A 4% Fee For A Reverse Mortgage?

by Peter G. Miller
October 17th, 2008

While cruising the Internet I came across an interesting reverse mortgage opportunity for lenders: Yes folks, step right up and meet an FHA reverse mortgage that pays a 4% commission to lenders.

Huh? Wait a minute. Didn’t the FHA Reform bill passed on Capitol Hill during the summer limit lender fees for FHA loans? Didn’t the new standards go into effect as of October 1st?

Yes and yes.

That said, lenders can still get big commissions from reverse mortgages.

The way it works is this:

FHA reform says in general terms that reverse mortgage fees charged to a borrower can equal only 2 percent of the first $200,000 of the loan amount, 1 percent of the balance and not more than $6,000.

But what about fees to someone other than the borrower?

Suppose you qualify for a $200,000 reverse mortgage with a 6 percent rate — but the lender gleefully supplies you with 7% financing. You’re overpaying. You’re paying through the nose. However, having gotten such a fine piece of financing the lender now has a valuable asset to sell. Since the interest rate is higher than it should be, the lender is able to market the note at a premium — say an additional 2% mark-up.

And that, folks, is how you can lawfully have an FHA reverse mortgage with a 4% fee to the lender.

I sent the Internet item over to HUD.

“Our FHA staff says they are shocked to hear those figures,” said HUD spokesman Lemar Wooley. “They say the numbers seem out of line with the pricing with which we’re familiar. HOWEVER, they point out that we don’t regulate the secondary market pricing of the product.”

HUD is right. Their rules — the rules established under FHA reform — relate to the origination of reverse mortgages and not the re-sale of such notes. HUD does not set reverse mortgage interest rates.

“Given the market volatility as of late, we had heard that most investors had shied away from reverse, leaving Fannie Mae as the predominant secondary market player. Fannie is generally very fair with their pricing, so, again, we’re very surprised.”

How can you protect yourself?

First, shop around. Compare like products. Get good faith estimates in writing. Read them carefully. Don’t hurry, don’t rush. See whether or not a reverse mortgage makes sense for you.

Second, don’t overpay. A lender can only get a premium selling a reverse mortgage note if you pay a premium price.

Third, protect your interests. Work with an attorney or legal clinic that specializes in elder law before signing any reverse mortgage paperwork.

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