Reverse Mortgage Guide

For some time there has been considerable concern regarding the origination costs associated with HUD-insured reverse mortgages, fees which are “limited” to 2 percent of the property’s maximum claim amount.

“Generally,” says HUD, “the property value and the maximum claim amount will be the same because the maximum claim amount is the lesser of the appraised value or the maximum mortgage amount under Section 203(b) of the National Housing Act.”

Now the House, under H.R. 3221, is moving to substantially lower origination costs.

The legislation as passed by the House last week limits the origination fee to 2 percent of the first $200,000 of the claim amount plus 1 percent of any remaining claim amount above $200,000. There’s a $6,000 cap, a cap which may be adjusted for inflation.

Is this good? You bet.

A borrower seeking a $300,000 home equity conversion mortgage (HECM) would save $1,000 under the new system. A borrower who took out a $550,400 reverse mortgage — the likely new reverse mortgage limit if the bill is passed — would see origination costs fall from $11,008 under today’s rules to $6,000 under the new system — a savings of roughly $5,000.

This is a case where reverse mortgage lenders have largely lined up in favor of legislation which would result in smaller fees per loan. The idea is that while the origination fee per loan would be reduced, more loans would be originated under the system because the product will be more attractive to consumers. This is an example of enlightened thinking by everyone involved.

Will HR 3212 become law as written? That’s unclear given that the bill must pass through the Senate, emerge from the compromise committee and then be signed by the President — a President who has threatened to veto the legislation.

Stick around, this could get interesting.

The language from HR 3212 is below:

(d) Limitation on Origination Fees- Section 255 of the National Housing Act (12 U.S.C. 1715z-20), as amended by the preceding provisions of this section, is further amended –

`(1) be equal to 2.0 percent of the maximum claim amount of the mortgage up to a maximum claim amount of $200,000 plus 1 percent of any portion of the maximum claim amount that is greater than $200,000, unless adjusted thereafter on the basis of an analysis of (A) costs to mortgagors, and (B) the impact on the reverse mortgage market;

`(2) be subject to a minimum allowable amount;

`(3) provide that the origination fee may be fully financed with the mortgage;

`(4) include any fees paid to correspondent mortgagees approved by the Secretary or to mortgage brokers;

`(5) apply upon the date that the maximum dollar amount limitation on the benefits of insurance under this section is first increased pursuant to the amendments made by section 219(a)(3) of the Expanding American Homeownership Act of 2008; and

`(6) be subject to a maximum origination fee of $6,000, except that such maximum limit shall be adjusted in accordance with the annual percentage increase in the Consumer Price Index of the Bureau of Labor Statistics of the Department of Labor in increments of $500 only when the percentage increase in such index, when applied to the maximum origination fee, produce dollar increases that exceed $500.’.

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This entry was posted on Thursday, May 15th, 2008 at 12:16 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.