What is a reverse mortgage? A reverse mortgage is a unique loan that enables homeowners to convert a portion of the equity in their homes into tax-free cash without having to sell the home, give up title, or take on a new monthly mortgage payment. If you are a homeowner age 62 or older and have paid off your mortgage or have only a small mortgage balance remaining, and are currently living in the home, you are eligible to participate in Federal Housing Administration’s (FHA’s) reverse mortgage program. The FHA is a branch of the U.S. Department of Housing and Urban Development, (HUD). The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage (HECM), and is available through an FHA approved lender.

Since 1990, there have been nearly 700,000 HECM loans created, (Source: HUD). As you would expect the three highest annual totals were between 2007-2009. That time period, of course, was when the U.S. economy experienced its worst economic contraction since the early 1980’s with unemployment reaching double digits. Individuals were distressed, in need of relief and reverse mortgages may have helped a lot of seniors in dire times. In my eyes, it’s an excellent financial tool to help seniors stay in their home, and increase their standard of living. It’s a shame not everyone is so complementary of reverse mortgages. Like anything else, it has its fair share of both advocates and critics…

The biggest negative of reverse mortgages is high closing costs. The senior must pay origination fees that are about double what they are for conventional mortgages and mortgage insurance. And the interest rates are adjustable, (which means rates can be raised at periodic intervals according to the prevailing interest rates in the market). Another potential negative to think about is, what about seniors who depend on Medicaid or other state or federal programs? It’s important to consider if reverse mortgage payments will affect their eligibility…

How do reverse mortgages come to an end? Reverse mortgages come to an end in one of three ways. You can elect to pay it back; you can sell your home and pay it off; or when you die, the home is sold and the loan is paid off. Unlike conventional loans, you don’t owe anything until you die or sell the home. As with conventional loans there are fees and interest expenses which must be paid and which typically are rolled into the amount you receive.

Now, here is the $64 question: How do the adult children of these seniors feel about reverse mortgages? Some like it and feel it’s helped their parents live a fuller life in their retirement years. Of course, some don’t and feel like the equity in their parents’ home is their money. I jumped on a number of chats & forums in order to obtain some actual Voice of the Customer (VOC) on this very subject. And here are some of the things that were said:

• “I don’t like the idea, individually. There are other ways to get additional income minus giving the family house to a bank.”
• “I think it’s a good concept and families just thinking about them should pay a lawyer a few hundred bucks to just review the language.”
• “I would be vastly upset if my parents did this. They aren’t poor by any means, and I don’t want them to be spending up “my” inheritance on themselves.”
• “My parents reverse mortgage gave them the ability to continue living independently in their own home, which made my husband and I very pleased.”

My parents worked their entire lives to ensure that we had clothes on our back, food on our plates and a roof over our heads. Personally, I think that if my mom & step-dad want to use a reverse mortgage to help them out instead of leaving their home to us kids, I’m all for it and will even help with the set-up and closing costs. They deserve to use their money/funds however they choose. They’ve definitely earned the right!

Thanks & please let me know your thoughts or comments…

Just when you thought the light at the end of the economic tunnel was beginning to shine, The Chicago Tribune identified another symptom of the mortgage bubble and a weakened economy: bank walkaways.

Personally, I’ll admit that I had never heard that term before. It’s easy enough to discern the meaning, but just in case you haven’t had your coffee yet: a bank walkaway occurs when a mortgage servicer abandons the foreclosure process. This usually happens when the bank determines they will not recoup the cost of foreclosure, in addition to maintaining and marketing the property after the process. They can literally, walk away. While this may help companies keep bad debt off the books, it’s creating another problem – a surplus of abandoned properties.

Abandoned properties are a sign that our economic troubles are still alive and kicking. And it may get worse before it gets better. Rick Sharga with RealityTrac Inc predicts that 2011 will be a peak year for foreclosures, estimating over a million homes will be repossessed by lenders. Readers, my beloved home state of Illinois is ninth on the top ten list of states with the highest foreclosure rates. Considering that Chicago is the most densely populated city in the state – my neighbors are in trouble.

When banks walk away, it’s not always clear who is responsible for the upkeep and security of a vacant property. Sometimes, even the city needs to step in and demolish homes if they’ve fallen into complete disrepair. Then it becomes the taxpayer’s responsibility.

And yet, it’s not all doom and gloom. The forecast is still cloudy with a chance of foreclosure, but some lenders, Wells Fargo and Bank of America in particular, are working with the city on how to best to deal with abandoned properties. It’s in everyone’s best interest to keep current on their mortgage, but when that just can’t happen, banks shouldn’t be abandoning the neighborhoods either.

Readers, would you be more likely to procure a mortgage with a lender with a demonstrated commitment to the city and neighborhood in which you live?

A recent article in the Mortgage & Loan sector on Comperemedia’s website found that jumbo mortgage lending is making a comeback. I recently found another article on CNNMoney.com reporting on the comeback of adjustable rate mortgages (ARMs). Aren’t these the lending products that caused our economy to tank? In fact, according to CNNMoney, 70% of all mortgages issued during the so called real estate “bubble” were ARMs. By 2009, after that bubble burst, ARMs dropped to only 3% of the market. Now, ARMs make up closer to 5% of the market and Freddie Mac is predicting as high as 10% by December. Going through the home-buying process right now myself, I can honestly say I was slightly afraid of these unpredictable ARMs. But, I was curious nonetheless, and I found some legitimate reasons why these scary sounding products are slowly making a comeback.

The general fear about a mortgage rate that can fluctuate is the unpredictability. One of the biggest causes of the credit crisis was the sudden increase in rates which resulted in monthly mortgage payments that homeowners could no longer afford, so I understand the lingering doubts that current buyers may have. With a little bit of research, I’m starting to understand why these products can actually be a money-saving option. Currently, a 30-year fixed rate mortgage is hovering around 5%, which will stay constant for the life of the loan, resulting in consistent and predictable monthly payments. An ARM, on the other hand, can offer a lower rate for a limited period of time, after which it can vary according to the market rate. The most common ARM loan on the market today is the 5/1 ARM, which means that the initial interest rate applies for the first five years of the loan, after which the interest will adjust annually depending on the market. Currently, ARM loans are being offered at an astoundingly low rate of 3.5%. According to CCNMoney, “on a $200,000 mortgage, the monthly ARM payment at 3.5% would be $898 compared with $1,074 for a 30-year, fixed rate loan at 5%.” Clearly this can be a bargain, but it totally depends on how long you plan to own the house. The longer you hold on to an ARM loan, the more “unpredictable” years you will have. For buyers who think they only want to own for 5-7 years, an ARM can save a lot of money over that time; however, if buyers intend to stay longer than 7 years, it’s probably safer to go with a more consistent and predictable, fixed-rate loan.

I don’t think ARMs will ever reach the volumes they did back in 2007, but I do think that they are worthwhile products for borrowers who do their research and use them wisely, and I can see why they are becoming popular once again.

Unfortunately, I regret to bring (some of you) bad tidings for the New Year. If you’ve ever taken advantage of a rapid refund loan from H&R Block, the Grinch (or, the Office of Comptroller of the Currency [OCC]) has stepped in and ordered that refund anticipation loans (or RALs), backed by HSBC, be taken off the menu at the tax preparer.

Personally, I love tax time. But I’m not an accountant. I fill out my forms early so there’s a quicker turnaround for my refund. While I wait for that direct deposit, I’ll spend hours thinking about how to use it. Will I be responsible and pay bills or maybe put some extra money into my nest egg? Or, will I take a trip, or go shopping? I usually find some balance between treating myself to something pretty and putting some away for a rainy day. I’ve become accustomed to seeing the Rapid Refund commercials from H&R Block on TV, but often wondered is there really a need to be issued a refund, in the form of a loan, on the same day?

Typically, I am all in favor of instant gratification. However, this just seems a bit too instant. Why pay a ton of fees when you don’t have to? Last year, I used a free online service to do my taxes. My refund was issued in 72 hours. As in, 72 hours later, it was deposited into my checking account. It was a beautiful thing. And, I didn’t have to pay a ton of fees. In 2009, consumers who took advantage of RALs paid $738 million in fees. That’s a LOT of money.

So, the OCC has ordered H&R Block to stop issuing these loans in conjunction with HSBC Bank. However, H&R Block can continue to issue refund anticipation checks (funded through its own much smaller bank). Also, the OCC hasn’t prevented other tax preparers from issuing these refund anticipation loans. So why one, but not the others? I can understand trying to prevent a seemingly predatory lending tactic from taking advantage of the consumer – but shouldn’t that school of thought be applied to all tax preparers who offer RALs? As tax season gears up, only time and TV commercials will tell what changes are in store for this space.

According to the National Bureau of Economic Research (NBER), the recession is over. And it’s been over for at least 15 months. So how come nobody is celebrating?

Because the “recession” hasn’t ended in people’s lives. Basically, we are now in the “New Normal” where less credit availability means that things are still slowly contracting.

Less credit means that unemployment will probably stay high (by historical standards) for a while. There are a lot of numbers showing up in our consumer data that indicate the effects of the recession are reaching far beyond what is reflected in the current 10% unemployment rate (or the 20% or so under-employment rate).

Fully half of under-35’s say their parents have been impacted by the recession and that has influenced their own spending and saving behavior. About a third overall say that their children have been affected, which is having an effect on them. Considering that only 56% of the adult population 18+ have children (including children too young to have been impacted by the recession), this number is even more significant.

Seventy percent of survey respondents say that they themselves have been directly impacted by the recession and have changed their spending habits accordingly. That’s a whole lot more than 10%.

What this means is that consumer spending isn’t going to contribute to an acceleration in GDP growth anytime soon.

I am publishing a report on loyalty programs this week, and the report has been especially popular with Mintel clients.

The subject of loyalty programs is particularly timely in light of how consumer shopping habits have changed with the Great Recession. Loyalty marketers are aware that their loyalty program members are quite often their most profitable customers, and people who actually use loyalty programs tend to become even more loyal to a brand.

So the question is – why isn’t every company upgrading their rewards program to a loyalty program right now?

There are several ways this can be accomplished:

1) Offer rewards that customers see as having real value
2) Personalize offers and communications
3) Offer easy-to-redeem savings on those targeted products and services

It can’t be denied that loyalty programs are becoming a very important part of the relationship with the customer. For instance, according to Mintel’s research for this report, the quality of the rewards program is the number one reason people choose the credit card company they do.

Keeping this in mind, companies can add features to their programs that will really stand out with customers. Instant redemption is one feature that was cited by half of our respondents. Having a large number of redemption opportunities available was cited by a third. And it is the higher income groups (and therefore the most attractive groups for marketers) that are really focusing on these offerings.

It seems that now is the time to focus on adding or improving loyalty programs to help engage customers and maintain the relationship with the post-recession consumer.

On Tuesday, the Federal Reserve confirmed what we have all been thinking for the last couple months – the US economic recovery is weakening. The health of our small businesses is acknowledged as being key to the recovery and many economists agree that the inability of small firms to obtain financing has stifled economic growth. Small businesses need loans to invest in capital and hire employees so that they can begin new projects. We need to have faith in these companies in order to break the negative cycle that is holding back the country.

I was therefore shocked to read in the Mintel Comperemedia Q2 2010 Small Business Lines and Loans Review that just 3% of business panelists had received a business loan offer via direct mail during the quarter; this is down from nearly 40% two years ago.

This fact is particularly alarming when you consider some of the bold statements made recently by banks as they compete to outdo each other with various lending statistics. I take my hat off to those banks that are not just talking-up their lending activities, but are also integrating those efforts with direct marketing campaigns. In other words, reaching out to small businesses, directly, in their time of need.

PNC, BBVA Compass and Chase are doing just that:

– PNC has been promoting its Cash Flow Options program in direct mail. Cash Flow Options encompasses a suite of loan products and the bank is offering a half-point reduction off its daily quoted interest rate plus a 50% reduction off the loan origination fee.

– BBVA Compass has been sending offers to small business owners promoting unsecured lines of credit and business loans. Lines range from $10,000 to $250,000 with interest rates as low as 6.00%. For 5-year term loans of $100,000 or more, small business owners can get a rate as low as 5.18%.

– Chase’s Loan for Hire campaign is the most noteworthy campaign of the national banks. Small businesses can get a half-point rate discount on each employee they hire up to three. Also, if you have a business checking account with Chase, you get another half-point discount on top of that for a total of 2% off the published daily interest rate. We haven’t seen a direct mail campaign promoting Loan for Hire yet, but Chase has blanketed the country with print and radio advertisements and has been promoting the product in its branches.

The PNC, BBVA and Chase examples are encouraging, but clearly it is not enough to keep economic recovery strong. Another positive sign is that small business credit card marketing is up significantly. This will be invaluable for many small firms as they struggle to stay afloat.

It’s time for business lending to follow suit and pull this country clear of the great recession once and for all. Yes, a rallying cry for small business marketers; nothing less than our economic future is at stake.

Further evidence that the “Great Recession” has had a significant effect on consumer behavior:

– In a recent Mintel consumer study, a substantial 76% of respondents state that they are “smarter shoppers” than they were a year ago.

– Almost seven in ten say they are trying to buy only necessary items, such as food (and that last number includes about half of those households earning more than $100k annually).

But price is not the only consideration. Only half of the consumers in the survey say that low price is more important than good customer service, while seven in ten say they only buy brands they trust.
What does this mean? It means that the definition of “smart shopper” is not just about price, it is more and more about value. And the concept of value has been extended to include trust in the brand, as well as good customer service.

These numbers look very much the same as they did a year and even two years ago, when the recession was just beginning to alter consumer behavior. This means that consumers are settling into a “less is more” mindset, while expecting more from their brand and shopping experiences.

Anyone in Financial Services (along with other industries) who is not conducting branding studies and consumer experience research should probably take note.

Thank you to everyone who listened in to my webinar yesterday (July 22): “Beyond the New Normal: The Financial Services Consumer in Today’s Economy.”

I really enjoy presenting Mintel Comperemedia’s information on how people are reacting and changing their habits due to the economy of the last couple years. Many of you asked questions related to consumer trust, which I think is an excellent topic for banks and other financial institutions to think about right now.

If you missed the webinar, you can access the slides and recording here:

- Webinar slides
- Webinar recording

Here are my answers to some of the questions we didn’t get to yesterday:

Q. Is there somewhere that all of the statistics are posted? Some were mentioned that were not on the slides.

A. Please contact your account manager with specific requests for data. I will also be posting some data points from the presentation on the blog over the next few days. If you are not a Mintel Comperemedia client, please contact info@comperemedia.com to learn more about subscribing.

Q. There seems to be a lot of contradictory information – consumers don’t want a relationship with a bank, but that’s the only way we’ll attract customers. If we need to build trust, how specifically do bank marketers do that?

A. Actually…customers DO want a relationship with banks and other financial services companies. I could write a book (actually several books) on different ways that companies could build trust with their customers, but it begins with a longer term focus, rather short-term strategies designed to maximize quarterly earnings, as well as openness with customers – being forthcoming with information about what to expect from the relationship.

As I mentioned during the webinar, it is not necessarily the fees themselves that are the problem, for example. Instead, the problem is that customers feel like banks are being unfair or even “sneaky” about how they charge fees to their customers. Same thing for privacy and the use of personal information.

The best way to think about it is to think about what factors into maintaining a long-term friendship, since customers are looking for the same things from a personal relationship as from a business relationship.

Q. What was meant by “control” in the characteristics people expect from banks?

A. We didn’t define the concept of control when we asked about the 12 attributes. That would actually be a good focus for future studies – to break down those attributes even further to gain an even better understanding of how customers define “trust”.

The question(s) as they were asked were:

“Thinking about what it means to ‘trust’ another person (financial services company), please indicate on a scale of 1-5 how important each of the following is in establishing that trust”

Top 6 for both:
Honesty
Respect
Loyalty
Fairness
Communication
Commitment

Bottom 6 or both:
Reciprocity (receiving an equal or greater amount in return)
Empathy
Predictability
Usefulness
Empowerment
Control

Q. Where will lower income customers turn for credit, given that alternative lenders (e.g., payday, auto title) are increasingly scrutinized?

A. Lower income customers have definitely borne much of the burden of the declining availability of credit. The regulatory changes will probably only exacerbate that situation. This is a huge market, however, and eventually (as always happens), new ways of mitigating risk, or new ways of offering credit that to these segments that have regulatory approval, will appear.

One way that this market may open up again is through the use of better risk assessment tools – above and beyond the traditional Fico or other type of risk score. That would allow lower income customers, who are not necessarily higher risk, to have access to credit because lenders will have better and more detailed ways of assessing credit worthiness.

Q. How do you see Bank of America’s move to eliminate ODP (overdraft protection) fees in the context of your presentation?

A. One of the best marketing moves a bank can make is to be proactive about eliminating or restricting something ahead of the game. It is a tremendous differentiation strategy that helps establish trust. The same is true for entire industries.

About three years ago I wrote a piece for the Mintel Oxygen website titled “Self regulate or be regulated,” suggesting that the credit card industry, which has historically suffered from a tremendous lack of consumer trust, might want to be proactive in limiting fees across the industry to improve general perceptions of the entire industry. That of course never happened, and sure enough, the CARD Act has accomplished much of that restriction of fees for them.

The result? People are still highly distrustful of credit card companies/issuers/networks, and their fees have been restricted anyway. It might have been better to get ahead of the game and at least have the additional bonus of somewhat improved customer relations.

This relates to my points about a short-term focus on quantifiable returns, rather than the longer term focus on building a relationship that improves perceptions of a brand.

Please join Mintel Comperemedia’s, Susan Menke, Ph. D and Economic Psychologist, on July 22, 2010 for a free webinar entitled “Beyond the New Normal: The Financial Services Consumer in Today’s Economy.” The webinar will start promptly at 2pm CT.

You can register HERE.

Over the last two years, the banking crisis and the “great recession” have caused a dramatic shift in consumer’s attitudes and behaviors. Consumers are now asking for different kinds of products and services from their financial services providers, and the most successful companies will listen to what they are saying and act accordingly.

A few of the questions to be discussed in this webinar include:

– How is the consumer mindset changing as they place more emphasis on asset accumulation and less on consumption?
– What are the similarities and differences in the ways Gen X, Gen Y and Baby Boomers have been affected?
– What specifically is driving the level of trust (or lack thereof) in the financial services industry? How instrumental are concerns about privacy and security?
– What is the current status of financial reform legislation, and what does the consumer think about it?
– What is currently driving consumer satisfaction with the financial services industry? How does this relate to the “emerging under-banked” trend that Mintel has been discussing for the last several years?
– How important will social media be to the future of the industry?

The webinar will last 45 minutes with 15 minutes of Q&A. All attendees will receive a copy of the presentation and the slides following the webinar. Also, you can check back here on the Comperemedia Blog to see answers to questions submitted during the webinar from July 23, 2010 on.

Want to learn more about Susan Menke, VP of Mintel Comperemedia? Read her bio or contact us_marketing@mintel.com to get in touch with her.