NEXA’s Loren Riddick on reverse refinance churning and debunking HECM misconceptions

Sarah Wolak: A lot of the conversation in the past year has been about potential improvements in the HECM space. What specific changes would you like to see that would better serve today’s borrowers?

Loren Riddick: I would say the first thing is that I’m very thankful for the program, and I’m extremely aware of the three amazing components that mortgage insurance offers. Obviously, one is the protection. If lenders know they’re 100% covered and that those IOUs stacking up are protected — as long as they follow the rules, they’re going to get their money — that’s paramount.

Then, of course, there’s the nonrecourse feature. That’s awesome for the family, along with the fact that heirs are guaranteed 5% equity.

Now, that being said, we are very much in the black in relation to the Mutual Mortgage Insurance Fund for reverse — very solid. To ask a client who has a $1 million property and just wants to set up a line of credit as a great financial tool — which it is — to pay about $30,000 to $37,000 in closing costs because they have a $20,000 mortgage insurance premium on barely a 10% LTV just doesn’t feel right.

There have been some suggestions to raise the annual MIP or maybe stairstep the front-end MIP as it’s used. If a client isn’t going to take a draw at closing, maybe they only have a half-percent MIP. Then, when they reach the maximum of what they can access, the rest of it would be fulfilled into the fund. That’s one thing specifically related to the mortgage insurance situation that I hope somebody hears.

I’m not a big fan of HECM-to-HECM refinances; I feel like that’s eating our young. As an industry, we shouldn’t be doing it unless it truly is justified for the client. Churning that business isn’t good for the industry, and it’s not good for clients to continue paying closing costs. I would like to see the fund adjusted so that when somebody does need to do a HECM refinance, there’s some mortgage insurance paid into the fund.

If somebody really cares about the industry, they’re playing the long game. They’re building their business. The phone rings because they take care of people, and they do a good job, and they’re out on the front lines. I’m talking about the bottom feeders that want to churn as many reverses as they possibly can. All the hard work has already been done, and now they come along and refinance a client, go back to the well again and again. That’s not good for our industry; it’s not good for anybody.

Wolak: In what instance would a reverse mortgage refinance make sense?

Riddick: Let’s just say, in your hometown, there’s a mortgage professional who’s been there for two or three decades, with five-star reviews you read about. Then you compare their services and pricing to a 1-800 number in a 200-cubicle building. Which one is going to give better service? The local guy.

Now here’s the big question: Is the local guy going to be way cheaper than the 1-800 guy, or is it going to be the exact opposite? The local one would probably be more expensive, and there’s a reason for that. There’s a reason people pay 5% to 6% to a real estate professional instead of doing a for-sale-by-owner. There’s a difference.

So what happens? Let’s say someone goes to that local professional and does a forward loan, and let’s say he gives them a 5.875% rate. Then three months later, some bottom feeder, because he bought a lead from the credit bureau or whoever, goes right behind that deal and calls the client and says, ‘Hey, I can get you a 5.25% interest rate.’

They didn’t sell anything. They didn’t educate. They haven’t talked to anybody. They just offered a better rate.

What happens then? Two things: No. 1, they close that loan, and the local guy who busted his butt gets charged back the commission he made. So it churns that book of business, it hurts the tried-and-true pro, and it hurts the industry because the investor who bought the loan initially didn’t even get three payments out of it. In my experience, a reverse was meant to stay on the books for eight to 10 years.

Wolak: In May, you’re one of the hosts of the Reverse Mastermind Summit, which I understand is going to focus on sales training. Is this scenario something you’re going to be speaking about?

Riddick: Definitely, if it’s brought up, we’re going to mention it. And there is a place for best practices. There is an amount of ethics that needs to be involved with this program.

But the primary focus of the summit is to give back to our industry. We wanted to collectively collaborate to enhance the awareness and excitement for the reverse industry and NRMLA membership. It’s kind of like my love letter to the industry and the reverse program [because] it’s been so good to my family, to my clients and to my community. I think the focus is also to inspire, motivate and equip loan officers who want to get in reverse, do it the right way and learn from the best of the best. Most of us had to go through the jungle with a machete because we didn’t have a mentor — and that’s one of the biggest challenges of our industry.

This particular conference is for anybody. Even for a veteran professional like me, I’m going to be in the front row taking notes like everyone else. Because there are a lot of people who have misconceptions. Let me ask you this: A real estate agent goes to a listing and he or she determines that there are 12 years left before Wells Fargo‘s paid off. The question is, who owns that home until they pay it off, the bank or the client? Ninety-eight percent will say the bank, but we’re all wrong.

I’ll tell you why: Imagine somebody rings the doorbell to that home and slips on a block of ice or a banana peel. Are they suing Wells Fargo or the homeowner? They’re suing the homeowner. If a Realtor says, ‘I want to get you top dollar for your home, but we need to update your kitchen,’ you don’t call Wells Fargo to get permission to do that, right? A mortgage isn’t some three-headed monster. It’s just a mortgage.

Wolak: There is a lot of skepticism in the space. How can that narrative change?

Riddick: People will say, ‘You’re telling me that someone can do a purchase on a $700,000 house, and they put down, you know, $400,000, and they have no payment on that $300,000 they borrow for the rest of their life? Man, that sounds too good to be true.’ That’s the job of the professional to step in and help them understand that in 1987, Congress developed a program that allowed senior Americans to redistribute their wealth through their equity in a better way.

There are 10,000 to 12,000 seniors turning 62 every day, trillions of dollars in senior equity, and yet over 95% of our peers don’t even know what HECM means in the forward world. So again, the Mastermind Summit is all about giving that empowerment the right way to our industry. 

There’s a phenomenon going on right now in our nation that’s near and dear to my heart, and that is when a home becomes a house. Think about this for a moment: You probably have a widow in your town right now who has a $700,000 home and owes $300,000, despite paying $2,000 a month on that mortgage.

The home has become a chore. There’s a yard to mow, stairs to climb and she isn’t using nearly all the space. Most importantly, she’s walking past her husband’s favorite chair, and he’s not there anymore. That home has become a house. And God help her — $2,000 on a fixed income was probably tough for both of them, but now she’s left to handle it alone.

She’s praying for help and she doesn’t even know where it’s going to come from. Here’s the reality: She has $400,000 in equity — $700,000 value minus $300,000 mortgage — but she can’t take it with her when she dies. All of that equity is at risk to the market or the nursing home owner. And here’s the biggest question: When is she going to pay that $300,000 off if she’s 75? She probably never will. Yet we’ve all been taught to believe that’s the way it’s supposed to be — and it’s not.

Here’s what happens: We empower the mortgage professional and real estate professional to list the $700,000 home, pay off the mortgage and sell it. Then we structure a reverse purchase — part cash, part loan.

What happens? We save that woman’s life. She goes from being a prisoner in a home that became a house to eliminating her mandatory mortgage payment. She now gets to live on that $2,000 a month instead of paying it — $24,000 a year in tax-free income. She can buy a $600,000 home or condo with no payment for life. The client loves it, the Realtor loves it, and their job just became much easier. 

And here’s the best part for the mortgage professional: When there’s no traditional loan and it’s a cash deal, we still make money. For the first time in the history of our game, the client wins, the Realtor wins and the mortgage pro wins. And hardly anybody knows this is even possible. That’s why I’m so thankful for what we do.