Are Reverse Mortgages A Sign Of Bad Times?
January 3rd, 2008
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“There are still trillions of dollars of home equity that haven’t been spent yet and much of it will be spent in 2007. Unfortunately, much of this will be in the form of reverse mortgages for senior citizens in order to make ends meet,” says Tim Iacono on his blog, The Mess That Greenspan Made.
Tim also says that “the part about reverse mortgages is a truly sad commentary on the state of affairs in this country and, even more sadly, reverse mortgages, with their gigantic fees, have been one of the few bright spots for mortgage lenders in 2007.”
I have a somewhat different view, let me explain:
In any year there are people who run into financial problems or would simply like more cash. Without a reverse mortgage senior homeowners would likely have to sell and move. This is not necessarily a bad choice, but for many reasons people largely prefer to stay where they are — if they can. The result is that reverse mortgages as a financial product have a basic legitimacy.
On the matter of fees, they will come down as lenders get more experience with reverse mortgages, as more lenders enter the field and as HUD reduces its insurance premium. Let’s not forget that the real growth in reverse mortgages is less than two years old and the lack of experience is telling.
As to the idea that Alan Greenspan and the Federal Reserve are in large measure to blame for the current financial mess, sign me up.
The failure by the Fed to regulate lenders under HOEPA’s Section 129(I) is a disgrace for which the entire country is now paying. The whole “nontraditional” mortgage mess could have been prevented or at least contained if the Fed had cut-off lenders with appropriate regulation in 2004. The Fed took no action, protected its Wall Street client base — which is not the public — and the result is now on the front page every day.
For Tim’s full commentary, please see: A review of 2007 predictions
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January 4th, 2008 at 1:50 am
Specifically, what fees are too high? I have heard this over and over again but no one ever mentions what fees are too high. Please explain.
January 4th, 2008 at 11:15 am
Phillip,
The fees most people find objectionable are the upfront costs to get the loan done. On a convention HECM product, this is consumed primarily by 2 components; 1) Mortgage Insurance which is 2% of the loan amount and 2) Orginiation Fees which are federally capped at 2% of the home value. Net, the fees to get the loan running when you add in all the additional costs of appraisal and title fees, etc. can push up toward 5% of the home value. These are usually what people have a hard time with. In most cases these costs are financed into the mortgage. We can certainly discuss whether these fees are “worth it” or not. The MIP protects the homeowner as well as the lender. The origination fee is how the mortgage specialists get paid since there is little use of yield spread premiums on this side of the mortgage business (although this is creeping it’s way in…). Hope this helps a little. I am sure many others have a POV on this.
January 4th, 2008 at 12:31 pm
I think that the FHA MIP is to high and the service set aside is too much. FHA could lower the MIP more in line with what they have to pay off on reverse mortgages and the sevice set aside is set up for many more years that the average borrower keeps the loan.
January 4th, 2008 at 12:55 pm
When it comes to deciding whether a Reverse Mortgage is a good investment or not, many senior homeowners don’t really understand their options. For some, a reverse mortgage is a way out of debt, or a way to pay for a child’s education. Others see a Reverse Mortgage as just another way for the bank to make money. The truth of the matter is, deciding whether a Reverse Mortgage is a good investment or not depends on the borrowers unique situation. This was definitely true for my aging parents, but it turns out, they made a good decision. My siblings and I had no interest in “inheriting” my parent’s house and so it made sense for them to get a reverse mortgage. Once my parents pass on, the bank will get the house and all is well. In the meantime, the bank is paying them a nice monthly income which helps them pay bills and also to take a few vacations per year.
January 7th, 2008 at 4:35 pm
[...] “The fees most people find objectionable are the upfront costs to get the loan done,” says Joe. “On a convention HECM product, this is consumed primarily by 2 components; 1) Mortgage Insurance which is 2% of the loan amount and 2) Orginiation Fees which are federally capped at 2% of the home value. Net, the fees to get the loan running when you add in all the additional costs of appraisal and title fees, etc. can push up toward 5% of the home value. These are usually what people have a hard time with. In most cases these costs are financed into the mortgage. We can certainly discuss whether these fees are “worth it” or not. The MIP protects the homeowner as well as the lender. The origination fee is how the mortgage specialists get paid since there is little use of yield spread premiums on this side of the mortgage business (although this is creeping it’s way in…). Hope this helps a little. I am sure many others have a POV on this.” [...]