The kosher stamp on a food means that it has been certified as fit
for human consumption. We have long needed a comparable certification
process applicable to financial instruments sold to consumers, with the
need most pronounced for the more complex instruments. HECM reverse
mortgages are at the top of that list. 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 summarizes the dysfunctional features of the existing
non-kosher market, and describes the major features of the kosher
version.
Existing Market Failure
The mainstream HECM
market is the most dysfunctional of all the major financial service
markets. Lenders don't display their prices anywhere, and borrowers
don't price shop. Most originators always charge the maximum origination
fee allowed by law, regardless of how much they are making on the
transaction. Markups are 2.5 to 3 times larger than in the standard
mortgage market, though the work load is much the same. The details are
set out in my Wharton working paper HECM Reverse Mortgages: Is Market
Failure Fixable?
The Kosher HECM is designed to maximize the
benefits a senior receives from a reverse mortgage, and avoid the
hazards inherent in a very complicated transaction. The following are
its major features as compared to the non-kosher alternatives.
Features of the Kosher HECM
Optimizing
the Selection of HECM Options With the Kosher Calculator: A major
positive feature of HECMs is the wide range of options available to
seniors for withdrawing funds. They can draw cash up front, get a
monthly payment for a specified period, take a credit line, or
combinations of two or three of these. In addition, they can alter these
combinations in the future. But this introduces enormous complexity,
and a danger that the borrower may make poor choices.
To reduce
this risk, we created a free Kosher HECM calculator that allows a senior
to see exactly what the options are in the sense of, e.g., "If I take
less of this, how much more can I draw of that?" The calculator
determines option amounts using the lowest of the competitive prices
posted by participating lenders. It also shows the combination of
interest rate and origination fee that generates the lowest cost over
the borrower's time horizon. In addition, the calculator shows the
changes in the senior's future finances that would result from any
combination of draw options taken now.
The Non-Kosher
Alternative: No existing calculator shows users the tradeoffs between
different draw options, or the consequences for their future finances.
Part of my game plan is an offer to license and maintain the Kosher HECM
calculator at no charge for HUD, the Consumer Financial Protection
Bureau, and perhaps others.
Optimizing the Selection of HECM
Options With Disinterested Option Experts: Because not all seniors can
navigate the Kosher HECM calculator on their own, we have created a
group of "option experts" to offer seniors free and disinterested help
in assessing Kosher HECM options when they are in an exploration stage.
In addition to my staff, the option experts are a select group of
reverse mortgage brokers and loan officers who are proficient in the use
of the calculator, who will advise on how best to integrate an HECM
into a longer-range retirement plan, and who provide their services pro
bono.
Seniors are assigned to an expert who is not licensed to
originate loans in the senior's state. This eliminates any financial
inducement to steer a senior in one or another direction. The experts
have no financial interest in whether or not the senior ends up with a
HECM.
The Non-Kosher Alternative: Draw option decisions are often
made haphazardly, usually to meet pressing financial needs. There are
no financial tools that balance one type of draw against others or
project results over future years.
see more: http://www.huffingtonpost.com/jack-m-guttentag/introducing-the-kosher-he_b_8096962.html
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