When Is An “Origination Fee” Not An “Origination Fee?”
January 7th, 2008
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Joe Miramonti offers an interesting discussion of reverse mortgage fees and such, to wit:
“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.”
Reading Joe’s comment I remain convinced that we really need to change some terms and expressions.
When most people hear the term “origination fee” they understand that it is a charge equal to 1 percent of the mortgage amount. But Joe is right in describing the origination fees for a reverse mortgages as being “2 percent of the of home value.”
You can see the conflict here. The value of the home is not the same as the loan amount, unless we have 100% financing, which we never do with a reverse mortgage.
The result is this: If Smith borrows $200,000 with a forward mortgage and pays a 2 percent origination fee his cost is $4,000 (2 x $2,000). But, if he have an HECM he pays on the basis of the property’s value. If the home is worth $500,000, then Smith is paying an origination fee of $10,000 (2 x $5,000) — even if he is still borrowing $200,000. That sure looks like a 5 percent “origination fee” to most people.
The reverse mortgage community needs to have a better expression than “origination fee.” It’s not what most people think it is.
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January 7th, 2008 at 6:10 pm
Peter,
Your paragraph utilizing an example is incorrect in it’s assumptions. In the example, you cite that the orgination is based on the homes value. That is incorrect. The origination fee is based on the lower amount of the 203b county lending limit or the home’s value. You may find the 203b county lending limits on the FHA’s website to learn more.
So using your $500,000 example and we assume this house is in a county with the highest lending limit- $362,790 then the origination would be 2% of $362,790 and NOT 2% of $500,000. In addition, the number of counties in the US that are at or even near this lending limit is very, very small.
For more information about Reverse Mortgages, I would check out http://www.reversemortgage.org.
January 7th, 2008 at 6:51 pm
I agree in concept to what you are saying but you have the fee based upon “2% of home value ” is not correct. The 2% is charged on PLEDGED value, which is total different. Every county has a seperate “lending limit” which is used to factor in the pledged value. You may have a home that is worth $ 1,000,000, but have a lending pledged value on that home of only $200,000. So your origination fee would only be $ 4,000….a far cry from home value.
January 8th, 2008 at 2:04 am
John & Greg –
You are correct. I was responding to the literal language found in the original post — I should have revised the example but did not. My fault.
For a fuller discussion of origination fees, press here.
January 8th, 2008 at 9:32 am
Yes, the costs to implement a reverse are high in relation to a conventional mortgage but when you compare the cost against how and when the loan is repaid and how a line of credit works with a reverse I think the fees are reasonable.
January 8th, 2008 at 10:13 am
Peter,
Totally agree with your comments. Also, the pages devoted to discussion of the orginiation fees for reverses are very insightful and helpful. As a broker, getting to a fair value “pricing” policy for doing these loans is really important. I want to beleive that when I charge a client for my time and expertise that they are getting that fair value. If the project is hard and consumes time then it should cost more that if it is easy and consumes less. I struggle with a one size fits all pricing policy for reverses that is just tied to what the FHA says is OK. I’d love to hear your thoughts on this. Thanks for clarifying the terms and getting into the details on “origination fees”. If you have a better term or set of terminology for this fee structure, I’d love to hear it. Welcome your comments.