I am a Reverse Mortgage Originator. There is a great deal of mystery surrounding margins. Let me simplify it for you because it has been a cause of great concern.

Prior to the collapse of the banking industry in the fall of 2008 there was an active secondary market among investers buying reverse mortgages. It was considered a low risk investment because of the government guarantee. As a consequence there was competition in the market and margins ranged between 1 and 2%.

Once the banking system collapsed the only remaining purchaser for reverse mortgages was Fannie Mae which was also technically insolvent. They continued to support the market at the margins previously in place. In the spring of 2009 Fannie Mae decided to raise the margins dramatically for two reasons: they hoped it would attract private capital back into the RM market and FNMA need the extra profit to offset balance sheet losses.

Under the current margins the borrower gets about 10-12% less than they did a year or so ago. This has been aggrivated by the fact the HUD has cut the funding level 10% for fear of future loan losses arising from depreciating property values.

In response to these changes many borrowers, especially those with a mortgage or immediate plans to use at least 50% of the money, have migrated to the HECM fixed which is now widely available at about 5.6%. This loan pays out at the maximum level allowed by HUD under the formula. It is not being funded by Fannie Mae but by her sister Ginnie Mae. Ginnie is a true agency of the Federal government and only funds FHA and VA loan.  Here is where it gets wierd. All the zombie banks wpuld rather have Ginnie paper on their balance sheet rather than Fannie. Fannie paper is discounted by 20% because the Government guarantee is only "implied" where with Ginnie it is specific.  The banks are borrowing money from the Fed for nothing, buying Ginnie paper and making money on the spread.

AARP is very unhappy with the present situation but they, along with other advocates, are powerless to do anything about it. There is no mood in Congress to subsidize the program and the financial problem at the banks and the GSE's is much bigger than this.

If you have a FHA adjustable rate HECM line of credit it is known as an open ended loan. That means any repayments you make increase your line of credit and can be reborrowed again . These payments are optional and you may make them in any amount and at any interval you wish.

Also the payments may be tax deductable. When you closed on your loan you were give a copy of the promissory note. In paragraph 6 it tells you the sequence of how the repayments are applied. Any initial repayments go to mortgage insurance which is currently deductable. After that, it goes to servicing fees which are not, then interest which is.

If your home was worth, say $200,000, you were charged $4,000 for up front FHA mortgage Insurance. Here's where it gets complicated. IRS makes you spread this out over a number of years. So you might have to repay all the mortgage insurance and service fees before you get to the interest which is fully deductable. In the interim you can dedeuct the Insurance Premium according to the schedule IRS allows. If they give no schedule I would use seven years which is the average maturity for a Reverse. If you satisfy it sooner than they you can take the unused part that year.

Do not expect tp get a good explaination of this from the servicing company because so few people repay. I would suggest you start off with a small repayment and see if it shows up on your statement and makes the line go up. If not call the servicer. If that doesn't work contact HUD. Servicers are not at liberty to change the rules. They have to follow what HUD says. I have a reverse from Bank of America that bought Seattle Mortgage, a real top notch lender. Whan i first deceided to beging making repayments for tax purposes the call center was no help. I then wrote a letter and got the reply I expected. i made a big payment, the lone went up and I got a 1099 showing that it was applied to the mortgage Insurance...yahoo!

I recently went with a reverse mortgage -- based on the payoff of the existing mortgage and the establishment of a credit line . . . that I do not need to draw on, except for the initial draw. 

I may be crazy, but I want to pay the monthly interest carry -- just to keep from paying interest on interest. The problem is the servicing company won't tell me where and what I should pay. Does anyone know where you go when you have a problem with the loan servicer's failure to communicate?

Thanks a bunch. 

Hey guys. I found this amazing website about reverse mortgage. Head on to http://rmapply.com It's worth it. Trust me.

I guess I don't quite see the differance between a RM and a regular mortgage except that the interest is deducted out of the amount raised at the beginning.

Karl

The title never passes to the lender except if borrower turns the title over to lender in a transaction called "transfer of deed in lieu of forclosure". The only amount that is owed  on a RM is the balance of the reverse mortgage consisting of original fees & insurance plus payoff of any secured debt to get the RM and any cash drawdowns plus interest and the 1/2% mortgage insurance on the debt over the period of time the debt was outstanding. As long as the homeowner pays the real estate taxes , home insurance and keeps up the property the RM will remain in force even if the creditline is 0.

Does this mean the lender gets the house for that 331k after the owners death?

Karl

My point was that an increase in  the margin decreases the amount of cash one receives from the RM.

The lending limit is the lower of $625,500 or the appraised value of the house. The cash available is based on the age of the youngest owner, 62 or over, the expected interest rate and the lending limit.

The expected interest rate (IE) is sum of the 10 year CMT (US Treasury) + the lender's margin. There is a minimum IE of 5.5%

If the margin is 3.5% and the 10 Yr CMT is 3.21% the IE is 6.71%

If lending limit, home appraisal, is $500,000 and age of borrower in 75, the net cash after set aside, insurance & fees = $290,810.

If margin was 2.5% the net cash = $331,412. The 3.5 margin yeilds $40,602 less cash than the 2.5% margin.

Owen