Up-Front Reverse Mortgage Fee Now Less Than An Oil Change

HUD is out with its newly-minted HECM Saver reverse mortgage and the program has one stunning feature: It requires virtually no FHA insurance premium up front.

Reverse mortgages are often in the news, an unusual loan program intended for home owners age 62 and above. In essence, a reverse mortgage is a huge, negatively amortizing loan secured with property and not the borrower’s credit. It requires no monthly payment for principal or interest but the owner still needs to pay for taxes, insurance and repairs.

The usual idea is that a homeowner gets a reverse mortgage and can then stay in place in their home. Once the borrower moves or passes on the loan is repaid by the heirs (perhaps by refinancing the property), sold to pay off the debt or simply turned over to the lender. Since a reverse mortgage is non-recourse financing there’s no claim against the borrower or the estate beyond the property.

The FHA comes into the picture because it insures most reverse loans, or what it calls home equity conversion mortgages (HECMs). If the lender has a loss on the transaction it can turn to the FHA for compensation.

Because of the financial risks such loans represent, most reverse mortgages are only available with FHA insurance. For this reason it’s big news when the FHA changes its reverse mortgage program, and now we have a whopper.

HECM Saver

To this point there has been what can be called the HECM Standard loan. This is an FHA-insured reverse mortgage which often has been criticized because of the up-front costs.

Initially, HECM fees could be and often were equal to 2 percent of the home’s value. Since the home’s value was always more than the actual loan amount, the effective fee could be substantially larger than 2 percent. Moreover, the size of the origination fee was unlimited

In 2008, the rules changed for FHA-backed reverse mortgages. The loan origination could be no more than 2 percent of the first $200,000 of the mortgage, 1% for any higher amount but not more than $6,000.

In addition to the origination fee, HECM loans also had a big up-front cost for FHA mortgage insurance, 2 percent of the loan amount in most cases. This is a huge number because in many cases borrowers elected to get their HECM in the form of a line of credit, meaning that not all of the money was received at closing.

New Fee, Almost No Fee

Under the HECM Saver program the new up-front fee is virtually nothing. Here’s an example:

Smith gets a $250,000 reverse mortgage. Under the old program — the HECM Standard — the up-front insurance fee is equal to 2 percent or $5,000.

Under the HECM Saver program the new fee is equal to .01 percent — or $25.

That’s an up-front saving of $4,975.

The HECM Saver reduces HUD’s risk because it lowers the amount available to borrowers. The annual insurance premium remains the same under both the Standard and Saver programs.

The question is whether the reduced loan amounts and lower up-front insurance premiums are sufficient to offset the inherent risk associated with HECMs. HUD asked Congress for $800 million to subsidize the reverse mortgage program in fiscal 2010 and $250 million for fiscal 2011. In contrast, HUD says its forward mortgage program will earn as much as $6 billion in profits during fiscal 2011.

The HECM Saver program is an attempt to right the risks associated with FHA-insured reverse mortgages. It will take several years to see if the new program works, or if reverse mortgages will slowly become rare and exotic loans, if not entirely extinct.

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