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Reverse mortgage market could teeter on collapse – Orange County Register

By on August 4, 2022 0

People over the age of 62, wealthy in equity but poor in money and income, are trying to survive the highest cost of living in more than 40 years.

The reverse mortgage – which typically provides monthly payments to homeowners – was designed to act as a safety net for struggling seniors, allowing them to tap into their home equity.

But rising mortgage interest rates, monster discounts from mortgage originators, and expensive mortgage insurance from the Federal Housing Administration can reduce or completely deplete usable equity. Huge transaction costs also reduce any possibility of ending house payments and putting money in the pockets of the elderly.

In 2020, only 4 out of 100,000 mortgages were reverse mortgages.

“The reverse mortgage industry is on the verge of collapse because there is not enough lending volume,” said Ted Tozer, president of Ginnie Mae 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 or HECM reverse mortgage (home equity conversion mortgage); and its so-called private label lapel, an FHA lookalike that is available for lower ages in some cases.

These loans effectively amortize fixed or adjustable rate mortgages negatively. This means that the loan balance increases monthly. This is because reverse mortgages eliminate the monthly house payment.

The non-payment is added to your existing loan balance. At 3.5%, the balance increase is much smaller than when mortgage rates climb to 6%. The higher the debt, the faster the mortgage balance increases. Think of it as compound interest going in the wrong direction.

All existing mortgage liens must be paid off through the reverse refinance, along with the initial FHA mortgage loan insurance premium and all other fees and closing points.

The loan origination fee is calculated by charging 2% for the first $200,000 of the home’s value, plus 1% for anything over that amount — up to a maximum of $6,000, Steve Irwin said, President of the National Reverse Mortgage Lenders Association.

On variable rate reverse mortgages, huge discounts are offered to mortgage originators. A rate sheet I reviewed offered a maximum of over 12 points. For a loan of $750,000, the repayment would be $90,000 plus a loan origination fee of $6,000.

All costs and refunds of the principal are the responsibility of the consumer. Significant originator discounts result in a smaller maximum loan and higher mortgage rate.

“No comment,” was Irwin’s response when I asked if discounts should be reduced.

Finally, there is the mortgage insurance premium. The initial premium for an FHA reverse mortgage is 2% of the home’s appraised value or 2% of $970,800, whichever is lower. That means borrowers could pay up to $19,416 up front for mortgage insurance. On top of that, there’s a mortgage insurance charge, which adds an extra half point to the rate on the note. Ouch.

The FHA should significantly reduce mortgage insurance premium costs.

Ginnie Mae should cap the purchase price of each closed loan at something closer to 102% like Fannie has done before. This would eliminate loan originator abuse.

And the FHA should open that 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 house.”

Freddie Mac rates the 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.

At the end of the line : Assuming a borrower gets the average 30-year fixed rate on a conforming loan of $647,200, last year’s payment was $821 less than this week’s payment of $3,470.

What I see: Locally, well-qualified borrowers can obtain 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 -balance ($647,201 to $970,800) at 4.75%, a 30-year conventional high balance at 5.125%, and a 30-year buy jumbo at 5.25%.

Eye-Catching Loan of the Week: A giant purchase over 30 years with an interest rate only and payment locked in 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 [email protected] His website is www.mortgagegrader.com.