Americans Don’t Know Their Mortgage Rates, Do Reverse Mortgage Borrowers?

Many Americans say they are unsure what the rate on their mortgage is, according to a new study commissioned by Bankrate.

But experts in the reverse mortgage space say often the reverse mortgage borrower is a little more tapped in than the average forward mortgage borrower — especially those taking out the loan as a line of credit.

About 35% of the survey respondents who have a forward mortgage say they are not very confident they know what their mortgage rate is, according to results of Bankrate’s Money Pulse survey for February.

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“Reverse mortgage borrowers may not be aware of it off the top of their head, but are aware of what is it by referring to the monthly statements they receive,” Beth Paterson, CRMP, executive vice president of Reverse Mortgages SIDAC, tells RMD. “After the loan has closed most may not care about the interest rate, although those with the line of credit may pay more attention because the line of credit growth rate is based on the interest rate of the loan.”

While 65% of forward mortgage borrowers said they are confident they know their mortgage rates, mortgage advisors tell Bankrate that percentage is likely lower based on experiences with their clients.

“As consumers, once we get the mortgage, we sweep the rate under the rug and we don’t worry about it,” Ed Conarchy, a mortgage adviser for Cherry Creek Mortgage Co. in Gurnee, Ill., tells Bankrate. “So, we don’t look at rebalancing or refinancing opportunities.”

Access results from the Bankrate survey here.

Written by Cassandra Dowell

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  • “Do reverse mortgage borrowers know what their interest rate is?” Well, kinda sorta but not really mainly because they don’t normally get a very clear explanation of what the base rate is nor the additional monthly charges that accrue but are not disclosed as a “true cost of credit” or “effective interest rate”, like the 1.25 percent monthly mortgage insurance premium. Additionally borrowers seldom understand that there is no refund of “unearned premium” in the event of early payoff nor do they fully understand the pace at which their variable rate can adjust nor by how much. Many in this industry don’t fully understand any of this either which certainly compounds the likelihood that the borrower is a bit foggy about all of it. The monthly statements are a colossal monument to obfuscation and non information and anyone who chooses to argue with this FACT simply needs to talk to a hecm borrower on the phone and have them looking at their statement.
    So, “do hecm borrowers know what their interest rate is?” Not a chance.

    • hecmvet,

      I generally agree.

      It is ridiculous to frame the story in terms of our borrowers vs. “their” borrowers especially when the only evidence offered as to reverse mortgage borrowers is 100% anecdotal. Based on a larger percentage of reverse mortgage borrowers sufferinmg significant loss in financial acumen over the term of reverse mortgages than forward borrowers generally, it is very hard to believe that HECM borrowers know their interest rates better than forward mortgage borrowers generally. Seniors are a protected class and there are important reasons why.

      RMD posted the following article relaying the story of a Home Keeper (a discontinued type reverse mortgage offered by FNMA and somewhat competitive to HECMs) borrower who complained about a negative change in their line of credit: http://rmdaily.wpengine.com/2009/06/02/negative-loan-growth-hits-reverse-mortgage-credit-lines/.

      Yet HECM borrowers have experienced the exact same thing. Borrowers with HECMs with servicing fee set asides (who even bother to check) generally find that the change to their line of credit when there is no other activity impacting the line of credit during the month is generally lower than the monthly growth rate that applies to the Principal Limit for that same month.

      The first time I calculated the change in the line of credit back in 2005 for a tax client I had advised to get a HECM was a nightmarish experience since no one could tell me why — when it was a full month and there was no payout from the line of credit to the borrower that month and the borrower did not pay down her balance due that month — the change was something other than one-twelfth of the sum of the current note interest rate plus the ongoing MIP of 0.5% times the end of the prior month’s available line of credit!! In fact it was smaller. It was then that for the first time I heard from one of several servicing staff members I spoke with that the amortization of set asides can also enter into the computation of the change in the available line of credit causing the line of credit to “grow” slower or in some cases faster than the growth rate for Principal Limit otherwise would. That person defined the Principal Limit growth rate as one-twelfth of the sum of 1) the annual rate of the interest being charged on the balance due for that month plus 2) the annual rate being charged as ongoing MIP. The ongoing MIP annual rate at that time was only 0.5% (but was increased to 1.25% but only for HECMs that received their case numbers after October 3, 2010).

      Based on reactions to the following RMD article I wrote near the end of summer 2009, there is a real question if all but a few HECM borrowers ever compute the change in their monthly line of credit that is until they begin observing that the change is negative: http://rmdaily.wpengine.com/2009/08/03/are-reverse-mortgage-credit-lines-really-shrinking/

      It is ridiculous that we are still using terms like the “line of credit growth rate.” The following two factors can significantly impact the change in the line of credit: 1) the growth in the Principal Limit and 2) the amortization of set asides such as the servicing fee set aside and soon LESAs. Other amortization can also impact an available line of credit such as amortization related to payouts over a term certain or tenure payouts.

      Those who have calculated the change in the HECM line of credit when a servicing fee set aside is still being amortized can verify that the growth rate which applies to the Principal Limit will not directly apply to the line of credit. The so called line of credit growth rate is simply an industry myth for HECMs with an amortizing set aside. However, when there are no set asides subject to amortization and there are no other activities in the line of credit, the rate of change for the line of credit is the exactly same as the growth rate for the Principal Limit.

      [The opinions expressed in this reply are not necessarily those of RMS or its affiliates. All reverse mortgages, including HECMs, discussed in this reply are assumed to be adjustable rate. Amortization in this reply is only amortization calculated using the expected interest rate for that HECM.]

      • Mr. Veale, I would just love to hear you explain this to one of my borrowers. This is the biggest problem we have in that by the time we have fully explained it, no one can understand it. Regulations make simplification impossible. Personally I consider the immaterial adjustments that you refer to in the line of credit balance are hardly worth worrying about.

      • hecmvet,

        You state: “Personally I consider the immaterial adjustments that you refer to in the line of credit balance are hardly worth worrying about.” Yet our integrity is based on our accurate explanations of the product. When borrowers discover that the change in the line of credit is NOT the growth rate in the Principal Limit, some lose their confidence in us based on what we told them to start with. Some even believe that the correct method of computing the change in the line of credit is “changing the terms of the loan” based on what we originally told them.

        Many originators find it easier to blame this or that rather than understanding that as salespeople we make trade offs. We want the senior to trust us but we put that trust at risk when we tell them some myth about how this or that is computed to simplify the explanation so that it is “understandable” rather than accurate; some do not really care enough to know what the right way is and so do nothing more than say what they believe will secure the sale.

        One speaker at the NRMLA conventions years ago used to present a session on HECM nomenclature. When he described how the servicing fee set aside was computed it was gibberish but he claimed that it got one close to the right answer which in many cases was utter nonsense. But as he said, either you choose this method or something similar otherwise you will be with the senior for hours and lose the loan anyway because of complexity of the actual computation.

        The problem with the regs and the HECM Handbook is that Mortgagee Letters have changed how things are computed over the years. For example, the growth rate used to be one-twelfth of the sum of the EXPECTED interest rate plus the ongoing MIP annual rate. The problem was that when the note interest rate got significantly higher than the expected interest rate for a substantial period of time, the change in the available line of credit started dropping like a rock. Just the opposite was true when the expected interest rate was significantly higher than the interest rate on the note for a substantial period of time. The replacement of the expected interest rate by the current interest rate on the note was mandated in Mortgagee Letter 1997-15. So even now we have some Principal Limits increasing using the expected interest rate in the growth rate but the vast majority are increasing using the current interest rate on the note in the growth rate.

        Yet the guiding principle as to explanations of difficult HECM concepts should be the explanations that your employer sanctions. The problem becomes intensified when you work for a broker who represents several lenders.

        (The opinions expressed in this reply are not necessarily those of RMS or its affiliates.)

      • Mr. Veale, this reminds me of a favorite expression: “I can explain it to you but I can’t comprehend it for you.”
        We can explain all day long and then bury our clients in disclosures and then our integrity will be preserved but our clients won’t be any wiser nor will they get any wiser as they age. I grow weary of our industry trying justify all of this complexity when it should be demanding change instead.

      • hecmvet,

        In the hope of bringing further clarification, currently without set asides for anything other than repairs, I simply explain to prospects that the growth rate is the factor by which the line of credit normally grows unless there are tenure or term payouts. If the latter is the case, I encourage them to send me their monthly statement to verify if the change to the line of credit is correct explaining that FHA requires adjustments to the so called growth when these options are in effect.

        With the addition of LESAs (whenever that will take place), my explanation will remain the same but adding the caveat that if they are required to have a LESA or tenure payouts or if they elect tenure or term payouts, I will help them verify that the change to the line of credit is correct.

        Despite our desire for simplicity, HUD must hold to the line of credit computations if the principal limit factors are to remain rational.

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