This past weekend I met with an 80-year-old Oceanside, CA woman that contacted me to review a reverse mortgage proposal that she had received from another reverse mortgage broker. She contacted me because she felt that she was getting pressured to order an appraisal. The woman told me that she did not feel comfortable and thought that they were pushing her very hard. She was concerned because she had questions and the reverse mortgage broker that she was using had glossed over her questions and dismissed her concerns. She wanted me to take a look at the proposal and give my opinion on whether or not she was getting a good deal. It took me 30 seconds to realize that the proposal provided to the 80-year-old woman, although not illegal, definitely was NOT a good deal. The following is the proposal provided to me by the 80-year-old woman (just to reiterate, this is NOT my proposal!):
The handwritten notes are from the Oceanside woman. As I mentioned, this is a very good example of a “Poor” reverse mortgage proposal. First, the reverse mortgage lender that prepared this is encouraging the borrower to obtain the monthly adjustable Libor product. Personally, I am not a big fan of the monthly adjustable product, I prefer the Annual Cap 5 which provides for an annual adjustment and a 5% lifetime CAP (5% + initial interest rate). The Annual Cap 5 offers protection against the steep and rapid rate changes that the monthly adjustable programs are subject to. I also like the Annual CAP 5 because rate changes may be no more or less than 2% at each yearly adjustment. The monthly CAP 10 typically has a lower available start rate BUT the monthly adjustment can swing as much as 10% in any given month and is capped over the life of the loan at 10% (10% + initial interest rate). Overall, in my opinion, there is just too much volatility with the monthly adjustable product.
My 2nd issue with this proposal is the margin. I do not give my clients margins of 3% or higher. It is obvious to me that the reverse mortgage lender is attempting to capitalize on the borrower. While giving a reverse mortgage borrower a 3% margin is not illegal, this is definitely something that borrowers should watch out for because not only does the 3% margin affect the overall interest rate, margins over 3% can also negatively affect the eligible principle balance. In this case, the borrower at age 80 should have an eligible principal balance of $166,878, however, as you can see, the eligible principal balance on the proposal above only shows $159,258 which is due to the 3% margin. This means that the borrower will lose out on over $7,000 that could have been added to her Line of Credit.
Lastly, the reverse mortgage lender is charging this 80-year-old woman a $2,500 origination fee. Although they are well within their rights to charge an origination fee (up to a MAX of $6,000), I RARELY charge an origination fee and I most certainly would not have charged an origination fee in this situation. This woman is on a fixed income and $2500 extra in her Line of Credit would be invaluable to her.
In summary, I told her that I did not believe that this was a good proposal for all the reasons mentioned above. I recommended that she not move forward with this loan because I do not believe she is achieving as much benefit as was possible. I offered to provide her with a competing proposal.
The underlying message is to make sure that you locate a reverse mortgage broker that you feel comfortable with and that will truly have your best interests in mind. Proposals like the one above are not built to create life long relationships but to “get as much as you can” from the borrower. I do not believe in that philosophy. I believe that I should treat everyone as if they were my blood relatives. I build my business on education and referrals not by looking at an 80-year-old woman as a cash cow.
If you or anyone you know has received a reverse mortgage proposal please feel free to forward the proposal to Michael@FrontierLoanGroup.com or call Michael Gaddis, J.D. at 760-692-5950. For moe information on Michael Gaddis, J.D. or Frontier Loan Group, Inc. please visit www.FrontierLoanGroup.com or http://am1170theanswer.com/Pages/the-michael-gaddis-show. Frontier Loan Group, Inc. BRE#01449152 NMLS#345305 Michael Gaddis, J.D. BRE#01433800 NMLS#280011.