Cheap Reverse Mortgages Disappearing, Says Lender

by Peter G. Miller
September 19th, 2007

The “HECM 100″ is being phased out by most FHA insured reverse mortgage lenders, says Joffrey Long, a 30-year veteran of the mortgage industry and the President of Southwestern Mortgage in Granada Hills, CA.

Long, the 2007-2008 President of the California Mortgage Association, says the interest rates on FHA insured reverse mortgages are determined by adding a certain percentage to the yield on one-year treasury obligations. The HECM 100 provided for adding only 1% to the one-year treasury. With the one year treasury at less than 5%, this meant that even after adding the one percent, HECM 100’s closed at an interest rate of less than 6%.

The HECM 100 is being replaced by the higher-cost HECM 150, which, says a release from Long, “is the same in every aspect, except 1.5% is added to the rate on the one year treasury security, rather than 1%. This extra half percent not only causes the borrower to owe more interest over time, more importantly, it means that the borrower is eligible for less money from the reverse mortgage.”

Long’s release offers the following analysis:

“The amount a senior citizen gets from a reverse mortgage is determined by their age, but also by the interest rate in effect at the time they obtain or close the reveres mortgage. How much does it affect the borrower?

“Look at this calculation:

“Under the HECM 100, a 72-year old borrower in Los Angeles County, with a $450,000 house could obtain $236,470.

“Under the HECM 150, the same 72 year old borrower, with a $450,000 house in Los Angeles County would obtain 220,050, — a $16,420 difference.

“What can borrowers do? If they feel that a reverse mortgage would help them, apply immediately. And make sure they lock in their loan and provide all conditions to the lender immediately to make sure their loan closes.”

Mr. Long’s comments cause one to wonder: Why¬†do lenders need to jack-up rates for an adjustable-rate loan insured by the federal government? Lender risk is just about zero.

And why is there not stronger price competition to force down rates? If all lenders charge the same then what choice to do consumers have?

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4 Responses to “Cheap Reverse Mortgages Disappearing, Says Lender”

  1. Alex Goldie Says:

    Would it be a reasonable assumption to say that these lenders are behaving in this manner because assets posed as collateral are in a state of great uncertainty regarding their value? And will an FHA guarantee really be able to cover vast holdings of real estate owned by America’s largest generation in history, if the prevalence of these loans increses as dramaticaly as expected? Concerning the increase in price, I would imagine that many of these companies underwriting these loans direly need profit somewhere in their loan portfolios. Demand is only improving for RAMs, so it is a niche of the industry that is picking up the slack, so to say. Stronger price competition will come about once more lenders get into the game.

  2. Peter G. Miller Says:

    Alex –

    You have made a really good point and a savvy observation. Allow me to take a somewhat different approach.

    If you’re a lender you’re getting your money up front. You then sell the loan. If the value of the home declines, it’s not your problem.

    As to the FHA, you are entirely right that the size of their reverse obligation is mounting. Under the FHA modernization bills now being considered, HUD would be allowed to increase the number of reverse mortgages that it underwrites. The question is, at what point is it insuring enough loans to sink the entire FHA system if something goes wrong?

    One thing which favors the FHA is that higher-LTV reverse mortgages tend to be short-term while loans generated to borrowers of an earlier age have far-better loan-to-value ratios for lenders — and the FHA.

  3. Juneboarder Says:

    Reverse mortgage closing costs consist of a few items: 1. Mortgage Insurance Premium; 2. Loan Origination Fee; and 3. Fees associated with the loan.

    1. Mortgage Insurance Premium: This is 2% of the lesser of either your home value or the FHA county limit set forth for your county. For example, if you are in Los Angeles, CA and your home is worth $450,000; then your FHA mortgage insurance premium would be 2% of $362,790 (the county limit).

    2. Loan Origination Fee: This is where the lender/broker make money. FHA restricts the amount just like the Mortgage Insurance Premium at 2% of the lesser of either your home value or the FHA county limit. This (along with the monthly servicing fee) are the only two items you can really negotiate with your lender to get costs down.

    3. Other Fees Associated With Reverse Mortgages: This would consist of the appraisal, credit report, flood report, and title/escrow fees. This is to simply pay all the charges associated with processing and completing the reverse mortgage loan application.

    One truly has to keep in mind that nobody works for free and there are a lot of folks that help orchestrate the completion of your reverse mortgage; hence the reason that there are costs up front. Please always utilize your loan representatives to answer any questions or concerns so that you are never in the dark; they should always be willing to work with you to help clear any matters of concern.

  4. Peter G. Miller Says:

    For a detailed response to the comment above, please press here.