Last month, I reported that a handful of reverse mortgage lenders had eliminating their servicing fees, in a move that would potentially save borrowers thousands of Dollars. Since then, many other lenders have already followed suit, with some going one step further and eliminating origination fees as well.

At this point, most of the major players in reverse mortgage lending have moved to match the fee cuts in one form or another, including Genworth Financial, Wells Fargo, OneWest Bank’s Financial Freedom, MetLife, and Bank of America. The former four will eliminate the origination fee and service fee set aside (SFSA), while Bank of America will contribute 50% of the reverse mortgage insurance premium. (In practice, these cuts are almost equivalent). All of the lenders have also announced reductions in in the interest rates that they will charge borrowers.

Reverse Mortgage Fee Cuts
The fee reductions (which could “save” borrowers $10,000+) have unfolded in the context of increased competition and decreasing volume: “From Oct. 1, 2009, to March 31, 2010, home-equity-conversion mortgage volume fell 22% from the same period a year earlier,” perhaps in response to falling home values. Given that reverse mortgages have basically become a commodity financial product, fought over by no less than 1,000 lenders nationwide, shrinking profit margins (in the form of fee cuts) were probably inevitable. In fact, the most recent data shows a slight uptick in volume, which perhaps shows that the cuts are working.

On the one hand, these cuts will probably be appreciated by the borrower. On the other hand, they are not exactly costly from the lender’s standpoint. When you consider that since all reverse mortgages are insured by the FHA (which, then, absorbs all of the risk), the lenders can basically sit back and collect rent (aka interest) risk-free for as long as the loan remains outstanding. The origination and servicing fees were certainly a nice bonus, but not exactly necessary to turn a profit. In fact, the latest trend is for reverse mortgages to be packaged and sold to investors (much like conventional mortgages); in this case, the lender’s responsibility is basically limited to collecting a handful of signatures from the borrower, before passing the reverse mortgage along its way and taking a cut in the process.

Moreover, the so-called savings that borrowers are supposed to realize from the fee reductions are typically rolled into the mortgage to increase the loan amount. Thanks to the structure of reverse mortgages and the law of compound interest, the lender can potentially earn more over the life of the loan by charging you less upfront. For example,$10,000 in savings rolled into the reverse mortgage will grow to $20,000 when the loan needs to be repaid (assuming 5% interest and 15 years), which means that the lender probably comes out ahead.

In short, the only way that you can come out ahead is simply to pocket the savings rather than using them to increase the loan size. For everyone else, these fee reductions might seem like a good deal, but the end result is basically a wash. From where I’m sitting, reverse mortgages are still expensive.

From Oct. 1, 2009, to March 31, 2010, home-equity-conversion mortgage volume fell 22% from the same period a year earlier.

3 Responses to “Reverse Mortgage Fees Fall, but Still High”

  1. Michael Belgeri Says:

    Let me first say thanks. You are elucidating the crux of the matter quite clearly. I am a Realtor AND a Baby Boomer. More important I am not a Mortgage Broker so I have no vested interest in the Home Equity Conversion Purchase Mortgage nor the Home Equity Conversion Mortgage.

    I agree with you completely that the “Reverse” product has a premium cost on it. I also agree that there are a number of consumer benefits that could be introduced to the interest structure that would lower the cost and give the consumer more cash.

    Yet despite the cost and the overall benefit to the money lender, this financial product, especially in the current market and especially as a Purchase tool, can make for an amazing financial change in the housing market. Let me give you my approach of how I’m looking at this using your example but using it as a purchase rather than a Re-Finance.

    My extended example has one additional parameter. The couple would have sold their empty nest and realized a profit of $600,000.

    Because of their use of the HECM purchase they now realize a tax free cash savings of $212,500.

    Suppose that property you use as an example is a Foreclosure or short sale property that meets the lender/FHA requirements and $625,000 is actually $100,000 below the appraised value. Here is what I see as benefits:

    1. The HECM Purchase has left $212,500 in tax free cash in the borrowers hands.
    2. The HECM Purchase of the property immediately creates an equity of $100,000 in the property against the future mortgage cost.
    3. Suppose the borrower or the borrowers heirs pick up a low cost permanent or term life insurance policy on the youngest of the mortgage signatories equal to the cost of the borrowed money 10 years out.

    You see where I’m going with this? As a Baby Boomer I have a different attitude toward both time and money than others. Buying a retirement residence is buying the home I will probably die in because it fits my aging lifestyle. I know that banks are lending money to make a profit. So what? Taking an aggressive approach and thinking as an investor about the money I’m taking from the bank rather than looking at the home as a Nest Egg device makes a big difference in the process and the product available.

  2. Re: “Are Reverse Mortgage Pricing Changes Confusing Consumers?” Says:

    […] be bad for borrowers, if they increase the size of reverse mortgage loan. As I discussed in a recent post, if a lender shrewdly (with or without the complete understanding of the borrower) rolls the […]

  3. samuel b.wells Says:

    we are paying off our reverse mortgage from met life early after 4 years. they will not give the unused service fee set aside money back. ($4,600) what can we do?

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