Seniors have more options than ever due to recent changes with the Reverse Mortgage product. During the 4th quarter of 2010 FHA added the HECM “Saver” product to its lineup. (HECM stands for “Home Equity Conversion Mortgage” – i.e., a Reverse Mortgage). The Saver product reduces the costly up-front mortgage insurance premium from 2% to just .01%. So the up-front costs are much cheaper than the “standard” HECM product.

This makes the Saver product perfect for the senior that wants to use his or her Reverse Mortgage primarily for contingency purposes and whose goal is to minimize the use of the Reverse Mortgage funds.

For example, some seniors do not need the funds provided by a Reverse Mortgage right away, as their retirement income is sufficient for most expenses. Also they do not want to incur the monthly and annual interest charges that build up on a Reverse Mortgage over time. By using the Saver Product, combined with an Adjustable-Rate HECM, one need not take any funds at closing but can choose to leave all of the Reverse Mortgage funds in an interest-bearing line-of-credit. Over time the amount of funds available grows as the interest proceeds are credited to the amount available.

An example can help. Say your home is worth $400,000 and you have no mortgage and you are 70 years of age. With a HECM Saver loan, using the Adjustable version, you can close your loan with minimum expenses and have a $163,000 line of credit available to you to draw on at any time for any purpose. If you do not need the money, but rather keep the funds in your line-of-credit in reserve for a period of time, the amount of funds avaialble to you grows by about $7000 per year. And, your home’s equity does not go down which can occur when the amount owed on your loan grows due to use of the funds within the line-of-credit.

This is the perfect scenario for the senior who plans on using the Reverse Mortgage primarily for contingency reasons. And, it preserves equity for future use or to pass on to heirs while provide peace of mind as the funds are availble if needed.

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Today we saw another drop in mortgage rates. This continues a trend that has developed over the past couple of weeks. The all-important Ten-Year Treasury Bond yield dropped to 3.39% from 3.47% today. JItters over the economy and mid-east concerns combined to press rates toward lower ground. As mortgage rates drop down well below 5% this creates an opportunity for more people to refinance their home loans before rates inevitably move toward higher ground later this year.

Today the benchmark 30 year fixed rate loan is at 4.875% with zero loan points, and the FHA 30 year fixed is down to 4.75% with zero points. The 15 year loan is down closer to 4% while the 10 year fixed has hit 3.75% with zero loan points. For people who plan on staying in their home less than five years the 5/1 ARM is at 3.50% with no points.

These lower rates present an opportunity for home buyers and persons seeking to refinance to cash in and save signficiant sums of money. However one must remember that interest rates were at 5.25% just a few weeks back. The market remains volatile. 

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The mortgage market continues to “welcome” new laws and changes that make the process more expensive.   The silver lining is that mortgage rates are still hovering just below 5% – but that could be about to change.

The Federal Housing Administration (FHA) and Fannnie Mae and Freddie Mac  (together these Federal agencies buy or insure approximately 90% of all home loans granted within the United States) are about to raise their fees.  Effective April 1st Fannie Mae is increasing the fees charged for its home loans by .25 to .50 point depending upon one’s credit score. Citing a need to address risk and price the Agency will raise fees for loans where borrowers are putting less than 25% down and have credit scores greater than 720. Previously this type of borrower had no “add on” fees.   These higher fees will be absorbed into higher mortgage rates.

FHA, on the other hand, is increasing its fee for insuring home loans to 1.15% of the loan amount. This means that for a loan of $300,000 a borrower will pay about $287 monthly for FHA’s insurance premium (to back the loan).  This effectively doubles the monthly cost from one year ago thus making it more difficult for first time buyers, most of whom use FHA financing

Add to these changes expected modifications of the Truth-in-Lending rules and alterations to mortgage lender compensation and one can envision still more costs being piled on to the total cost of a mortgage, as Lenders pass on fees to the end-user, the borrower.

Many of these changes may be overdue and will serve to (in theory) put the mortgage market on sounder ground – but it still hurts -right in one’s pocketbook.

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Credit Scores have a huge impact on one’s financial life. Knowing how to boost your score will save you many thousands of dollars over time. Your credit score can determine the interest rate you will pay on a mortgage or car loan or for a credit card.

There is a difference between having a lot of credit and using a lot of credit. It is OK to have five credit cards with low or zero balances. It is not OK to have five credit cards with high outstanding balances – if, that is, you value your credit score. The relationship between amounts owed to available credit drives 30% of one’s score.

Payment history accounts for 35% of one’s score. So if you want to boost your credit score make sure that you have a goodly amount of available (and unused) credit and keep current on your bills. (For a more comprehensive discussion of credit scoring click “credit scoring” under the “Product and Services” button on this web site.

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We just learned (and this is no surprise) that the top three mortgage lenders in the US closed 56% of the home loans during 2010. Bank of America, Wells Fargo and Chase Manhattan together funded far more loans than the rest of the market combined.

Wells Fargo funded a total of $387 billion to make it the largest lender.

This means, as I have stated elsewhere, that no matter where you apply for a home loan the chances are your loan will end up at the same lender. Most mortgage banks, including Spectra Funding (my employer) originate home loans and sell them off to the above-referenced lenders and a few others.

So why go with Spectra Funding and not approach a bank directly? Let me count the ways! More hands-on service, more experienced loan personnel, and swifter loan closings to name a few reasons.

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Both mortgage giants are set to substantially raise their fees this year and this will serve to boost the cost of mortgage credit. Both corporations have required massive federal cash infusions – more than $150 billion – since the housing market troubles began. These fee increases are set to begin this spring.

If you make a cash down payment of less than 25% Fannie Mae will charge an extra quarter of a percentage of the loan amount – $750 for a loan amount of $300,000. If you keep this same loan amount but your credit score is, say, 679 and you are putting just under 20% cash down on a purchase – you will be subject to add-on fees of 2.75% of the loan amount – or a staggering $8,250. This is a full $1500 more than the charge for 2010.

That is not all – Fannie Mae also charges “Adverse Market” Fees – and you pay this fee just to “get a seat at the table” so to speak. The effect of these fee increases will be to push mortgage rates higher. This news comes on top of the recent announcement of FHA’s MIP fee increase – see this information on an earlier blogging.

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Recent forecasts indicate that the ARM share of the mortgage market is increasing. Fannie Mae expects that the percentage of Adjustable-Rate loans to reach 14% during the second quarter of this year –up from 5% in 2010’s final quarter.

This is not surprising given the very low short-term rates that are in existence. All of the main indices remain at very low levels. As of today’s date, March 1, 2011, the 6-Month Libor was at .3116% and 1-Year Treasury was at .27%.
These low rates help to generate continued low interest rates for ARM’s fixed for the initial 3,56,7 or 10 years. For example, today the rate for a “conforming” ARM fixed for three years is 3.25% with zero points; for a “5/1” ARM the rate is 3.50% with no points –and a “7/1” ARM goes for 3.875% with zero points.

If one is considering moving within 10 years an ARM may be the way to go.

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February 18, 2011–In a welcome turn of events the mortgage market has produced somewhat lower interest rates this week.

Freddie Mac reported a 5 basis point drop for the benchmark 30 year fixed rate loan to a rate of 5.00%. The Agency is forecasting a rise in the 30 year fixed rate loan to 5.5% by year’s end.

As an indication of where mortgage rates are moving, the yield on the 10-year Treasury fell from 3.70% at the close of the markets last Thursday to 3.57% during trading today. This may result in somewhat lower interest rates during the upcoming week.

Having said all of this, it is the consensus of most analysts that mortgage rates will continue to edge higher over the shorter and intermediate term.

As a sidebar we have noticed a pickup in interest in “Hybrid ARM’s”, that is, loans fixed for 3, 5, 7 or ten years that convert to adjustable rate loans at the end of the initial fixed term. For example a 5/1 ARM has an initial fixed rate of 3.625% with zero points as of today. If someone is planning on remaining in their home for five years or less this is a viable option.

Stay tuned and watch for further updates next week.

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2/15/2011 – Just when we thought that the FHA premium increases were behind us we get notice yesterday of another increase in the premiums (MIP Premiums). Effective for case numbers issued after April 4th the recurring monthly MIP will increase from .90 to 1.15 for FHA home loans.

FHA insurance premiums are mortgage insurance premiums that insure against the risk of lender-incurred losses under the FHA home loan program.

Late last year the FHA changed the premium structure by reducing the up-front (financeable) FHA premium from 2.25% of the loan amount to 1.00% of the loan amount while increasing the monthly premium from .55% to .90%. Now we are seeing this new increase.

This has the effect of increasing the monthly FHA premium payment for a $350,000 loan from $262 to $335 per month. FHA’s objective is to increase the MIP reserves within the FHA Fund by $3 billion per year. My guess is that this may not happen, as fewer borrowers will qualify and this increased fee structure will slow business and/or transfer some business over the private mortgage insurance market.

In any event “hang on to your hat” as more changes to the mortgage industry are coming at us.

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Reverse Mortgage activity surged during the last part of 2010. Most Reverse Mortgage Lenders reported increases in production. More than 6,000 HECM loans were funded each month during the year’s final quarter.

During this time Bank of America, one of the largest originators of Reverse Mortgages announced that it was exiting the Reverse Mortgage sector. This will mean more opportunity for other lenders operating within this sector.

There are reasons to believe that the Reverse Mortgage market will expand. First, more and more people are old enough for a Reverse Mortgage. The only two qualifying criteria for Reverse Mortgages are age and equity. If one is 62 years of age or older and have sufficient equity in their homes they are eligible for a Reverse Mortgage. The older you are the more money you obtain under this program.

Secondly FHA introduced fixed-rate Reverse Mortgages for both purchase and refinancing over the past two years. Additionally FHA has introduced the popular Reverse Mortgage “Saver” program. Under this program the costly up-front mortgage insurance premiums are virtually eliminated and this has proven to be popular with many people.

For more information about Reverse Mortgages you may call me at 858-485-6100 x 106 or e-mail me at Bert@BertMorrison.com.

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