Why Closing Costs Can be a Deal-Maker for Reverse Mortgage Borrowers

In times of falling interest rates, reverse mortgage originators have had the capacity to pass along savings to borrowers in the form of covering some of the loan’s upfront costs and reducing the upfront fees overall.

Today, with rates rising, borrowers are increasingly facing the full upfront costs, it is increasingly important to clearly explain and detail those reverse mortgage costs and fees to consumers, says Craig Barnes, education leader for Reverse Mortgage Funding. By addressing all costs, originators can start a conversation about the loan’s benefits and protections.

“What education can we impart to loan originators about the virtues of the product regardless of whether you can sell it for zero closing costs?” Barnes asked during a presentation before attendees of the National Reverse Mortgage Lenders Association Western Meeting on Wednesday. “When rates rise and originators are not able to cover as many closing costs are before, it’s increasingly important to know what those costs are.”

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Borrowers who have had a forward mortgage will be familiar with many of the closing costs, Barnes noted, such as fees relating to title and escrow, appraisal services and insurance.

Costs that are unique to the reverse mortgage product should be detailed carefully with borrowers upfront, he says, so they understand the purpose of those costs — namely, borrower protections.

The mortgage insurance premium is often noted in the mass media as one of the hefty upfront costs of getting a Home Equity Conversion Mortgage. Particularly for those drawing more than 60% of the loan proceeds in the first year and paying the upfront MIP of 2.5% of the appraised value of the home, this can amount to a large sum for borrowers.

But for the upfront cost comes a very important protection, that should be detailed and shared and explained to borrowers, Barnes says.

“We have to explain MIP is there to protect the borrower,” he says. “We can’t have the non-recourse [feature] and not have MIP.”

Further, for those who are facing the higher upfront MIP but are on the cusp of drawing more than 60% of the loan proceeds in the first year, Barnes suggests explaining to borrowers how by bringing cash to close the loan can help them borrow more in the long run by reducing the MIP.

“In some cases, you as an originator can save borrowers lots of money,” he says, pointing to a recent transaction where the borrower could bring less than $100 to closing in order to save around $5,800 on the mortgage insurance premium.

“Now [the originator] has two loans in the pipeline that were referrals from that borrower,” Barnes says. “It sure didn’t hurt that they saved almost $6,000 [for the borrower].”

Written by Elizabeth Ecker

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  • Let us be clear the following quotation is both questionably true and false: “’We have to explain MIP is there to protect the borrower…. We can’t have the non-recourse [feature] and not have MIP.’”

    MIP is NOT a protection for borrowers in the form of the nonrecourse nature of HECMs. That is false. It is a pass through cost of a protection for the lender.

    There is NO MIP on proprietary reverse mortgages but all of them must be nonrecourse per federal law [15 USC 1602(cc)]. No proprietary reverse mortgage has MIP; neither did the biggest competitor to HECMs, Home Keepers, also a proprietary reverse mortgage.

    Why have MIP? First it allows lenders to offer HECMs with lower interest rates since lenders do not have to recover any loss created by the nonrecourse feature of the reverse mortgage. Second the MIP is low since US taxpayers pay all costs related to the insurance operation itself through annual Congressional appropriations for the program and FHA has no profit motivation in its insurance operations.

    So how do you explain all of that to a borrower? MIP holds down interest rates on what is to lenders a very risky loan. If there were no MIP, interest rates would make the available proceeds lower and would also mean much higher interest rates on the balance due.

    If the industry keeps relying on the false explanation for MIP, the value of HECMs will fade for those with any common sense about loans and their costs. That is exactly the crowd we are now trying to get to look at HECMs. Better to be honest than to be found misleading. This is but another way that HECMs are not too good to be true.

    • Hi James,

      I want to echo what you said, because it is very important for those selling these loans.

      The short form is that MIP is there for the protection of the lender and the government to reduce their chance of loss. The borrower has to pay it if they want the loan, even though it gives them no earthly benefit whatsoever. It is simply a requirement of the loan, one which all FHA loans are required to pay.

      The sooner salespeople stop trying to make a selling feature out of MIP and just acknowledge that it is what it is, the better off they will be. The more they try to talk around it and make it sound better than it is, the more they lose credibility when their client talks it over with a counselor. Some of the best salespeople that I know do not sugar coat this or any other charge. I can always tell when I am counseling their clients because the clients already know about the charges and do not have any false illusions. Those salespeople’s credibility is bolstered by counseling because they have been up front with their clients. They become even more trusted. The ones that have tried to talk their way around it tend to lose credibility. When it comes to making a choice between companies, where do you think the consumer is likely to go?

      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

      • Mr. Kautz,

        Lenders do not have to charge any MIP in fact in prior years there were periods of time when few HECMs were charged with upfront MIP even though it was 2% at those times. Some lenders did not charge upfront MIP on Savers since the maximum amount was only $62.55. Lenders are free to charge whatever they want for MIP as long as the charge does not exceed the lender’s actual cost.

        One large credit union that was a small HECM lender did not show ongoing MIP being charged in its amortization schedule even through the form was conforming and had a column for that cost.When contacted the VP of lending stated that they did not charge MIP for customers who had total bank accounts totaling above a minimum amount even though that policy was being examined for change by the Board of Directors. (We never communicated again and I received no other documentation other than the free amortization schedule the lender provided on its website. So at best the information is an anecdote.)

        Borrowers cannot negotiate for FHA insurance on their own and cannot pay it directly to HUD. It is the liability and cost of the lender which is free to pass the cost through to the borrower but is the party who must pay it to HUD directly..

        If my conclusions are incorrect please respond as I do not want to mislead anyone.

      • Hi Mr. Veale,

        Sorry I am getting to this late, I didn’t see it when it was originally posted. I agree with everything that you said, but I do not know how that contradicts what I said. There is no benefit to the borrower when it comes to MIP. I will grant that the lender may choose to pay it for their customer, but most do so. The Saver program has been gone for years, so I no longer even discuss it when counseling. I am focused on the here and now, not the past. I remember how those upfront fees got waived, but it will not do any of my current clients any good.

        The fact remains that most lenders either charge for MIP or they offer a “credit” towards the MIP cost. Some of the lenders offering the “credit” raise their margin to compensate, so that they are covering it one way or another.

        Good luck,

        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

  • Very good point Jim Veale brought up on the MIP issue as well as the other points Jim has brought out.

    Also, Frank Kautz comment not only reinforced what Jim Veal stated but Frank also brought other good points to the surface.

    I could not offer anything better than these two gentleman did, good job Jim and Frank on your reply!

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

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