Forbes: Must-Knows About Reverse Mortgage Upfront Costs

The latest in a series of reverse mortgage articles this week, Forbes recently spotlighted the upfront costs, among the other expenses, often associated with Home Equity Conversion Mortgages (HECMs).

The article, written by Wade Pfau, a professor of retirement income at The American College in Bryn Mawr, Pa., and frequent reverse mortgage commentator, details the three main expenditures to open a HECM: upfront costs, the initial mortgage insurance premium and closing costs.

“First, the mortgage lender can charge an origination fee,” Pfau writes. “With the HECM program, these fees are currently allowed to be up to 2% of the home value for homes worth $200,000 or less.”

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For homes worth between $200,000 and $400,000, Pfau notes the maximum allowed origination fee is $4,000 plus 1% of the home’s value above $200,000; whereas for homes exceeding $400,000, the maximum origination fee is $6,000. 

While these fees are the maximum amounts allowed by the government, Pfau suggests larger lenders with national advertising campaigns may charge the full amounts, “as their customers are less likely to engage in comparison shopping and may not recognize these fees as negotiable.”

He then goes on to state origination fees for smaller lenders may be much less, and that some might even provide credits rather than charges for the origination fee “as they earn revenue primarily by originating loans to sell on the secondary market rather than through charging origination fees.”

Read more at Forbes.

Written by Jason Oliva

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  • As a counselor, I find this interesting. Counselors are supposed to tell all of our clients to comparison shop. I usually find the National companies are more likely to drop the origination fee than the regional or local companies. The National companies seem far more aggressive in going after these loans.

    Frank J. Kautz, II
    Staff Attorney

    Community Service Network, Inc.
    52 Broadway
    Stoneham, MA 02180
    (781) 438-1977
    (781) 438-6037 fax
    FrankKautz@csninc.org

  • Frank, can you show us where it says HUD says Counselors are supposed to tell all of your clients to comparison shop?

    This is what I see in several various formats in the HUD Handbook:

    “Housing counseling agencies are not permitted to promote, represent, recommend or speak for any specific lender. The clearest way to avoid steering is by NOT PRESUMING THAT A CLIENT WANTS TO CONTACT A LENDER UNLESS THE CLIENT SPECIFICALLY ASKS FOR HELP IN FINDING A LENDER.”

    “If a client has already been in contact with a lender, the counselor must respect that established relationship by neither encouraging nor discouraging the continuance of the relationship.”

    I also want to note that while some lenders may not charge an origination fee, but when that is the case the margin will likely be higher. As HUD states, “Some lenders may charge lower origination fees, but they may charge higher interest rates. This practice may be more costly to the consumer.” It is also likely determined by how much the borrower may be drawing at closing because that is how the compensation to offset an origination fee is determined.

    • Hi Beth,

      I do apologize, I missed the follow up to these questions. (Usually I get them in my inbox, but this time it didn’t show up.) I went back and reviewed the protocol and I have to admit that I am wrong. The information I received came out nearly 10 years ago when I first started counseling and it was in my notes from the session I had with NeighborWorks back when the training was only two days (now it is five). It has been something I have done so long that it has become ingrained and now I realize that it was not part of the protocol, but rather the trainer’s perspective from years ago. It appears that I have to change what I have been doing.

      Thank you very much for pointing this out. It is important to me to find out when I have made a mistake. I honestly appreciate it.

      Frank J. Kautz, II
      Staff Attorney

      Community Service Network, Inc.
      52 Broadway
      Stoneham, MA 02180
      (781) 438-1977
      (781) 438-6037 fax
      FrankKautz@csninc.org

      • Thanks for the response and while hard, I’m glad you were “big enough” to admit to being incorrect. There are a lot of misunderstanding about this topic. HUD’s Handbook is very strong with their guidelines.

        I hope this helps other counselors as well. Everyone, including originators should be reading the Handbook to be familiar with HUD’s guidelines.

        We are all in this together to help senior homeowners.

      • Hi Beth,

        I’m the first to admit that I don’t know everything. 🙂 Seriously, sometimes we have been doing things one way for a long time and we are sure it is right, it takes having someone point out it is wrong to catch it. Thank you.

        Frank

    • Vera, reviewing normal, potential fees is part of the HUD guidelines. But as HUD states with lower fees the interest rate may be higher and “this practice may be more costly to the consumer.”

      However as I pointed out above and what I read throughout the HUD Handbook on Counseling, Counselors are NOT to stress Lender shopping. So please provide where HUD says Counselors are to tell borrowers to lender shop.

      • Vera, according to HUD’s guidelines you are not supposed to steer but you are also not to suggest speaking with several lenders. This is one quote but stated several different ways throughout their guidelines:

        “The clearest way to avoid steering is by NOT PRESUMING THAT A CLIENT WANTS TO CONTACT A LENDER UNLESS THE CLIENT SPECIFICALLY ASKS FOR HELP IN FINDING A LENDER.”

        “If a client has already been in contact with a lender, the counselor must respect that established relationship by neither encouraging nor discouraging the continuance of the relationship.”

      • If a client is in my office if they all ready have a lender picked out I do not say a word, if they ask me if there are other lenders or if they don’t have a lender I give them the HUD approved lender’s list and at that time suggest they call more than one. I would never violate HUD and I passed my exam with a 96 so please don’t quote HUD manual to me. I am a counselor you are a lender we are to respect each other and that is what I do. If a client ask me if the lender they have been working with is “good” I always reply that they adhere to the same lending rules that all approved lenders must follow.

  • Interesting are the comments by Wade Pfau. Sure, our senior borrowers need to be concerned and look at the costs they pay very carefully. The origination fee is and can be one of the larger items in the list of closing costs

    However, look at Beth Patterson’s comment, it is a very good one as far as the counselor is concerned. Beth also points out why origination fees may have to be charged on certain loans with characteristics that force it to be charged.

    In short, the case of the origination fee is not as simple as black and white as some may want people to believe.

    Product pricing, the margins on the ARM product as Beth puts it all makes a difference in the origination fee. It is not just because a company may be large or small the way Wade Pfau puts it, on the contrary!

    On the other hand, yes, origination fees can be competitive and the borrower should try and get the best deal they can, as long as they compare what they are asking for are Apples for Apples!

    John A. Smaldone
    http://www.hanover-financial.com

  • I do respect Frank Kautz as not only a counselor but as an attorney as well.

    However, as I said in my comment below, Beth Paterson made a very good point when she said:

    “However as I pointed out above and what I read throughout the HUD Handbook on Counseling, Counselors are NOT to stress Lender shopping. So please provide where HUD says Counselors are to tell borrowers to lender shop”

    I guess what I am asking Frank to tell us is where does it state that counselors are “supposed” to tell all of their clients to lender or comparison shop?

    Mind you, I am not saying a counselor should not advise their client to comparison shop but I would still like Beth’s question answered, if possible.

    In this day of age, costs should be a concern for our seniors, even though they do not in most cases have to come up with the actual dollars, they still realize the costs in their equity position in their home.

    On the other hand, our seniors can over shop and become very confused. If a senior finds a loan officer they have faith, confidence and trust in, that can mean all the difference in the world, maybe even more important than costs.

    I still say to the senior, shop around a bit but when they find a loan officer that is completely trustworthy and he or she gave the proper advise to meet the need of the senior’s, they need tostick with that LO! If a senior may find a cost lower, go back to that LO and see what he or she can do to compete!

    I will be very interesting to see what answer Frank comes back with on Beth’s question!

    John A. Smaldone
    http://www.hanover-financial.com

    • Hi John,

      Upon review, Beth is correct and I am wrong. I am embarrassed to admit it, but admit it I must. Please see my reply above.

      Frank J. Kautz, II
      Staff Attorney

      Community Service Network, Inc.
      52 Broadway
      Stoneham, MA 02180
      (781) 438-1977
      (781) 438-6037 fax
      FrankKautz@csninc.org

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