Fox Business: Reverse Mortgage Feature

NewImage.jpgFox Business News features a new article on reverse mortgages covering the reduced fees and the potential for additoinal principal limit reductions in October.

“There are some seriously reduced fees: there’s no origination fee most times, no monthly servicing fee, and sometimes there’s no upfront insurance on the fixed rate,” says Brian Brown, mortgage manager at Lenox Financial Mortgage. “If seniors are considering the program, they need to move on it simply because the HUD is probably going to be decreasing the principle limit by anywhere from 5 to 20% by September or October this year [2010].”

The article recommends you shop around and compare the different offers from lenders.

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“I highly recommend speaking with several reverse mortgage lenders and/or brokers,” says Kenneth Klawans, president of iReverse Home Loans. “While cost should be one consideration in choosing who you work with, you must also feel comfortable with the knowledge and abilities of the loan representative.”

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  • u201c’The great thing is that you can never owe more than your home is worth,’ …. ‘Nobody is ever going to be left with an outstanding bill.’u201d How much poorly can nonrecourse be defined? rnrnLetu2019s say the borrower owes $220,000 but can clearly show that the home is worth just $180,000 from three separate appraisals. Will the amount due be $180,000 from that point forward or $220,000? Will the lender charge interest on $220,000 the next month or $180,000? In what way does the borrower not owe more than the value of the home? Before coming into the industry, I got this kind of statement and asked the same questions. The information provider was stumped. rnrnAs another example, say a borrower wanted to get an interest deduction so prepaid $50,000 on the loan five years before termination. At termination the home is worth $180,000 and the loan amount due is $220,000. How much more will the senior pay on the loan at termination — $130,000 (since she already paid $50,000) or $180,000? The answer is $180,000 for a total of $230,000 over the life of the HECM. There are no discounts or reductions for prepayments.rnrnNonrecourse on a HECM means the payment due at termination can never exceed the lower of the value of the home on that date or the balance then due (unless the borrower or heirs want to keep the home in which case the entire balance due must be repaid). We need to say what we mean and mean what we say. This is why seniors can make huge mistakes by trying to pay down their HECM in a market where home appreciation is low, stagnant, or trending down.rnrnThis article is full of other problems. For example the article states: u201cTo be eligible, you must u2026 live in the home and own it or have a low mortgage balance that can be paid off with the proceeds of the reverse loan when closing, according to the HUD web site.u201d We know the author meant to say that there must be no mortgage or a low balance on the mortgage — but it says what it does, warts and all. In fact we all know there does not have to be a low balance just a balance that the HECM proceeds plus contributions from the borrower can pay off unless subordination will apply.rnrnLater the author says: u201cThe portion of equity from a reverse mortgage depends on age, the appraised value of the home, fees, and interest rates. Using a calculator can help you figure out what you can borrow.u201d The problem is if one reads books by alleged authorities in the industry, they also talk about PLFs as if they are a percentage of equity rather than a percentage of the appraised value of the home. While I realize it is easy to make mistakes in speaking, we need to limit those in print. I know that is like talking to the wind but…. rn

  • Fox needs to talk to professionals that deal with RMs exclusively. The quote from Lennox Financial is simply not accurate. First, the lower origination fees they quote as going down are primarily on fixed rate products ONLY. Second, the principal limit reductions being lowered from 5% to 20% as stated were discussed in the context of the Congress not appropriating adequate funds for reverses for the coming fiscal year which starts in October. The Congress has approved $140 million and if passed by the Senate, which is what seems to be the case, the principal reduction will be more on the order of 1%-4%. The last thing we as professionals need to do is try to scare the senior into making a hasty choice based on false information.

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