Reverse Mortgage Guide

In response to the posting on the disappearance of cheaper reverse mortgages we received a comment which went like this:

Juneboarder Says:
September 24th, 2007 at 9:29 pm

“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.”

I read this posting and several questions arose:

Why should a borrower “please always utilize your loan representatives to answer any questions or concerns so that you are never in the dark?”

Lenders, after all, do not act as borrower agents or have a fiduciary obligation to get the best possible loan or the most suitable financing for a consumer.

“Some have proposed,” Harry Dinham, president of the National Association of Mortgage Brokers, told a congressional hearing earlier this year, “that a fiduciary duty standard should be implemented and mortgage originators and their loan officers should act in the ‘best interests’ of the consumer. NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.”

“A lender underwrites, approves and funds the loan,” says John Robbins, Chairman of the Mortgage Bankers Association. “The lender does not hold himself out as an agent of the borrower. While a lender must serve its customers fairly, and the industry has done much to assure high professional standards, a lender owes a duty to its shareholders and investors. A borrower knows a lender offers its own products and does not offer to shop for borrowers.”

Until lenders are legally obligated to serve the best interests of borrowers, why should reverse mortgage borrowers not seek independent sources of information, such as an attorney who specializes in elder law?

Second, you can find 105,000 references to origination fees on Google — origination fees that equal 1 percent of the loan amount. So, for a $200,000 mortgage, the origination fee would be $2,000.

Alternatively, if we agree that the FHA “restricts” — you have to love that term — reverse mortgage origination fees to “2% of the lesser of either your home value or the FHA county limit” we can see that such a fee is far more than 1 percent of the loan amount, the usual and customary size of an origination fee.

For instance, imagine that a borrower wants a $200,000 reverse mortgage for a property that’s valued at $600,000. Imagine further that the local FHA loan limit is $362,790.

Let’s see:

*One percent of $200,000 is still $2,000.

*Two percent of $600,000 is $12,000.

*Two percent of $362,790 is $7,258.

The “lesser of either your home value or the FHA county limit” is $7,258 in this case — and that sure is a lot more than $2,000.

No less important, this fee is paid whether or not a borrower actually uses all the money available from a reverse mortgage loan. If someone has a $200,000 reverse line of credit and pulls out $50,000, the up-front fee is unchanged. On both a percentage and absolute basis, this fee is huge.

As the commentator says, “this is where the lender/broker make(s) money.” (parenthesis mine).

No kidding.

But wait, as they say on late night television, there’s more.

Our commentator says there are “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.”

What about servicing fees? Our correspondent posted earlier on this blog and explained that the “FHA allows a monthly servicing fee of $25-35. A max of $30 would be nice, but there are many HECM lenders out there that charge the full $35.” In a year that’s $35 x 12 or $420.

Is there more? For instance, can a reverse mortgage lender get a yield spread premium? Yes or no? If yes, how many thousands of dollars are we talking about for a $200,000 reverse mortgage?

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This entry was posted on Tuesday, September 25th, 2007 at 9:37 am and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.