Can the Consumer Financial Protection Bureau (CFPB), a Federal Government agency, protect unsophisticated consumers transacting in complex markets? It can but it doesn’t. I will illustrate with one of the most complicated financial instruments a consumer is likely to encounter: a HECM reverse mortgage. That HECM borrowers must be 62 or older, which is past the intellectual peak of many, magnifies the challenge of protecting them. As the role of HECMs in retirement plans rises in importance, the need for protection increases with it.
The CFPB’s Approach to HECM Reverse Mortgages
What the CFPB does now is to explain how HECMs work, with a special emphasis on their very complex legal structure. This is important and the CFPB does it well. What the CFPB doesn’t do well, or at all, is to guide consumers in navigating the market to avoid overpaying and to select the most advantageous options.
I will illustrate this by its on-line responses to some plausible questions a prospective HECM borrower might pose.
· How do I shop for a reverse mortgage?
· How do I identify the lender offering the best terms?
· What lender offers the largest cash draw?
· What lender offers the largest credit line?
· What lender offers the largest monthly payment over X years?
The CFPB’s automated response to these questions was the same for every one of them: “No results found.” Yet all the questions are answerable in a manner consistent with the role of a Federal agency dedicated to the welfare of consumers, yet fair to lenders. The balance of this paper shows what CFPB can do to answer these and related questions.
Collect Required Price Information From Participating Lenders
To help consumers obtain competitive prices on the HECM option that best fits their needs, CFPB needs price data from any lender that elects to participate. Most will because transactions that emerge from the process will be low-cost leads with a high conversion rate. Lender costs will be very low because HECM lenders are already generating price data for their loan officers and brokers. High-price lenders won’t bother, but that is a desirable consequence of competition.
Collect Required Information From Consumers
To provide guidance, CFPB must know the ages of consumer and spouse, their property value and mortgage balance, and their objective in using the HECM. The major consumer objectives are:
Tenure Payment: the largest payment for as long as they live in the house.
Term Payment: the largest payment possible for the period they specify.
Credit Line: the largest line on which they can draw at any time.
Cash Now: as much as possible to meet immediate needs.
Combination: the optimal combination of any of the options cited above.
Purchase a House: the largest possible cash draw for use as down payment.
Because HECM prices include both initial interest rates and origination fees, the objectives shown above might be overridden by differences in future debt under different options. Consumers comparing payment options from different lenders should have access to the estimated future HECM debt on each option.
HECM Information That Could Be Provided by CFPB to Consumers
The bottom line for consumers is the best deal on the specific HECM features they want. Here is an example based on prices posted to my site by 6 HECM lenders. The example applies to a single borrower of 63 who wants the largest possible HECM credit line on his $400,000 home in zip code 90001 on September 23, 2023.
The data in the table were drawn from Kosher Reverse Mortgage which is owned by The Mortgage Professor LLC. Lenders pay nothing to participate, their sole obligation being to deliver their price sheets to the site daily. They benefit by receiving no-cost leads carrying a high probability of closure.
The Mortgage Professor would be pleased to license the technology to CFPB, with any modifications they need, at no charge. Our purpose is to enhance the retirement plans of homeowners by cutting through the complexities of HECMs in choosing payment options, and by assuring competitive prices on whatever options they select.