Fees on Reverse Mortgages

I read your article "Pulling Back the Curtain on Why Reverse Mortgages are So Heavily Marketed Today" and agreed with much of what you pointed out. A couple that is netting only $38,000 (implying a property value of less than $85,000) should rarely if ever do a reverse mortgage.

However, when I consider the seniors who are netting... $100,000 or more and are using that money to stop making mortgage payments forever and significantly increase their quality of life, I believe they are benefiting significantly from this unique product.

That being said, the point I want to discuss is your statement, “It also helps that the fees on reverse mortgages are amazingly high.” The fees are high. However, I think it’s important to differentiate between the fees that a lender earns and the fees that go to the FHA and others.

On a typical $200,000 loan, the costs break down like this:

- 2% MIP ($4,000)

- 1.5% Origination fee ($3,000)

- Title, appraisal, etc. ($2,000)


That means of the $9,000 in fees, the lender is making $3,000.

There is a lot of pressure coming from AARP and other to reduce the fees on reverse mortgages by capping the origination fee at 1.5% versus the current 2% maximum. The reality of the market is that competitive pressures have already driven the norm from 2% origination fees down to 1.5% and in some cases as low as 1.25%. At these levels, lenders are making less on a reverse mortgage than they can make on forward mortgages (where they can make points on the back and mask how much they are truly making).

Which brings me full circle to my two arguments: First, the AARP and other observers should focus on reducing the MIP from 2% to 1.5% rather than the origination fee because the free markets have already accomplished their goal on lender fees. Second, when analyzing the reverse mortgage, use an average case: a 71 year old widow living in a $186,000 home with a $34,000 mortgage.

I appreciate your taking the time to write about this product and look forward to reading more of your work in the future.

Your posted comments on this and other questions are welcome.
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