Written by David J. Cesario Wednesday, 07 May 2008 12:10
One of the longest relationships that exists between a borrower and lender is the relationship established through the servicing activities of their mortgage loan. Since the reverse mortgage loan has a variety of unique features, the servicing aspects are somewhat different with respect to how the loan is managed after closing. But something else that makes servicing of reverse mortgage loans different is the effect servicing has on the qualification ability of the borrower. Therefore, it is very important to understand, and differentiate servicing aspects of reverse mortgage loans compared to servicing of forward mortgage loans.
Since most new reverse mortgage borrowers will have had experienced servicing of forward mortgages, it is important to be able to explain the different functions and expense components to your reverse mortgage borrowers. Servicing expense is not necessarily a concept discussed with most forward mortgage borrowers, but it is absolutely a concept dealt with for reverse mortgage borrowers.
As with any mortgage loan, there is an expense incurred by the lender for the servicing of that mortgage loan; and a reverse mortgage is no exception to this rule. Reverse mortgage servicing has many similar functions as forward mortgage servicing including monthly statements mailed to borrowers, the maintenance of a customer service call center, and handling payoff requests. But unlike forward mortgage servicing, reverse mortgage servicers may be making outgoing monthly disbursements (payouts) to borrowers instead of collecting incoming payments. They may also be dealing with borrower requested changes to the payout methodology selected, which can be changed as many times as the borrower desires, after the loan is funded.
Since most new reverse mortgage borrowers will have had experienced servicing of forward mortgages, it is important to be able to explain the different functions and expense components to your reverse mortgage borrowers. Servicing expense is not necessarily a concept discussed with most forward mortgage borrowers, but it is absolutely a concept dealt with for reverse mortgage borrowers.
As with any mortgage loan, there is an expense incurred by the lender for the servicing of that mortgage loan; and a reverse mortgage is no exception to this rule. Reverse mortgage servicing has many similar functions as forward mortgage servicing including monthly statements mailed to borrowers, the maintenance of a customer service call center, and handling payoff requests. But unlike forward mortgage servicing, reverse mortgage servicers may be making outgoing monthly disbursements (payouts) to borrowers instead of collecting incoming payments. They may also be dealing with borrower requested changes to the payout methodology selected, which can be changed as many times as the borrower desires, after the loan is funded.
The biggest difference in the servicing of a reverse mortgage loan versus that of a forward mortgage is how the cost or expense for servicing activities is paid for. In a forward mortgage, servicing expense is collected (or paid) from the incoming monthly payment of principal and interest. The lender will typically pay a fixed fee to the servicer for their services. This monthly revenue stream does not exist for reverse mortgage loans as no incoming monthly payment is required. The question then arises how to collect for (or pay) the servicing expenses incurred?
The solution was to charge the borrowers a monthly servicing fee as part of the ongoing expense of a reverse mortgage loan. This monthly servicing fee is typically added to the outstanding loan balance each month that the loan continues in force.
According to HUD guidelines, lenders are not required to charge servicing fees on a reverse mortgage loan. Instead, HUD recognizes that a lender may charge a higher interest rate, or build the cost of servicing into the rate, instead of charging a monthly servicing fee. This typically would be disadvantageous to borrowers who then would be incurring higher interest rates over the life of the loan. Therefore, most FHA reverse mortgage lenders have chosen to charge a monthly servicing fee. This has the effect of lowering the overall borrower expense while still providing servicers with a source of revenue to pay for their services.
According to HUD Handbook 4235.1, Rev. 1, Section 1-12, reverse mortgage servicing has the following features:
According to HUD guidelines, lenders are not required to charge servicing fees on a reverse mortgage loan. Instead, HUD recognizes that a lender may charge a higher interest rate, or build the cost of servicing into the rate, instead of charging a monthly servicing fee. This typically would be disadvantageous to borrowers who then would be incurring higher interest rates over the life of the loan. Therefore, most FHA reverse mortgage lenders have chosen to charge a monthly servicing fee. This has the effect of lowering the overall borrower expense while still providing servicers with a source of revenue to pay for their services.
According to HUD Handbook 4235.1, Rev. 1, Section 1-12, reverse mortgage servicing has the following features:
SERVICING. The lender is permitted to charge the borrower a servicing fee if this cost has not already been priced into the borrower’s mortgage interest rate.
A. If the lender chooses to assess a servicing fee, the fee is established at closing as a monthly figure and the amount necessary to pay this fee throughout the life of the loan is calculated and set aside from the principal limit at closing (see Paragraph 5-7B. for calculations).
B. The servicing fee that may be charged on fixed rate or annually adjustable loans may not exceed thirty dollars ($30.00) per month. The servicing fee that may be charged on monthly adjustable loans is uncapped.
C. The lender adds this fee to the borrower’s outstanding balance monthly, and cannot assess any other fees to cover the costs of servicing.
A. If the lender chooses to assess a servicing fee, the fee is established at closing as a monthly figure and the amount necessary to pay this fee throughout the life of the loan is calculated and set aside from the principal limit at closing (see Paragraph 5-7B. for calculations).
B. The servicing fee that may be charged on fixed rate or annually adjustable loans may not exceed thirty dollars ($30.00) per month. The servicing fee that may be charged on monthly adjustable loans is uncapped.
C. The lender adds this fee to the borrower’s outstanding balance monthly, and cannot assess any other fees to cover the costs of servicing.
So there appear to be straightforward guidelines on how servicing expense can be recaptured by the lender, with certain program limitations to protect the borrowers.
Something that is unique to reverse mortgage loans is the concept referenced in subsection A of Section 1-12; the concept of a servicing set aside. The reference to section 5-7B of the Handbook describes where the description, calculation and methodology for the set aside can be found.
It is important to note that there are specific limits in place on fixed rate HECM’s and annually adjusting HECM’s, while there is no limitation on the monthly adjusting HECM’s. Market forces currently have the monthly adjusting HECM’s servicing fees is ranging up to $35.00 per month. Since the level of the fee established at the lenders discretion, you may want to make sure that your wholesale lenders offer you multiple levels of servicing fees to offer your borrowers.
Something that is unique to reverse mortgage loans is the concept referenced in subsection A of Section 1-12; the concept of a servicing set aside. The reference to section 5-7B of the Handbook describes where the description, calculation and methodology for the set aside can be found.
It is important to note that there are specific limits in place on fixed rate HECM’s and annually adjusting HECM’s, while there is no limitation on the monthly adjusting HECM’s. Market forces currently have the monthly adjusting HECM’s servicing fees is ranging up to $35.00 per month. Since the level of the fee established at the lenders discretion, you may want to make sure that your wholesale lenders offer you multiple levels of servicing fees to offer your borrowers.
Fannie Mae HomeKeeper loans and most Proprietary and Jumbo reverse mortgage loans also have monthly servicing expense. The monthly servicing fee limit on the HomeKeeper is a maximum of $30.00 per month and Proprietary and Jumbo products individually determine what monthly servicing expense is to be charged.
The monthly servicing fee, and ultimately the servicing set aside calculation, influences the amount of available funds a borrower will be able to access along with amount of revenues available to the lender. Having the flexibility to find the right combination should be one of your primary concerns for both the borrower and your company.
During the next part of this two part series, we will discuss how the servicing set aside is calculated, we will debunk erroneous explanations of what the set aside truly is and we will cover how to explain the set aside to reverse mortgage borrowers.
About David J. Cesario: David J. Cesario is a national speaker and educator on Reverse Mortgage Lending. He serves as the Executive Vice President of 1st Reverse Financial Services, LLC, a national wholesale reverse mortgage lender, located at 410 Quail Ridge Drive in Westmont, Illinois, 60559. The company’s website is www.1stReverse.com where information can be found about 1st Reverse’s wholesale lending programs and options for lenders interested in offering reverse mortgage loans.
The monthly servicing fee, and ultimately the servicing set aside calculation, influences the amount of available funds a borrower will be able to access along with amount of revenues available to the lender. Having the flexibility to find the right combination should be one of your primary concerns for both the borrower and your company.
During the next part of this two part series, we will discuss how the servicing set aside is calculated, we will debunk erroneous explanations of what the set aside truly is and we will cover how to explain the set aside to reverse mortgage borrowers.
About David J. Cesario: David J. Cesario is a national speaker and educator on Reverse Mortgage Lending. He serves as the Executive Vice President of 1st Reverse Financial Services, LLC, a national wholesale reverse mortgage lender, located at 410 Quail Ridge Drive in Westmont, Illinois, 60559. The company’s website is www.1stReverse.com where information can be found about 1st Reverse’s wholesale lending programs and options for lenders interested in offering reverse mortgage loans.
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