Lock and Load; What do Reverse Mortgage Borrowers Get?

Like rivalrous siblings, the forward and reverse mortgage worlds frequently sneak sideways glances at what the other is doing. Escrows? Suitability? Counseling? “Let’s see – what’s he doing now? Should I do that?” Practically speaking the two products are more unalike than similar, yet the comparison game goes on, now with a new question, this one about rate locks – or the lack thereof.

“Because the reverse mortgage business doesn’t really have any long-term rate lock provisions like the forward industry does, consumers are left unprotected when it comes to the rate they will get at closing,” argues Mike Gruley of 1st Financial Reverse Mortgages. He is referring to fixed-rate products. “In our experience, if a borrower applies for a 5.06 percent fixed-rate and the rate goes to 5.31 percent by closing, the borrower receives less money at closing.  For LIBOR loans, the borrower gets the better PL [principal limit] either set at the application date or the closing date.”

“Yes,” says Jerry Wagner of Ibis Software Corporation. “HECM already has a price lock that is good for 120 days from the case number date. The borrower gets the higher of the PL as of the app date or the closing date.” And, HUD tells RMD that Mortgagee Letter 2003-16 established FHA’s policy to allow lenders to lock-in the expected interest rate, which is used to determine the principal limit, at initial loan application. Subsequent guidance, according to the federal housing agency, can be found in ML 2006-22.

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Gruley adds that “for the majority of my tenure in the reverse business, rates have mostly stayed the same or gone lower, so this was not an issue. Rates have almost always moved in the borrowers’ favor. But, in today’s environment, what will happen as rates rise and loans die?” he asks, answering: “Lenders are forced to take hits on pricing.”

From an image – or better yet a personal service perspective – Shannon Hicks of Reverse Fortunes, notes that “keeping promises to the customer is key, even more so when dealing with a protected class of consumers such as seniors. A principal limit lock would be beneficial as a ‘good-faith’ promise and for many who have borderline equity to qualify paying off existing mortgage(s).” According to Hicks, “the real question is the feasibility of such a proposal in the secondary markets.”

Written by Neil Morse

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  • How quickly we forget. There is far too much inaccurate information in this article. It would have been slightly more reflective of the situation in the industry if it had been written in 2008. Although the article never states so it addresses HECMs and only HECMs.

    What may be true about HECMs (and not all in this article is true even when it comes to HECMs) is not necessarily true about proprietary products. For those of us who provided proprietary products in prior years, there were adjustable rate proprietary products where “Principal Limits” never changed between application and closing, no matter what happened to indices or margins. Although we were told that if there were ever significant changes in the “expected interest rate” it was possible “Principal Limits” would change, it never occurred with any proprietary reverse loans I worked on.

    Now as to adjustable rate HECMs, many of us woke up one day in 2009 to find that the “Principal Limit” lock-in rules available to lenders under Mortgagee Letter 2006-22 (which most lenders had adopted) were being abandoned by lenders. While lenders had no problem honoring those rules if indices changed, they were suddenly facing a new problem — Fannie Mae was requiring higher margins. This difference made most of feel like — as to adjustable rate HECMs — we were heading back into the era before Mortgagee Letter 2003-16. It was not a comfortable feeling. If you forgot about that time or were not in the industry in those days, you can read about it in the RMD article dated May 5, 2009 titled “FNMA’s Reverse Mortgage Pricing Changes Worry Industry” and the linked articles.

    When it comes to adjustable rate HECMs, as to changes in indices much in this article is true but the same cannot be said about changes in margins. It was difficult explaining why lock-in principal limit letters were not being honored in 2009 and most lenders stopped issuing them as a result and instead honored them if margins did not change between application and closing.

    Back in mid 2006, Financial Freedom could not process HECMs within 60 days; it was during the days FF was the largest wholesaler in the industry. The ten-year CMT was rising and the possibility existed, many in the industry were going to have to inform borrowers that the principal limit lock-in letter they had signed could not be honored due to no-fault of borrowers. But HUD came to our rescue with ML 2006-22. Over the years many of us have seen the expected interest rate rise between application and closing; that is exactly why ML 2003-16 was written.

    I have intentionally left fixed rate HECMs and proprietary reverse mortgages to the comment of others.

  • How quickly we forget. There is far too much inaccurate information in this article. It would have been slightly more reflective of the situation in the industry if it had been written in 2008. Although the article never states so it addresses HECMs and only HECMs.

    What may be true about HECMs (and not all in this article is true even when it comes to HECMs) is not necessarily true about proprietary products. For those of us who provided proprietary products in prior years, there were adjustable rate proprietary products where “Principal Limits” never changed between application and closing, no matter what happened to indices or margins. Although we were told that if there were ever significant changes in the “expected interest rate” it was possible “Principal Limits” would change, it never occurred with any proprietary reverse loans I worked on.

    Now as to adjustable rate HECMs, many of us woke up one day in 2009 to find that the “Principal Limit” lock-in rules available to lenders under Mortgagee Letter 2006-22 (which most lenders had adopted) were being abandoned by lenders. While lenders had no problem honoring those rules if indices changed, they were suddenly facing a new problem — Fannie Mae was requiring higher margins. This difference made most of feel like — as to adjustable rate HECMs — we were heading back into the era before Mortgagee Letter 2003-16. It was not a comfortable feeling. If you forgot about that time or were not in the industry in those days, you can read about it in the RMD article dated May 5, 2009 titled “FNMA’s Reverse Mortgage Pricing Changes Worry Industry” and the linked articles.

    When it comes to adjustable rate HECMs, as to changes in indices much in this article is true but the same cannot be said about changes in margins. It was difficult explaining why lock-in principal limit letters were not being honored in 2009 and most lenders stopped issuing them as a result and instead honored them if margins did not change between application and closing.

    Back in mid 2006, Financial Freedom could not process HECMs within 60 days; it was during the days FF was the largest wholesaler in the industry. The ten-year CMT was rising and the possibility existed, many in the industry were going to have to inform borrowers that the principal limit lock-in letter they had signed could not be honored due to no-fault of borrowers. But HUD came to our rescue with ML 2006-22. Over the years many of us have seen the expected interest rate rise between application and closing; that is exactly why ML 2003-16 was written.

    I have intentionally left fixed rate HECMs and proprietary reverse mortgages to the comment of others.

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