CHIP parent lowers rate to win over advisors

If your company offers just one product and it’s restricted to a certain age group, wouldn’t it be nice to diversify just a little? When HomEquity, best know for its CHIP reverse mortgage program, became a chartered bank in October, that was, in part, the rationale.

The reverse mortgage market is limited to homeowners over the age of 60 years, but by becoming a chartered bank, HomEquity Bank is now able to offer deposit instruments as well.

So far, this offering has been limited to guaranteed investment certificates (GICs), which may also serve a fairly limited market. But most importantly, the retail GIC represents a much cheaper source of capital, which has in turn enabled the bank to cut the interest rate charged on its reverse mortgages.

“Becoming a bank is one of the strategic options that we’ve been considering for a while,” says Greg Bandler, senior vice-president with HomEquity Bank. “It really relates to availability of capital, which we can, in turn, lend out through our reverse mortgage product.”

He is under no illusion that there is some reluctance in the advisor community to recommend a reverse mortgage to senior clients, but the new funding model could help win over some in the industry. Since receiving its bank charter, HomEquity has cut the interest rate charged on the reverse mortgage from 4.95% to 3.75%.

“One of the inhibiting factors, from an advisor’s perspective, in the past has been pricing and concerns over equity erosion. But at 3.75%, you’re basically on par with a secured line of credit,” Bandler argues. “If the client chose to make interest payments, as they would have to with a secured line, we offer a further 50 basis point discount. The benefit of not having to service that debt over the life of the loan is a huge benefit.”

Before getting the bank charter, HomEquity relied on debt issuance to raise the capital for its reverse mortgage payments. The GICs are offered through brokerage networks, including the chartered banks and larger independent brokers.

“The credit crisis really served up a catalyst for us to execute on this,” he says. “In the month that we have been a bank, it’s proven to be a very viable and sound strategy.”

Federal programs to shore up liquidity in the financial sector in October 2008 left HomEquity out in the cold, but Bandler says the company has not explored whether its new bank charter will improve its access to such programs in the future.

“I don’t know if now, in our current status, it would be available to us, but we don’t have a requirement for it at this point in time.”

He says the bank has no immediate plans to expand its service offering, preferring to focus on selling GICs and reverse mortgages. There is a chance that it will eventually offer a high-interest saving account, but Bandler says there is no firm plan to do so.

Offering wealth management services is pretty much off the table, not only because of the perceived conflict of interest, but because the bank relies on brokers to sell both the GICs and the reverse mortgages.

“They’ve got the advisors in place to offer up what the clients should be doing with this money that they free up from their home equity,” Bandler says. “We don’t envision going into that space. We’re tapping into their network, and it’s a very expansive network across the country.”

The current portfolio includes roughly 7,000 reverse mortgages with a total value of $837 million. Since the company started, it has completed over 15,000 reverse mortgages.

(11/13/09)