Recent changes in the HUD insured reverse mortgage program has left some of us scratching our heads, again. The program, once described by many as “Too good to be true,” is having a hard time living up to that comment in light of the new fee changes set to go into affect in October of this year.
HUD cut the reverse mortgage principle limit factor (loan amount) last October (2009), delivering a stunning blow to the reverse mortgage industry which has been down, across the boards by 39% in 2010. Combining the lower principle limits with already reduced real estate values was a knock-out combination punch that reduced the number of active lenders to under 800 from 3000+ a year or so ago and the number of closed loans is expected to dip to well below 80,000 from a high of over 130,000. The damage to the program would be far worse if lenders had not decided to collectively reduce the burden of costs associated with these loans by paying the lion’s share of closing costs on behalf of the borrower and waiving other fees. These actions by reverse mortgage lenders enabled some potential borrowers who might have been close enough to qualify, to close on a reverse mortgage without paying substantial, customary fees like lender origination fees, servicing fees and FHA mortgage insurance (MIP). We have all heard of someone who was saved from foreclosure this year, with a reverse mortgage and this is the reason why it happened.
As if this was not enough to protect the program from sure extinction, HUD has again made several changes to the FHA reverse mortgage program starting October 4, 2010. Like traditional (forward) mortgages, insured by HUD, the insurance fees HUD collects for reverse mortgages has been increased, by quite a bit. The industry has relied on HUD to insure a larger and larger share of mortgages throughout the credit crisis and the result is; more risk to the FHA insurance fund and higher fees for borrowers. The current reverse mortgage program requires an up-front FHA mortgage insurance premium of 2% of the appraised value of the home, up to a maximum of $12,500. This fee is added to the closing costs of the loan, however, due to falling home values and a sharp decline in the number of qualified borrowers, reverse mortgage lenders (the good ones) have been footing the bill on behalf of borrowers for this charge which is the most expensive of all charges associated with the loan. As the new changes take affect in October, lenders will be challenged to keep up the practice of paying fees for borrowers.
In addition to the up-front mortgage insurance premium (MIP) reverse mortgages also require and ongoing insurance premium (MIP) to HUD, for the life of the loan. This fee is currently 1/2 of 1 percent (.50%) of the current insured loan amount and is set to change to 1 and 1/4 percent (1.25%) on October 4, 2010. Borrowers with FHA case numbers assigned before October 4th can choose between the current and the new program. There are some benefits to the new program, even though it requires higher fees. You can read about the new program and see illustrations of its benefits HERE and decide how it may or may not be a good alternative to the existing, lower fee program.
Lenders are again coming to the rescue of borrowers faced with higher MIP and gravitating toward a lower interest rate loan to make some of the difference. If you have a current FHA case number but have not yet closed your reverse mortgage loan, call me to discuss the different options you have and I will quickly illustrate them. The changes are substantial, so an in depth look at things like ammortization schedules and credit line growth rate should be seriously considered.
Michael Manfredi is a Reverse Mortgage Specialist in Phoenix, Arizona
Reverse Mortgage Concepts
Phoenix, AZ 85020
(602) 456-0009
(888) 697-5556
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