FHA Insured Reverse Mortgages Without the SFSA, A Growing Trend?

August 31st, 2009 | by John Yedinak Published in Celink, News, Reverse Mortgage | 14 Comments

PenFed, an Alexandria, VA based credit union is offering customers their PenFed Advantage program which provides an FHA insured HECM without any origination fee or service fee set aside (SFSA). Without the SFSA, a 70 year old borrower will see roughly $5,000 more in proceeds with a property valued at $600,000.

Below is a comparison of the PenFed Advantage and the HECM or you can see a detailed printout here.

Product	PenFed	HECM
Margin	2.50%	3.25%
Available	362,474.00	$309,997.72
After Fees

The PenFed Advantage still requires a borrower to pay the 2% insurance premium upfront which according to a loan officer I spoke with at the company means it still qualifies as a FHA insured loan.

According to HUD’s Handbook 4235, lenders are not required to establish a SFSA:

1-12SERVICING. The lender is permitted to charge the borrower a servicing fee if this cost has not already been priced into the borrower’s mortgage interest rate.

A. If the lender chooses to assess a servicing fee, the fee is established at closing as a monthly figure and the amount necessary to pay this fee throughout the life of the loan is calculated and set aside from the principal limit at closing (see Paragraph 5-7B. for calculations).

So is PenFed building the servicing costs into the margin? Probably not considering their margin is 2.5%, but it’s not the first time we’ve seen a credit union take a hit on fees for its customers.

Other lenders have been considering eliminating the SFSA, which is the most difficult concept in servicing to explain to a senior about their reverse mortgage says Ryan LaRose, Executive Vice President of Celink.

"We heard some talk of lenders looking at pricing the SFSA into their margin, but it all seemed to quiet down as none of them could get their arms wrapped around what the right amount they would need to increase the margin by in order to cover the life of loan servicing costs," said LaRose.

"In addition, some said they were staying away from it because it could be viewed as a hidden cost vs. the monthly servicing fee, which is broken out plainly for the borrower to see."

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James_E_Veale_CPA_MBT

Admin,

If there is no origination fee or servicing fee set aside, the proceeds from the credit union’s own comparison sheet start out over $11,000 higher with an origination fee of $6,000 and a servicing fee set aside at just over $5,471 at 6.17% plus 0.5%. Of course, the starting net principal limit is still lower than a fixed rate HECM with an interest rate of 5.56.%.

What is bothering on their amortization schedule is they have no Accrued MIP. Is that paid for out of the interest rate?

The loan has a cap of 5% above its original start rate. How often is the rate subject to change, monthly, every six months, annually? Are there any other caps like the annual HECM?

In computing their tenure payments the interest rate is exactly 6.67% with an expected interest rate of 6.17% if there monthly MIP charged this would make sense; however they have no monthly accrued MIP per their amortization schedule. If it is buried in their interest rate then how can they add it 0.5% to their expected interest rate in computing tenure payments? That would mean adding the hidden to the increased rate they are using a 1% MIP annual rate in computing tenure payments. That is bizarre.

Interesting product but odd. For those HECM loan officers in North Eastern Virginia, this product is a competitive disadvantage. Is this the credit union for just Pentagon employees?
Admin

All good questions, I will see what I can find out. Anyone can become a member if you donate $20 to the National Military Family Association (NMFA)

https://www.penfed.org/howToJoin/overview.asp
wealthone

Why are they comparing to CMT versions instead of LIBOR? I realize their version provides more but they are comparing to a product that doesn't exist today.

BTW, the 5.56% fixed provides a larger lump sum than their version with their reduced fees.
lancejackson

Seem to be lots of unanswered questions here. Looking forward to a follow up article on this for more clarification.

SFSA has always been confusing to homeowners and others. Its elimination through slightly higher rates would add clarity to understanding, which is a positive for homeowners and the industry.
The_Critic

wealthone,

Who decided that the CMT version does not exist today??? Perhaps you intended to say they are not offered by lenders today. Most outstanding HECMs are CMT HECMs.

Just because the company you work for has elected not to offer CMT HECMs does not mean they do not exist, cannot be offered, or are not being offered. Rumors like this need to be nipped in the bud.

The only thing that is true is that Fannie Mae has chosen not to purchase them anymore. You need to look at the balance sheet of the Pentagon Fed CU to see why it may be able to offer them.

As to your fixed rate comment, please read Mr. Veale's comment at the top of these comments.
wealthone

So if no one is buying them (CMT), who is offering them? Maybe I should be comparing Pontiacs to Fords?
dduck12

This is available in VA, DC and MD, only.
Is any one else using a similar product, or is this an isolated case?
One robin does not a spring make.
James_E_Veale_CPA_MBT

Thanks for doing this research. Those are the places that make the most sense. As to your question about similar products, this is the first exactly like this I have heard of but hopefully if there is, perhaps other readers will chime in.
The_Critic

wealthone,

And the point is?

Getting back to the article, the talk of the industry is not if they are comparing their product to one that is hard to find a buyer for. It is the product they are originating. Who has one to compete with it?

If you have something to add to that discussion please do. If you want to dwell on the products they compare themselves to using misleading statements, well, that is your craft, not mine. Whether they compare them to HECM CMTs, HECM LIBOR, Oldsmobiles, or Fords is not my concern. It is the product they offer that stirs most of our interest. How about yours?

Do you offer a HECM with such low upfront costs, no servicing fees, and no monthly MIP? Now that would be of great interest.
dduck12

Thanks. I think the extra cash flow would be helpful for some cases including those borderline mortgage debt situations.
wealthone

Critique, no need to get your panties in a wad. My point, which you completely lost, is why would they offer a rate sheet with products that don't currently exist for the client in this environment. I'll give you a definition of “currently” if you want but I'm not going to sell a Ford Focus and compare it to the costs or fuel efficiencies of an Oldsmobile blah blah blah. You know why? Because it DOESN'T EXIST AS AN OPTION CURRENTLY.
wealthone

You know what, I will add something for you. In Maryland there is a recordation tax on real estate transactions and title companies have different ways to charge for that tax, some not understanding the intricacies of how to charge for those fees and there are some that have figured it out to the benefit of the borrower and hence provide them with a modest gain in cash flow- in some cases up to $3000. I found it all to be completely up front and the client loves knowing that I helped them save money on their RM transaction. In addition since title insurance is almost all profit anyway, that is easily negotiable for borrowers, again to their benefit. Wonder if this is known by title company servicing the CU's biz and passed on to the borrower?
Anonymous

Critique, no need to get your panties in a wad. My point, which you completely lost, is why would they offer a rate sheet with products that don’t currently exist for the client in this environment. I’ll give you a definition of “currently” if you want but I’m not going to sell a Ford Focus and compare it to the costs or fuel efficiencies of an Oldsmobile blah blah blah. You know why? Because it DOESN’T EXIST AS AN OPTION CURRENTLY.
Anonymous

You know what, I will add something for you. In Maryland there is a recordation tax on real estate transactions and title companies have different ways to charge for that tax, some not understanding the intricacies of how to charge for those fees and there are some that have figured it out to the benefit of the borrower and hence provide them with a modest gain in cash flow- in some cases up to $3000. I found it all to be completely up front and the client loves knowing that I helped them save money on their RM transaction. In addition since title insurance is almost all profit anyway, that is easily negotiable for borrowers, again to their benefit. Wonder if this is known by title company servicing the CU’s biz and passed on to the borrower?

FHA Insured Reverse Mortgages Without the SFSA, A Growing Trend?

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