Rising interest rates, FHA mortgage insurance premiums and huge rebates to loan originators leave senior borrowers little opportunity to pull out cash.
By Jeff Lazerson | email@example.com | MortgageGrader.com | August 07, 2022
* Article originally posted in Orange County Register on August 04, 2022
Equity rich, but cash and income poor seniors over age 62 are trying to survive the highest cost of living rates in more than 40 years.
The reverse mortgage – which typically provides monthly payments to the homeowners – was designed to serve as a safety net for struggling seniors, allowing them to tap into their motherlode of home equity.
But rising mortgage interest rates, monster mortgage originator rebates and expensive Federal Housing Administration mortgage insurance can reduce or completely deplete the tappable equity. Enormous transaction costs also cut into any potential to end house payments and put cash in seniors’ pockets.
As of 2020, just 4 out of every 100,000 mortgages were reverse mortgages.
“The reverse mortgage business is teetering on collapse because there is not enough loan volume,” said Ted Tozer, Ginnie Mae president during the Obama administration. Ginnie Mae is the secondary market for certain government-backed mortgage programs, including FHA-insured reverse mortgages.
There are two main types of reverse mortgages: the FHA reverse mortgage, or HECM (home equity conversion mortgage); and its so-called private label reverse, an FHA look-alike that’s available for lower ages in some cases.
These loans are effectively negatively amortizing fixed or adjustable-rate mortgages. This means the loan balance increases monthly. This is because reverse mortgages eliminate the monthly house payment.
The non-payment gets added onto your existing loan balance. At 3.5%, the balance increase is a lot smaller than when mortgage rates jump to 6%. The greater the debt, the faster the mortgage balance increases. Think of it as compounded interest going in the wrong direction.
Any existing mortgage liens must be paid off through the reverse refinance, along with the upfront FHA mortgage insurance premium and all other closing costs and points.
Loan origination fees are calculated by charging 2% for the first $200,000 in home value, plus 1% for any amount above that – up to a maximum of $6,000, said Steve Irwin, president of the National Reverse Mortgage Lenders Association.
On adjustable-rate reverse mortgages, huge rebates are offered to mortgage loan originators. One rate sheet I reviewed offered a maximum of more than 12 points. For a $750,000 loan, the rebate would be $90,000, plus a $6,000 loan origination fee.
Every charge and loan originator rebate are at the consumer’s expense. Large originator rebates translate to a smaller maximum loan and a higher mortgage note rate.
“No comment,” was the response from Irwin when I asked if the rebates should be reduced.
Lastly, there’s the mortgage insurance premium. The upfront premium for an FHA reverse mortgage is 2% of the home’s appraised value or 2% of $970,800, whichever is less. That means borrowers could pay up to $19,416 upfront for mortgage insurance. On top of that, there’s a mortgage insurance charge, which adds an additional half point to the note rate. Ouch.
FHA should drastically reduce the mortgage insurance premium charge.
Ginnie Mae should cap the purchase price of each closed loan at something closer to 102% as Fannie previously did. That would get rid of loan originator gouging.
And FHA should open this up to rental properties owned by seniors with modified requirements.
“Social Security and Medicare are running out of money,” Tozer said. “All people have is their homes.”
Freddie Mac rate news: The 30-year fixed rate averaged 4.99%, 31 basis points lower than last week. The 15-year fixed rate averaged 4.26%, down 32 basis points from last week.
The Mortgage Bankers Association reported a 1.2% increase in mortgage applications from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was $821 less than this week’s payment of $3,470.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 4.5%, a 15-year conventional at 4.375%, a 30-year conventional at 4.875%, a 15-year conventional high-balance ($647,201 to $970,800) at 4.75%, a 30-year conventional high-balance at 5.125% and a 30-year purchase jumbo at 5.25%.
Eye catcher loan of the week: A 30-year purchase jumbo with an interest-only rate and payment locked for the first five years at 4.875%, without points.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or firstname.lastname@example.org. His website is www.mortgagegrader.com.
Jeff Lazerson - Mortgage Columnist since 2011