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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