Where a commodity or service has only one price, people can easily shop around for the best price. In markets where there are two prices, effective shopping is more difficult.
How can a product have more than one price? If the transaction is not consummated entirely at one time but extends into the future, there can be a price to be paid now and a price that will be paid in the future. This is the case with mortgages. The price paid now is lender fees including “points,” while the price paid later is the interest rate.
Here is an example of how dual prices complicate shopping. The two quotes shown here apply to a 30-year fixed-rate mortgage. Which of them is the better deal for the borrower?
The correct answer is that it depends on the borrower:
• If the borrower is income constrained, meaning she is grappling with a high ratio of monthly housing expenses to income, she will prefer quote A because it provides a lower monthly mortgage payment.
• If the borrower is cash constrained, meaning she is grappling with a shortfall of cash needed for down payment and other closing expenses, she will prefer quote B because it has a smaller upfront cash requirement.
• If the borrower is neither income constrained nor cash constrained, she should prefer the quote that will result in the lower cost during the period that is her best guess of how long she will have the loan. Borrowers with short time horizons should prefer B while those with long horizons should opt for A.
This is a challenging decision. Few borrowers have more than a vague idea of how long they will have the mortgage. Calculating the cost accurately is beyond the capacity of most, and lenders don’t help. To my knowledge, my website is the only place where a borrower can find the total cost of a mortgage over a specified period selected by the borrower.
When we turn to HECM reverse mortgages, the challenge is even greater because of the greater diversity in borrower objectives. In the forward market, borrowers use mortgages to buy houses and want to minimize the cost. That is it. In the reverse market, borrowers use mortgages to meet a variety of needs, each of which may involve a different objective or objectives.
For example, the borrower looking to supplement her income might select the HECM that provides the largest tenure payment — the monthly payment that lasts until she dies or moves out of the house permanently. The borrower looking to acquire a reserve for contingencies might shop for the largest initial credit line, or perhaps the line that grows after some period of nonuse. In both cases, the borrower interested in minimizing the loss of equity in their estate (home) might shop for the HECM that generates the lowest loan balance after some period.
Perhaps the best head-to-head comparison of a forward and a reverse mortgage is the case where both are used to purchase a house. Where the forward purchaser seeks to minimize loan costs, the reverse purchaser might have any of the following objectives:
• Obtain the largest possible amount of cash at closing with a fixed-rate HECM.
• Obtain the largest possible amount of cash at closing and after 12 months with an adjustable-rate HECM.
• Incur the smallest loan balance after X years with a fixed-rate HECM.
• Incur the smallest loan balance after X years with an adjustable-rate HECM.
A senior dealing with a single reverse mortgage lender might be offered different combinations of interest rate and origination fee from which they can select, but they probably will not be offered any performance measures related to their objectives. Further, selecting from among the offerings of one lender is not “shopping.”
The difficulties in shopping effectively for HECM reverse mortgages provide a very strong case for multi-lender networks. Because they cover multiple lenders, such networks can offer shoppers more options from which to choose, and the performance measures that shoppers need to guide their selection.