New Reverse Mortgage Issues

Not that we do not already have a long list of potential problems with reverse mortgages - now we get word that new changes will make more problems. But maybe these new changes will be a deterrent of sorts. Ever changing interests rates and closing points are bound to scare many people away. Perhaps this will turn out to be a good problem. In an article in The Record titled Reverse mortgage: declining reliability we get a glimpse of the new changes and the effects they are already having. Let's take a look -

Reverse mortgages are becoming more popular, in part because retiree stock accounts have lost so much value. Federal data show a record 11,261 reverse mortgages were made in March, up from 9,086 the month before. The National Reverse Mortgage Lenders Association expects the number to grow to about 150,000 this year, up 30 percent over last year.

Last month — and without any real warning — Fannie Mae made changes that allow for higher margins for reverse mortgage lenders. Simply put, margins are the interest rate spreads a lender makes on the loan. So, the higher the margin, the higher the interest rate the borrower pays.

Worse still, under the new rules the margin — typically 2 to 3.5 percentage points — can change from the time a borrower submits an application and the loan is funded, which can be up to 120 days.

The borrower signs a disclosure form from the lender projecting the maximum amount of money the borrower may receive. But with rates that can change, the seniors will not really know how much they can borrow until closing, or days before. That makes the disclosure form practically useless, Smaldone said.

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But within the industry, fears are mounting that the higher margins are turning the reverse mortgage industry into the more traditional loan market, creating heavy competition that could lead to over-lending and introduce more predatory lenders.

Is this a bug or feature? And the sudden changes that caught the lending industry off-guard? There is definitely more to this than meets the eye.