Posted by GA/Atty on 5/1/08 6:38pm
Msg #245870

Financial Freedom Reverse Mortgage Question

Ok!

So one of the docs in the Financial Freedom package shows a breakdown of the initial principal balance of the loan. (costs + existing lien payoff(s) + disbursement to borrower + "service fee set aside".

This particular loan was one where the borrowers were intending to draw out the maximum disbursement up front. My question is, what is the "service fee set aside" for and how is it calculated?

Of course I asked the FF rep and his answer did not satisfy me. He said it was put there in case taxes or insurance or any required maintenance was not paid for by borrower, then lender could advance those payments and add the amount advanced to principal. But this was not a situation where any such payments were anticipated - taxes and insurance were current and there were no required structural repairs.

FYI the appraisal was 170k with an initial principal limit of 113k. The costs were $9000 and the payoff was $99,500 and the disbursement to borrower was $300 and the service fee set aside was $4200. The monthly servcie fee was $25 which is going to be added to the principal each month as normal. I just don't really understand why that $4200 was not paid over to the borrower.

If anyone knows, please educate me!

Reply by Maureen_nh on 5/1/08 8:14pm
Msg #245880

I looked it up and this is what I found. It sounds as if it is a disclosure of a projected fee.

Service Fee Set-Aside
The service fee set-aside is an amount of money deducted from the available loan proceeds at closing to cover the projected costs of servicing your account.

Federal regulations allow the loan servicer (which may or may not be the same company as the originating lender) to charge a monthly fee that ranges between $30-$35. The amount of money set-aside is largely determined by the borrower's age and life expectancy. Generally, the set-aside can amount to several thousand dollars.

(Note: The servicing set aside is just a calculation and not a charge. The only amount added to your loan balance is the monthly servicing fee, which ranges from $30-$35.)

Just out of curiousity, who was the title co? I'm still waiting for payment from one.

Reply by GA/Atty on 5/1/08 8:30pm
Msg #245882

It would make more sense to me if they just deducted that

calculation from the principal limit (because by refusing to disburse it, that is essentially what they are doing).

Thanks for your response. The title company was Title Stream.

Reply by Hugh Nations Signing Agents of Austin on 5/1/08 8:56pm
Msg #245886

Re: It would make more sense to me if they just deducted that

The servicing fee is exactly that, a fee charged to service the loan each month -- such things as calculating the interest payable, the interest accrued, and the total amount added to the principal each month, etc. Your signer was lucky; although service fees can be as low as $25 (the amount is discretionary with the loan officer and can range up to $35), I rarely see a $25 fee. Loan officers will reduce the amount of the service fee sometimes to help a borrower qualify, or to sell a loan, just as they will the origination fee. The $25-35 service fee and the interest are added to the principal each month.

My understanding is that if the loan terminates before the service fee set-aside is fully used, the balance is used to reduce the principal amount, since it is a "set-aside" and not a cost as such, much like a repair set-aside. The money still belongs to the borrower, but the use of it is limited to pay the monthly service fee.

Reply by GA/Atty on 5/1/08 9:54pm
Msg #245891

Well the set aside is not included in the principal amount

so I do not think it could ever be used to reduce the principal. Basically it is like "left-to-draw" money that the borrower is not allowed to pull out.

The $25 dollars will be added every month, as will the accrued interest. My borrower's issue was that, assuming he would never pay the loan back, and assuming his kids would let the lender keep the house after he dies, it may as well have been a fee as far as he was concerned (ie something that limited the amount of cash he could pull out).

Of course, had they just told him that his principal limit was $108,800 instead of $113,000, he would never have raised it as an issue.

Reply by Maureen_nh on 5/1/08 8:58pm
Msg #245887

Re: It would make more sense to me if they just deducted that

For your sake I am glad you are an attorney. I am over 60 days out on payment, actually two of them, one an aborted signing at the direction of the lender.

I took this against my better judgement because I know the LO from previous experiance and I didn't think they would fool around with a big lender like that.

What I got after letting them know was that I would get my check in 45 days or less and they were"cutting checks everyday"
Live and learn

Reply by Regal/NC on 5/1/08 8:23pm
Msg #245881

GA/Atty,

The following is from the Financial Freedom form 511-3 (version 01-5/2005) "Most Frequently Asked Questions At Closing" page 3 of 3.

Question #16. Why is there a monthly servicing fee being charged?

" The servicing fee on the Reverse Mortgage covers the monthly costs of processing payments, mortgage insurance premiums (if applicable) and record keeping. This is a flat fee that is added to your loan balance each month."

Reply by MikeC/NY on 5/1/08 9:47pm
Msg #245890

They went through all of that for just a $300 disbursement? Wow.

The RMs I've seen specifically state that taxes, insurance and maintenance are the borrower's responsibility, so I think the rep was just blowing smoke... The service fee set aside is meant to cover the monthly service fees; $4200 covers 14 years at $25 per month; the interest on that may cover the rest (assuming a 15 year loan).

Just taking an educated guess here - these loans are structured so that there's no out-of-pocket cost to the borrower. What they're doing by creating a set aside is reducing the amount of principal available to the borrower; the rest of it will be used to pay the service fees. That way, the amount disbursed plus the service fees will never exceed the principal limit, and the borrower pays nothing out-of-pocket.

If they disbursed that $4200 to the borrower, they couldn't add the service fees to the principal, because the borrower is not paying anything back; the principal stays unchanged and would already be maxed out. That would mean that the borrower has to pay the service fees separately, and out-of-pocket.

Reply by GA/Atty on 5/1/08 9:56pm
Msg #245893

Ok that makes sense. But it was more than a $300 pay out....

Don't forget they no longer have a mortgage payment. That was the primary benefit.

Reply by MikeC/NY on 5/1/08 10:53pm
Msg #245895

Re: Ok that makes sense. But it was more than a $300 pay out

Good point. The RMs I've seen had large amounts of money available to the borrower, because the mortgage was either already paid off or close to it.

Reply by Hugh Nations Signing Agents of Austin on 5/1/08 11:31pm
Msg #245896

Re: Ok that makes sense. But it was more than a $300 pay out

I'd estimate about one out of 10 reverses I handle are zero disbursement to borrower. The only real purposes are to eliminate a monthly payment and keep a roof over the borrower's head.

Reply by BrendaTx on 5/2/08 6:10am
Msg #245900

Oh yes...Set Aside Amounts -

Since "Set Asides" are a concept most people (Borrowers) find a little confusing when they are signing up their loans, I tried to discuss those in my own experience when I wrote them up in my RM Notebook. Here are a few pages from my RM Notebook...

=========================
More Definitions: Set Aside Amounts

In the loan documents you will see where there are amounts set aside. They are
subtracted from the Principal Limit so that that money is there when needed to take
care of certain things regarding the property and the loan.. Sometimes they are listed on
the settlement statements as paid at closing (Property taxes, insurance) and at that point
they are considered Loan Advances. Either way, they are subtracted away from the
amount considered to be the total principal that the borrower can get from the property's
equity.

Some of the amounts set aside will be:

Repair costs amounts can be set aside. By repair costs I mean termite damage, rotted
boards, fixing the septic system, leveling a slab or any number of things. You will see
repair bills in your loan package. (TIP: --TIP Redacted.--)

Payments due for the first year of property taxes.(TIP: --TIP Redacted.--)

Payments due for the first year of hazard insurance, ground rents, assessments. (--Redacted.--)

Servicing Fee(s)
At the beginning of the loan, the lender will set aside from the
Principal Limit a fixed monthly charge for servicing activities of Lender or its servicer. Such servicing activities are necessary to protect Lender's interest in the
Property. A servicing fee set aside, if any, is not available tothe Borrower for any
purpose, except to pay for loan servicing.

The fee is usually $30 or $35.
What the fee is used for is servicing the loan. To get a more thorough set of notes on
service fees, please read [the following] section:

Section 3-4
More Definitions: Servicing Fee(s)

Service fees are charged to cover the post-funding maintenance of the loan. I
realize it sounds like servicing a loan is not much of a job, but please read on to
understand all that is involved in the maintenance of loan records. I have included
what my research revealed from reading several sources online, as well as my "real
life adventures" as a mortgage loan processor/mortgage loan service person in a
small Texas Savings and Loan.

Amazingly enough, the Reverse Mortgage service fees are either paying for the loan
servicing (in house) or outsourced loan servicing (as I understand it).

Supposedly, in the case of a Reverse Mortgage, a loan servicer must stand ready to
provide such services as
-- scheduled and unscheduled payments to borrower
-- accept prepayments from borrowers
-- make mortgage insurance premium payments to HUD
-- keep accurate records of mortgage balances
-- send out regular statements of mortgage activity to borrowers
-- pay property taxes and insurance if requested by borrowers
-- ensure that borrowers are in compliance with the loan agreement (including the
verification of continued occupancy of the property)

-- process borrower requests for payment plan changes.

So...why is this charged on Reverse Mortgages when it is not charged on forward
mortgages? (--Section Redacted.--)

In a regular mortgage, interest payments to the lender are painfully high in comparison to
the principle payment. This is true for most of the usual loan's lifetime and often up to
the time the loan is paid back (due to sale of the home) or refinanced.

On the other hand, Reverse Mortgage balances are smallest in the early loan years and
grow larger. Loan servicing fees charged in the Reverse Mortgage's interest rate would
be pretty small in the beginning and larger in the later years...if the later years come to
fruition.

Most of the time, as I understand it, the Reverse Mortgage is based on a Borrower
reaching age 100.

Since the odds are that such a ripe old age will not commonly occur, to even out the
amount of the servicing fee, most Reverse Mortgage lenders charge a flat monthly
servicing fee.

Somewhere in the docs you see a total of what the servicing fees will be. Seldom do they
reach that amount though it is "set aside" as a safety net in case the Borrower does reach
the age of 100 years. In other words, the amount set aside is overstated.

HECM rules permit lenders to include the cost of loan servicing within their interest
rates.

And, I have learned in the future, as more stats become available on HECMs, we may
see competitive "no servicing fee" loans. I suppose this means the fees will be hidden in
the interest rates.

The amount of the Reverse Mortgage servicing fee is usually $30 or $35. The reason:
HECMs with ANNUALLY adjusting interest cannot exceed $30 in service fees/month.
HECMs with MONTHLY adjusting interest to amount must not be more than $35 in
service fees/month.

Care and maintenance of (Servicing) loans comes with a price. When I serviced loans for
a small S&L it was 1/2 of my full-time job. The other 1/2 was processing loans. My
point is the lender sees keeping watch over the condition of the loan to be a task that
should be paid for by the Borrower. The lender may do it in house or they may do it by
sending the loans out for servicing.

In the dark ages I typed loan applications on an IBM Selectric typewriter. Half of the
duties of my post was to service loans for the late great Burnet County Savings and Loan
Assn. Here is what I did as a loan servicer in a small time S&L...

--I had to pay all the insurance and property taxes on the properties as they became due.
Some hazard insurance policies were paid monthly or quarterly. Some were every six
months. I do not know who set those schedules up.

--One "really difficult" job (which seems to elude many loan servicers to do it
accurately) was to add up the property tax and insurance due each year and divide by 12
to get the amount of escrow payment which should be paid each month.

--Another "hard part" of the loan servicers job was to determine how much the shortages
were and send letters out to the Borrowers to let them know if they owed money to
escrow in the upcoming year so that their insurance and taxes could be paid.

--Some Borrowers rented out property and I accepted payments from renters to apply to
the mortgages.

--If we sold a loan I got it into compliance for the buyer if it was not already packaged
properly. (I.e., gather up missing documents or missing information.)

--I posted payments (Yep...part of servicing the loan.).

--I took in the hate letters from the taxing authorities when the Borrowers did not pay
and wrote hate letters to the Borrowers to tell them they needed to pay their taxes. This
in the case of non-escrow loans.

[End of quote.]

Reply by sue_pa on 5/2/08 6:59am
Msg #245901

do all you get into that amount of detail

with your signers? I sure don't.

Reply by MikeC/NY on 5/2/08 8:22am
Msg #245904

There's nothing wrong with trying to understand

the documents you're handling. That doesn't mean you can or should share the information with the borrower; it's outside the scope of what you're supposed to be doing at the table (although GA/Atty is an attorney, so that doesn't apply to him). Understanding this stuff isn't necessarily a bad thing.

Reply by BrendaTx on 5/2/08 8:40am
Msg #245905

Re: There's nothing wrong with trying to understand

Set asides is one thing that I found was important for me to understand inside/out.

It think a lot depends on the personality of the LOs you are working for.

Reply by EastTxNotary on 5/2/08 11:45am
Msg #245926

Re: There's nothing wrong with trying to understand

Brenda, you know I read your manual AGES ago and thank goodness I did! I can't tell you how many times I've had to fly "solo" with the LO sitting right there beside me.

Reply by GA/Atty on 5/2/08 9:11am
Msg #245908

Not always - this borrower just happened to ask

So I wanted to be able to answer him.

Thanks all for the answers.

Reply by Linda_H/FL on 5/2/08 9:19am
Msg #245909

Shouldn't this have been explained to them in their

mandatory counseling prior to closing?

Reply by Therese on 5/2/08 9:53am
Msg #245911

Re: Shouldn't this have been explained to them in their

Yes it is, but sometimes the counseling is months before their actual closing. So when it
comes to the numbers on the docs the borrower needs to be refreshed. Most of the time with RM's the LO is present. In my experience I have found that when in LO is out of the area that is when I am flying solo.

Also with the set aside amount the BO is not charge interest while it sits there. Only when the monthly fee is pulled is it added to the principal loan amount.

Reply by Laura Vestanen on 5/2/08 6:55pm
Msg #245982

Presentment clause in FF note

All the FF Notes I have seen have a Presentment clause near the end of the Note.

Does anyone know how to explain what this clause means?

I do. I'm just wondering if anyone else has gotten an explanation from FF, LO, TC, or anyone else. I've only had 1 borrower ask. He was very financially astute. After I explained what the clause meant, I was surprised he signed anyway.

I would NEVER sign a contract/note that did not allow me to use Presentment as a resolution to a dispute. I would also never sign a contract/note that required I use Arbitration as a resolution to a dispute. I worked in law offices for 20+ years and understand the Arbitration/Mediation process thoroughly. So my decision is a very well informed one.

Challenges via Presentments are very advantageous for the borrower and bad news for the lender. That's why FF requires that borrower not use Presentment as a method of conflict resolution.

I'm curious if any other NSA has researched this clause in FF's notes. I'd love to hear from you.

LauraV

Reply by GA/Atty on 5/2/08 10:38pm
Msg #246023

What do you mean by "use presentment as a resolution"?

Waiving your right to presentment means you are alleviating the lender of an action that may otherwise be required for him to collect sums due under the note. I don't follow what you mean by using it to resolve a dispute (other than a flat out refusal to pay if their required presentment was found to be lacking in some respect).

I think most notes that I see do include a clause waiving the necessity of presentment, though no borrower has ever asked me about it and I certainly don't check every time.