On Tuesday August 29th 2017 the Department of Housing and Urban Development released Mortgagee Letter 2017-12. This letter changes the reverse mortgage landscape forever and likely brings on the death of the reverse mortgage refinance. There were a couple changes announced at the same time. HUD announced that they will lower the annual mortgage insurance that is added to the rate from 1.25% down to 0.500% which is great news. They also had a formula previously on the upfront mortgage insurance charge that meant if you needed to utilize more than 60% of the total amount loaned immediately you would be charged a one-time fee of 2.5% of the value of the home and 0.500% if you utilized less than 60% right away. Now the utilization will not matter and borrowers will be charged a flat 2.0% no matter what. That is great for those high utilization people who were paying 2.5% but obviously bad for those who would have paid 0.500%.
The second and more serious change has to do with lowering the rate floor. The rate floor is a rate (5.06%) you want to make sure your interest rate is lower than at the time of closing allowing you to get the maximum cash out on the reverse. The rate floor in reverse is measured with the expected rate which is pretty much what it sounds like, it’s what they feel the rate may go to. The expected rate is comprised on the 10 year LIBOR (around 2.2%) and the margin set by the lender (2.875% is most common at the moment). Add the margin and the index to get the expected rate. Previously you could get max cash out as long as the expected rate was below 5.06% but HUD has said they will lower the rate floor to 3.00% for people who don’t have a case number by Oct 2nd. So if the index rate is 2.2% and the expected rate needs to say below 3.00% that means the lender needs to sell a margin of 0.80% and that likely won’t happen so people will be taking interest rates above the rate floor and leaving benefit money on the table. In some cases getting 20% less money.
The bottom line is borrowers who get a case number assigned on or after Oct 2nd will get less money and in most cases have higher upfront fees. A side effect of loan officers having to sell lower margins is much smaller commissions which will carry over into smaller credits to offset closing costs. HUD feels this is all needed in order to preserve the equity of the borrower but in the end it only benefits the Governments MMI fund. Borrowers will see higher upfront costs in the way of higher initial mortgage insurance premium costs and less ability to waive closing costs on all loans. The only way to avoid all of this is to call or email me today to get started. Don’t wait until the last second because in order to get that case number assigned you need to be counseled and have signed an app. I expect counseling companies to be backed up for the counseling appointments and lenders to be back logged getting the case numbers assigned. I look forward to hearing from you and assisting you in obtaining a reverse.