I thought it would be necessary to post this article just after my last “Lowest Reverse Mortgage Fees” because there are definitely some issues of concern about the ongoing costs of reverse mortgages, or any FHA loan for that matter. The last article defined the reasons for the dramatic decrease in up-front closing costs and fees associated with obtaining the reverse mortgage while this article aims to discuss the ongoing fees and charges that appear on a borrower’s reverse mortgage statement and thus, are added to the loan balance.
A recent new bill, HR5702, designed to give the FHA the power to regulated monthly insurance fees added to a borrower’s loan balance was received in the Senate and Read twice and referred to the Committee on Banking, Housing, and Urban Affairs on June 10, 2010.
FHA loans are insured by HUD and provide an element of safety and comfort to both lenders and borrowers but at a price. Without FHA insurance, some riskier types of loans might not exist and some segments of the borrowing population might not get loans at all. First time home buyers and reverse mortgages are almost always FHA insured today because few if any lenders are willing to jump back into the business of providing cheap credit with any amount of risk involved. The risk of a first time home buyer is obvious but reverse mortgages borrowers, whom may or may not be a credit risk themselves, are treated as such because the loan currently does not require any credit approval. Without credit approval or any required minimum credit scores, all borrowers are treated as if they may be a credit risk. That is why reverse mortgages would not exist today without FHA insurance that guarantees to make claims available to the lender in the event of a default and creates a non recourse loan for the borrower.
With defaults on the rise, the cost of this insurance is going higher. All FHA loans will require higher insurance premiums to be paid by the borrowers in the near future including reverse mortgages which are no longer considered a special niche program by the FHA that elected to pay reverse mortgage default claims from the same general insurance fund as all other FHA loans last year.
The current, on going, insurance premium charged to reverse mortgage borrowers is .50%. HR5702 gives the FHA the flexibility to raise these premiums to a staggering 1.55% tripling the cost of FHA insurance coverage on all types of FHA loans. First time home buyers will have a harder time qualifying at higher monthly payments with these premiums tacked on and reverse mortgage borrowers will have yet another deterrent to consider.
One could argue that policies like these are responsible, to a fair degree for extending the housing/real estate crisis but the argument is that without all of these adjustments, these programs might disappear entirely. To live and borrow in today’s environment is certainly difficult at best but some of us are still reeling from double digit interest rates the last time around. The bottom line is, that even with 1.5% increase in FHA insurance premiums, the overall ongoing cost with the interest rate added to a fixed rate reverse mortgage today would be around 6.5%.
Michael Manfredi is a Reverse Mortgage Specialist
Reverse Mortgage Concepts
Phoenix, AZ 85020
(602) 456-0009
(888) 697-5556
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