Mortgage Professor Offers HECM Option Experts

Markets don’t work well when one party in a transaction knows much more than the other party, a condition economists call “information asymmetry.” The problem is particularly acute in the HECM reverse mortgage market, because the knowledge gap between borrower and lender is extremely wide, reflecting the complexity and novelty of the instrument. Largely for this reason, reverse mortgages are subject to a unique requirement: mandatory counseling.

Under Federal law, lenders cannot accept applications for HECM reverse mortgages until applicants deliver certificates attesting to their having been successfully counseled by a third party who is independent of the lender. While most of the borrowers I have queried found their counseling experience useful to some degree, in its present form its capacity for improving the market is negligible.

The weakness of the existing approach to counseling is that it is designed to protect seniors against mistakes of commission: taking a reverse mortgage when they would do better without one. The implicit assumption is that the senior may make a mistake, and if so will discover it in the counseling process and drop out. In fact, very few seniors opt out of the process as a result of counseling, suggesting that there are very few mistakes of commission.

The big mistakes, affecting untold millions of seniors, are mistakes of omission, committed by those doing nothing, because they never heard of reverse mortgages, or never heard anything good about them, but would nonetheless benefit from one. The existing counseling system does not touch them. Virtually all the seniors who are counseled have been to a lender first, which means that they had already made at least a tentative decision to proceed.

Counseling directed to mistakes of omission would focus on the best possible use of the reverse mortgage, which means helping the senior make the best choices among the different ways of drawing funds, the type of mortgage (ARM versus FRM), high and low mortgage insurance premiums, and the combination of interest rate and origination fee. The critical question is whether there is a combination of these factors that would make the senior better off? This question is now off-limits to counselors whose goal is preventing mistakes of commission.

The mortgage professor is attacking this problem in four ways.

  • His HECM calculator allows the senior or the senior’s counselor to assess the costs and benefits of any combination of HECM draw options, mortgage types, mortgage insurance premiums, and combinations of interest rate and origination fee.
  • His kosher designation is attached to HECM reverse mortgages that have been evaluated using his HECM calculator, based on prices available from competitive loan providers who deliver their prices to
  • His tables of kosher reverse mortgage characteristics will be offered freely to web sites and other media as a way of generating greater public awareness of reverse mortgages.
  • His option experts offer seniors free and disinterested help in assessing kosher HECM options when the seniors are in an exploration stage.

The option experts are a selected group of reverse mortgage brokers and loan officers who are proficient in the use of the calculator, and who are willing to provide their services on a pro bono basis. Seniors will be assigned to an expert who is not licensed to originate loans in the senior’s state, eliminating any financial inducement to steer a session in one or another direction. The experts are satisfied to participate in a program that will expand the size of the market, which will benefit them indirectly, as it will all loan originators.

In or near retirement? The Professor’s Retirement Funds Integrator (RFI) might enhance your life during retirement.

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