Are Reverse Mortgages Predatory Lending?no comments
I am a young 69-year-old who has no debt and owns her own home in Florida. I found a need for a loan to address some financial growing pains. I received an advertisement for a reverse mortgage so I thought I would research your program as you were recommended by HUD. What I found horrified me. As an example, if a senior citizen borrows $66,000.00, the repayment would be around $35,000.00 in one year. That is approximately 50% fees. I think that is called “usury” which is against the law in most states. You get away with it by calling the fees, service fees, or loan document fees. However, it is still an exorbitant amount of interest on any loan. The most disturbing part of these predatory loans is the fact that your company charges, 2% loan fee on the “appraised value” of the property, not the borrowed amount. Even though the citizen is only requiring a $66,000.00 loan, the upfront fee based on $400,000 is $8,000.00. As far as the risk to the loan company, well there is basically no risk at all. Even still, you charge the victim “insurance” loan guarantee. Why? If the victim passes away, you are guaranteed your money back with 6% interest. Since you will only loan 50% loan to value on the property, your risk is extremely low. (Insane). Shame on you Sir. If given the chance, I will pass along my concerns to our local politicians, Mr. Tom Selleck, and the AARP.
Thank you for your input but unfortunately you have misstated most of the program information. I am not sure where to begin but please allow me to attempt to explain the program, our part in the program and our “fees” vs the program costs and other costs involved.
Reverse mortgages are federally-insured loans
Firstly, out of everything you see in your package, lenders are allowed to charge an origination fee based on the value of the home up to a maximum of $6,000. The 2% charge you reference as the most disturbing is the HUD mortgage insurance and the lender gets no part of that money. It is the reverse mortgage insurance paid to HUD to insure the loan against the risk of default by the borrower. You may believe that amount is outrageous but in 2015, the program was almost shut down by Congress due to the over $5 Billion dollar shortfall which occurred as a result of shortfalls with property values upon borrower’s passing and also due to defaults and claims payments made to the Mortgage Insurance Premium (MIP) fund for things like taxes and insurance that borrowers failed to pay and HUD had to advance on their behalf. Due to the catastrophic losses, HUD acted by doing two things to shore up the MIP fund, they enacted the financial assessment guidelines to help prevent borrower defaults of payment of taxes and insurance and they changed the payment of both the upfront and renewal MIP premiums. Since that time. MIP premiums have actually been reduced from the increased levels to which HUD had initially increased them.
Some states have higher costs
Every other fee you see on those disclosures are bona fide third-party fees. For instance, your state of Florida charges extremely high Documentary Tax Fees and Intangible taxes and title insurance costs are among the highest in the nation making them the highest closing cost fees of any state. Everything from the title fees to document fees to credit report fees to tax service fees, and every other fee listed are all charges from other companies who provide those services for reverse mortgages (which is a specialized lending process) and reverse mortgage lenders cannot, by law, add even one penny to their fees or state regulators can fine and licenses are at risk if shown a pattern of overcharges. Reverse mortgage lenders undergo regular audits not just in Florida but in every state in which a lender holds a lending license and then must produce documentation that if a lender charges you a credit report charge for $37.50, there is an invoice for $37.50, and so on for every fee in the file – to the penny. A lender can charge the origination fee and that is the only charge in that entire package that you received that is paid to the company.
Reverse mortgages are not suitable for short-term borrowing
The closing costs on a reverse mortgage are “front end loaded” which means that they are paid at the beginning of the loan. This makes the reverse mortgage a very poor short-term choice. The loan was meant to be the last loan you will ever need and not an interim financing tool. You also receive a disclosure in your package known as a TALC (Total Annual Loan Cost) which illustrates this point. If you review the boxes on the TALC disclosure from left to right, you will see that it starts with a very short repayment period and as you have pointed out, if repaid in a year or two, the loan costs can be over 40%. However, as you begin to shift to the right and the loan is stretched out over 17 years, often that cost is reduced to 4% or less (I don’t know what yours says, I don’t have that information in front of me). If you read our articles and our blog posts, this is why reverse mortgage companies tell borrowers repeatedly that if they are looking for a short-term loan, a reverse mortgage is not a good choice, and if at all possible, they should look at other loans such as a Home Equity Line of Credit (HELOC) or other option. You need to know your goals and then choose the best loan product that meets your needs.
Reverse mortgages cost less the longer you have them
If you want a loan that will stay with you for 17 years without you needing to make a payment on the loan, the HELOC will not achieve that goal – but the reverse mortgage will. But since HUD does incur significant risks by insuring a loan against losses on which they may not see repayment for many years, they will require you to pay for insurance to obtain such a loan. But you need to understand that it is not the reverse mortgage lender that is charging for the insurance, and it is entirely your decision it that makes the loan right for your circumstances. If you have issues with HUD’s program or their administration or costs of the program, perhaps you should contact HUD or Congress with your protests since they are the only ones who can make any changes in that regard. But in speaking of on your concerns, AARP is fully aware of the program and has a complete write up on it on their site which includes your concerns about the HUD Mortgage Insurance fees for the loans being based on the appraised value, the other fees involved and the capped $6,000 origination fee that I mentioned above (it’s actually a very good article and I would suggest you give it a read).
There was never any shame being honest with people and letting them make an informed decision about their own homes. We do not believe in “selling” this loan program. We believe that we can only give people the honest information and then it is up to them to talk to their financial advisors, their families or trusted sources and make the decision that is right based on their goals. Perhaps this loan is not the right decision for you, and we respect that. But at least now you have the correct information and can do with it what you wish.
We wish you the best in all your future endeavors.
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