An industry at the crossroads
On ARMs, the expected rate is a published rate selected by HUD, but the lender sets the loan rate margin – the amount added to a rate index to generate the loan rate. Margins now range from 2.25 percent to 3 percent. Lenders also set the origination fee subject to a ceiling set by HUD. Most lenders charge the ceiling amount except where they are running a promotion, in which case they will tell you about it.
Shopping ARMs poses a quandary for borrowers because a higher loan rate increases the rate at which the borrower's debt rises, but it also increases the rate at which the unused portion of the credit line increases. Further, a higher loan rate increases the size of the lifetime annuity the borrower can draw. Since a higher-rate HECM commands a higher price in the secondary market, originators make more on higher-rate loans unless they pass the benefit on to the borrower in the form of lower fees. On this topic, stay tuned.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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