Reverse Mortgage Information

Not widely reported yet, reverse mortgage counselors are experiencing much difficulty passing a new mandatory licensing test.  This follows multiple reports of reverse mortgage loan originators struggling greatly to pass their own government mandated nationwide examination under the S.A.F.E. Act.

Reverse Mortgage Counselors Stumped

A Charleston, SC newspaper (The Post and Courier) ran a story today with a quote from Debbie Kidd, a very experienced counselor and head of the Homeowner Resource Center at Family Services Inc where she said she has failed the new counselor test four times in a row.  Kidd says, “It’s humiliating…. I’ve done this for 20 years… Why can’t I pass this test?”  Debbie is an acquaintance and we know of her long time service to seniors and her standing in the counseling profession.  Her knowledge of the industry is exceptional.  I would say her knowledge of the subject matter is unquestionable.

HUD Fixes Things… Again

In their wisdom, the U.S. Department of Housing and Urban Development (HUD) decided to make the licensing exam for counselors more difficult.  This action is just one more badly conceived response to a cadre of poorly informed,  loud-mouthed housing advocates who continue to beat the drum about so-called abuses to the Home Equity Conversion Mortgage (HECM) program.  According to an article in the Post and Courier, a HUD spokesperson said the agency “acknowledges the test is intentionally difficult, but we believe it needs to be so because of the vulnerable population” who seek reverse mortgages.  In other words, HUD thinks all seniors are stupid and need to be protected from themselves.

After receiving complaints from test takers, HUD posted more study material online. But in South Carolina, only one counselor in Columbia and one in Greenville have passed this test so far.  Seniors trying to get counseling for the HECM program have even fewer options now.  Who knows what the statistics might be in other states.

Seniors Will Get Less

The result of all the unanswered negative publicity that has been hammering the HECM program for many months is that seniors now qualify for less money, see lower home values, are forced to pay out-of-pocket for appraisals directly, are forced to pay for counseling out-of-pocket directly… and now they will be certain to have more trouble finding a “qualified” counselor.  The mounting unintended consequences of poorly conceived changes to the HUD program are destroying it piece-by-piece.  At this pace, soon… there will be no HECM program remaining for for seniors.

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Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant

Outrageous fees! This is perhaps the hottest topic one could chose to address about reverse mortgages. I especially like the analysis of an experienced Minnesota reverse mortgage loan originator, Beth Paterson on this subject. Please read her blog at Beth’s Reverse Mortgage Blog  In a June, 2009 post she published a great analysis of specific costs of  the HECM reverse mortgage vs. a conventional forward mortgage and she shows a side-by-side comparisons of the numbers. If you are interested in facts… as opposed to falsehoods or myths perpetuated by the uninformed, read on.

Below is an excerpt from her June 27th post Reverse Mortgage Closing Costs – High or Mythical? She closely examines fees & costs and shows total cost calculations in a summary chart at the end. The property in the example is a $200,000 home. Her conclusion is that reverse mortgage costs are not outrageously different from traditional mortgage costs. Following is a excerpt but please read her entire post to follow the analysis from beginning to end:

“Now let’s compare the Lender Fees:

FHA’s Mortgage Insurance Premium (MIP) is paid directly to FHA.  This is 2% of the home value for the reverse and 1 ½% for a forward.  The advantages with FHA insuring the reverse mortgage include:

• Guaranteeing the funds are available for you.
• Guaranteeing the lender against default or shortfalls which means the interest rates are lower (currently under 4%) compared to other mortgages.
• Providing a line of credit growth rate (available only with reverse mortgages).
• Insuring as a reverse mortgage it is a non-recourse (no personal liability) loan.

The origination fee is what the originating lender receives to cover the loan officer’s salary, overhead to run the business, i.e. staff salaries, administration costs, computers, electricity, office supplies, marketing expense, gas mileage, health insurance of employees, etc..  The origination fee also includes the processing and underwriting costs which are generally separate and charged to the borrower on forward loans.  HUD regulates the reverse mortgage origination fee to be 2% of the 1^st $200,000; 1% thereafter with a cap of $6,000.

The reverse mortgage fees are based on the full home value because over time borrowers can access more than the home value at the time of origination.

An estimate based on a $200,000 home value:

*Typical points on Forward loans are 0-4%; this example is based on $100,000 loan at 2% points
** Forward loans often have a 1% backend fee
*** Number of points are directly related to interest rate charged; the more points paid the lower the interest rate; the lower points paid, the higher interest rate

Note:  THE DIFFERENCE IS BASICALLY THE FHA MORTGAGE PREMIUM!”

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Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant

In previous post we discussed myths 1-3. Here now is the discussion regarding Reverse Mortgage fees.

4 - The fees are outrageous. Yes, the fees you pay for a Reverse Mortgage are substantial… but “outrageous” ?  That’s a little over the top and usually the comment of misinformed persons or even media writers who do not have any concept of what the fees and charges relate to.  So let’s examine them and see who gets what:

My borrower is a long since retired single person living in a beautiful coastal Maine community with numerous friends.  His sole source of income is a portfolio of stocks & bonds devastated by major losses now yielding only about $1,200 per month.  He could sell the home for $325,000 for which the fee would be $19,500 in real estate commission.  (Now, that’s outrageous!)  Or he could sell some of the equities in a depressed market at a 50% loss.  Or he could do a reverse mortgage and generate a lifetime income increase of $1,942 per month for a combined total monthly income of $3,142.  Total up front fees and costs would be about $13,657… usually financed or rolled into the loan balance.  With this latter choice he continues to own the home, he lives rent free, he continues to own his stocks & bonds which have a chance to make a comeback at some point.

Origination Fee – We charged the borrower $4,900 to educate & answer his questions, to help him select the program making the most sense in his situation, to prepare the proper paperwork, travel to his home to take his application,  prepare the required property insurance, flood, credit, title documentation, to process the documentation and properly submit his file to the lender, respond to underwriting demands of the lender, oversee the commitment procedure, prepare closing documentation and hold the closing in his home with the lender’s attorney present.  We discounted our origination fee by $350 in this case.  We could have charged as much as $5,250 according to HUD rules.

FHA Mortgage Insurance – HUD requires the borrower to pay an upfront fee of 2% or $6,500 in this case for FHA Mortgage Insurance.  This fee is federally mandated and may not be discounted.  In this example you can see that almost, 50% of the total $13,657 fees & costs are derived from the FHA Mortgage Insurance fee paid direct to the government, not the lender.

3rd Party Closing Costs – These charges total $2,057 and include normal real estate related expenses charged by third parties to the transaction. Our borrower paid $425 for the   FHA appraisal,  $53.75 in credit report, flood certification and courier costs. $125 counseling fee, $200 title search, $550 attorney fee, $694 title insurance fee, $60 recording fee and $100 lender document prep fee.

Conclusion – None of these fees and costs are outrageous.  An origination fee (or broker fee or bank fee) is paid by every customer for every mortgage loan… but with conventional mortgages it’s usually buried somewhere in the interest rate so most borrowers don’t even know it.  FHA Mortgage Insurance is required on about 25% of all conventional loans today and it protects the borrower as well as the lender in the case of HECM loans.  Uniquely, HECMs are non-recourse loans; conventional loans are not.  Borrowers can never owe more than the home value. They have no liability personally.  There is no prepayment penalty.

Finally, lawyers, appraisers and title insurance, filing fees, etc. are simply a fact of life when dealing with a real estate transaction.  We do not charge any “junk fees” to our borrowers but pick the wrong loan officer/lender and you might get hit with additional fees (application fee, courier fees, etc.)

So…. yes, there are some substantial expenses involved in a reverse mortgage but nobody is stealing anything from seniors.  All costs are clearly documented and fully discussed at application including an analysis of the TALC (Total Annual Loan Cost) and the Amortization Schedule.  If your loan officer fails to discuss these particular documents at length with you… you picked the wrong loan officer to work with!

Author – Robert H. Irving, CSA
Senior Reverse Mortgage Consultant

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Up until now this was a fairly easy question to answer. The older you are, the more money you qualify for under the Home Equity Conversion Mortgage program. And when home values were climbing at 5% or better every year, the calculation was easy to make. Wait for 2 more years and receive $20,000 more…

Well, they’ve changed the rules while you were mulling it over!  Or, at least they’re talking about changing them. Pay close attention if you’re on the fence about when to do your reverse mortgage because it could get ugly – real soon.

First, home values are falling (still).  So at least one component used in the calculation of your dollar benefit continues to move against you. Lower value – less money for you.  Second, there is a lot of talk in Congress about the mortgage insurance program used by FHA to guarantee these loans.  A group of lawmakers favors increasing the already burdensome mortgage insurance fee.   Higher fees – less money for you.  Third, another group is proposing reducing the Principal Limit… the amount you initially qualify for and a major component of the calculation.  Lower principal limits – less money for you.

But what about your age?  Age is a major component of the calculation today.  Presently, the older you are, the more money you qualify for.  A variation on the Principal Limit reduction theme is the proposal to cap limits at some arbitrary age…say 75.  Meaning once you reach that age, the amount you can expect to qualify for will no longer increase if you are older.  Higher age -  less money for you (than today).

Old Question – New Answer

The question remains easy to answer… but the answer is radically different. If you are seriously thinking about doing a reverse mortgage it is beginning to look like there is no advantage to waiting.  As a matter of fact, if you wait you might qualify for much less money than today.  Once we get the politicians tinkering with programs they know nothing about… watch out!   These are, after all, the Barney Frank’s of the world who brought you the current financial mess we are in today.  No problem, they say – print money!  Same for the HECM reverse mortgage program.   No problem – raise fees and reduce benefits!

UPDATE: Effective October 1, 2009 FHA reduced dollar benefits by 10%. If you waited, you lost!

Author – Robert H. Irving, CSA
Senior Reverse Mortgage Consultant

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Negotiate lower fees and costs on your reverse mortgage

Trying to negotiate fees and costs with several different lenders can be a difficult process and requires careful coordination, precise timing, and expert knowledge. There are many spots where you could be led astray, get confused and fail to find the best deal for yourself.  Some lenders, for instance, may not even reveal all of the reverse mortgage programs available to you; they could show you only a few…  higher margin products.  Don’t be persuaded that all lenders offer exactly the same reverse mortgage programs and rates.  They don’t!

Worse, not all lenders have access to the reverse mortgage programs that provide the most money to you.  Fixed Rate reverse mortgage products, for example, presently offer borrowers much more money than any adjustable rate product.  But not all lenders can offer you a fixed rate product, so you might never even know about it.

Then there are 3^rd party fees and costs including some “junk fees” that might get added to your overall expense.  Some of these fees can be negotiated and some even eliminated.  Do you know what fees to challenge?

Negotiate Other Reverse Mortgage Fees and Costs

While most loan officers are ethical, you could run up against a lender who intentionally “lowballs” fees and costs… or encourages overestimating your home value just to win you over from a competitor.  By the time you get to the closing many weeks later,  those numbers have changed drastically.  Surprise!  It does happen… not often, but it does happen.  Do you know how to fairly estimate what your appraisal value should be?  Hint – it’s not your assessed (tax) value and it’s probably much less than you think.  A good loan officer will help you through this calculation.

Author – Robert H. Irving, CSA
Senior Reverse Mortgage Consultant

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