Reverse Mortgage News Headlines

A few of the reverse mortgage headlines from the week:

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  • In response to “Lenders abuse reverse mortgage sales”

    Dear C Paikert

    Just a couple of comments regarding your article on reverse mortgages.

    The next time a financial planner tells you that reverse mortgages are expensive, will you please ask them about the $10,000 commission they just made on the $100,000 annuity they just sold. Or ask them if they discount their 2% management fee when their clients portfolio declines 15%. Seems like the pot calling the kettle black. Why do they get the liberty of passing judgment?

    When you ask a financial planner what is the best investment opportunity they will tell you that you will need to sit down with them so they can evaluate your whole financial picture before they can make any recommendations. But ask them about a reverse mortgage and they will give you a blanket statement. Why do they get that liberty? The appropriateness of a reverse mortgage requires a complete evaluation of the clients financial situation as well.

    As the fair and balanced reporter that I know you are, please allow me to offer a little more detail about this program and its costs.

    I have been a loan processor for over 17yrs. I don’t sell anything and just add up the numbers.

    When I first started my mortgage career it was very common for lenders to charge 2 points on every (forward) mortgage loan application plus all the applicable closing costs. As more and more competition entered the market lenders started marketing the “NO CLOSING COST” mortgage loan. The reality of this structure is the borrower would be charged a higher interest rate, which paid the lender a premium. The lender would use part of the premium to pay the closing costs and give the client the appearance of a “NO CLOSING COST” deal. The reality is that the client paid for the cost over time by accepting a higher interest rate.

    This practice has been ingrained into the publics mind so that any loan transaction that charges up front fees is thought to be expensive.

    Which is better, taking a higher rate and paying no fees or getting a lower rate and paying the fees up front?

    From the late 80’s and through the 90’s interest rates were constantly dropping. It was not uncommon for me to process a mortgage loan for the same customer 2 or 3 times a year. Everybody was refinancing to get a lower interest rate. With interest rates falling and customers refinancing multiple times it makes sense to take the higher rate with the lower fees.

    However, the reverse mortgage is not structured in this manner. The reverse mortgage transaction is designed to be done one time. It is not designed to be refinanced every other year. It is a one time loan and it is a long term loan.

    So comparing this to a regular mortgage, if you were going to purchase a home with a 30yr traditional mortgage and would not have the option of refinancing in the future, it would most certainly be to your advantage to take the lower interest rate and pay the fees up front.

    The interest rates on the FHA reverse mortgage are controlled by HUD. Every Tuesday HUD posts the rates for the week. They don’t give you a range of rates or the option of giving the customer a higher rate to offset the fees. They post one rate and it is at “par”, meaning there is no “premium” to the lender. The only way for the lender to cover the costs and make any money is to charge the fees to the borrower up front.

    The typical fees for any mortgage transaction include: appraisal fee, credit report, flood cert, title insurance, title closing, mortgage recording, and maybe a fee minor misc. fees. These are fees you will see with a reverse mortgage transaction as well.

    There are 2 fees that are charged on a reverse mortgage that make up approximately 80 to 85 percent of the total cost of the fees. These are the “Loan Origination fee” and the “FHA Mortgage Insurance” premium.

    The loan origination fee is capped by HUD and the lender can charge 2% of the appraised value of the home up to the FHA lending limit for the county in which the homeowner resides. HUD also allows for a minimum fee of $2000. I work in the Metro Detroit area. Most of my customers have home values around $120,000. Our FHA lending limit is $226,100 which means the loan origination fee could be $2000 up to a maximum of $4522. That is the total gross revenue for the lender on a loan. I have many many conversations with my customers and spend several months with them on these loans. These are not big money makers. No one is getting rich (in Detroit) writing these loans. Again, please ask your financial planner about the $10,000 commission on the annuity he sold you, which he spent a total time of 1hr on.

    Please also keep in mind that the lender does not see any payment stream on this loan. If a homeowner takes out a reverse mortgage at age 62, it is very possible that the lender will not get their money back (and their profit) for 25 to 30 years. Would it be ok if the lender charged some up front fee to cover their current overhead and payroll?

    The FHA insurance premium is 2% of the appraised value of the home up to the FHA lending limit for the county in which the homeowner resides. This fee has no minimum. If your home appraises for $50,000 the fee is only $1000. It is also capped at $4522, which is the max FHA lending limit on the high side (for Metro Detroit).

    Now please pay close attention to what the homeowner is getting for this fee.

    First, FHA is insuring the homeowner against any default by the lender. If the lender goes out of business (lenders are closing their doors everyday), FHA will insure the homeowner gets their full benefit from the loan. Second, and here is the biggest benefit of all. All FHA (and most private) reverse mortgages are “NON-RECOURSE” loans. This means the homeowner is not personally liable for this debt. I am going to repeat this again. The homeowner is not personally liable for this debt. This takes a little time to sink in so one more time. THE HOMEOWNER IS NOT PERSONALLY LIABLE FOR THIS DEBT! This is the greatest safety feature you could possible ask for in any type of loan and it is only available with a reverse mortgage.

    As I said, both the FHA and the private reverse mortgages are non-recourse loans. So why pay the FHA mortgage insurance premium when the private loans don’t charge the fee. Here is the benefit of the FHA program. The FHA program is going to give the homeowner approx. 50% more money and the interest rate is almost 3% less then the private programs. Keep in mind that this is a long term/one time loan and if you add up the fees and calculate the interest charges, project this into the future, paying the fees and getting the lower rate is generally always cheaper.

    The people that are making comments about the cost of these loans really don’t understand who my customers are. My customers don’t have million dollar portfolio’s. My customers are your neighbors trying to survive on $1500 a month when their bills are $2000 a month. How do they make ends meet? If they don’t have family helping them, they typically charge it. Many of my clients have maxed out credit cards at 16 to 20% interest rates.

    You can’t compare a reverse mortgage loan to a traditional mortgage because most of these folks can’t qualify for or afford the monthly payment of a traditional loan. A traditional loan that could cost them their home in a foreclosure.

    What you need to compare it to is their alternative choices. Moving? High interest rate credit card debt? Not buying their prescriptions that month?

    Please…………………….let the financial planners reserve their comments for their million dollar portfolio clients. These negative comments in the media scare the people who need this program the most. How about some balanced reporting?

    I help change the lives of my clients in a very positive and real way.

    I am proud of what I do and my customers love me.

    Sincerely,
    Richard Woychowski

  • I notice you all referenced an article in the USA Today. They had another one this weekend that was a flat out hit piece on the concept of reverse mortgages. It was a total disservice to their readers and presented an unfair and twisted version of reality. It is quite a shame that financial vehicles are demonized the way reverse mortgages were. Here is how I analyzed the article…

    http://theeprovocateur.blogspot.com/2008/01/demonizing-reverse-mortgages.html

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