can be employed to draw any combination of cash upfront, monthly cash payout for a specified period, and unused credit line for future use. The senior can select one option or a combination of two or three. The kosher system makes it easy to compare one combination of options against another.
• It discloses projected future values of alternative option combinations. A senior selecting among different option combinations might want to know how each is likely to affect their HECM status in the future: loan balance, equity remaining, unused credit line, and potential conversion options. A kosher HECM system provides such information.
• It offers seniors choices between upfront charges and interest rates. Seniors who don't expect to have their HECM very long can opt for low settlement costs in exchange for paying a higher interest rate.
• It generates competitive prices. The system includes an online network where kosher loan advisers representing different lenders post their prices using a uniform format, which makes it easy for seniors to find the best deal.
Kosher HECM reverse mortgages.
It follows that a kosher HECM reverse mortgage has the following features:
• There are no unanticipated surprises down the road that would make the senior regret taking a HECM.
• The set of options for drawing funds is the best of those available to the senior.
• The combination of interest rate and upfront settlement costs is also the best available, given the senior's expected future tenure.
• Price quotes are competitive, reflecting offerings of multiple loan providers.
• The final price set on the lock date is immune to manipulation.
I have it on reliable authority that at least one kosher HECM system with kosher loan advisers will appear in 2014.
• Contact Jack Guttentag via his website at mtgprofessor.com.