Seniors, not lenders, to pay for FHA losses on reverse mortgages
By Jeff Lazerson
What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.
Rate news summary
From Freddie Mac’s weekly survey: The 30-year fixed rate dropped to 3.78 percent, four basis points better than last week’s 3.82 percent. That’s the seventh rate drop in the past eight weeks, falling to the second-lowest rate since the presidential election. Ditto for the 15-year fixed, also landing four basis points better at 3.08 percent from last week’s 3.12 percent.
The Mortgage Bankers Association reported a 3.3 percent increase in loan application volume from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $424,100 loan, last year’s rate of 3.44 percent and payment of $1,890 was $81 less than this week’s payment of $1,971.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages at zero cost: A 15-year at 3.125 percent, a 30-year at 3.75 percent, a 15-year agency high-balance ($424,100 to $636,150) at 3.25 percent, a 30-year agency high balance at 3.875 percent, a 15-year jumbo (over $636,150) at 4.125 percent and a 30-year jumbo at 4.25 percent.
What I think: The Federal Housing Administration lost nearly $12 billion in the past seven years on the reverse mortgage loan program.
According to a U.S. Department of Housing and Urban Development analysis released last fall, more than 18 percent of reverse mortgage loans taken out since late 2009 are expected to go into default because these borrowers are not able to cover their property taxes and insurance.
Even the go-go predatory lending days before the mortgage meltdown had nowhere close to this astronomical 18 percent default estimation.
Lenders and their sales force can make obscene amounts of compensation on the back end of reverse mortgages by charging seniors higher interest rates, causing the debt to grow more rapidly. Most reverse mortgage originators earn in the range of 8 percent to 10 percent of the funded loan amount.
So instead of limiting what mortgage loan originators earn and leaving seniors with more real equity (and undoubtedly slowing loan defaults), HUD decided to double down against seniors.
Starting Oct. 2, senior reverse mortgage borrowers will pay 2 percent of the appraised value of their home upfront, up from 0.5 percent of the appraised value for a majority of reverse mortgage borrowers.
On the flip side, their annual mortgage insurance premium or MIP will be reduced to 0.5 percent, down from 1.25 percent over the life of the loan.
Borrowers largely will be able to access less money under the new formula.
Under the Dodd-Frank qualified mortgage-ability to repay rule, mortgage loan originators are limited to a maximum of 3 points on owner-occupied, first mortgages.
Congress gave reverse mortgages an exemption to this 3-point rule, according to former Consumer Financial Protection Bureau attorney Richard Horn, now of Tucson-based Rich Horn Legal.
Why is HUD raising the mortgage insurance premium instead of limiting originator compensation? I couldn’t get an answer from HUD.
Because no mortgage payments are required under a reverse mortgage, there are no mortgage payments for seniors to compare. But don’t be fooled. Get a reverse mortgage written quote as well as a reverse mortgage comparison summary of contrasting programs from at least three lenders.
You will be able to compare closing costs and the maximum payout to you. Those amounts can widely vary.
For example, some lenders may waive their upfront loan origination fee. Loan originators can charge a maximum of $6,000 in upfront points, according to Peter Bell, CEO of the National Reverse Mortgage Lenders Association.
This origination charge is not to be confused with all of the back-end points lenders can make at your expense.
Jeff Lazerson - Mortgage Columnist since 2011