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Jumbo reverse mortgage lenders who offer mortgages in California have almost universally reduced their initial loan amounts that they are offering to senior homeowners.

At first, it was just Financial Freedom who instituted an automatic 6% reduction in loan amount for jumbo reverse mortgages in most California counties. Then, a couple weeks later, Bank of America followed suit with their new jumbo reverse mortgage guideline that automatically reduced initial loan amounts by 5% for most of California.

In the latest development, LLS Financial a wholly owned subsidiary of KBC Bank (and known to seniors who have their reverse mortgage product as Vertical Lend), has also reduced loan amounts on California properties. Though LLS Financial has not issued any official statements to date, California reverse mortgage lenders have recently reported loan amounts reductions after a review of their submitted jumbo reverse mortgage file. In one case, LLS responded with a 12% reduction in the initial loan amount as compared to their reverse mortgage calculator software output for the loan application.

While five and six percent reductions in loan amount were common among jumbo California reverse mortgage lenders, those reductions were reasonable and understandable given the declining real estate market in California. But, the 12% reduction by LLS Financial is over the top. To add insult in injury, LLS has also eliminated their broker rebate compensation on jumbo reverse mortgages, which effectively increases the borrowing costs to the senior homeowner.

I will continue to track changes in the reverse mortgage marketplace and report them here on this reverse mortgage info blog.

Last year, Bank of America bought out Reverse Mortgage of America (formerly Seattle Mortgage) becoming an instant player in reverse mortgages for seniors. With perhaps the largest brand of any bank in the business, they brought instant credibility and a wide distribution channel through their retail and reverse mortgage wholesale divisions.

With such size and market clout, Bank of America because an immediate competitor to Financial Freedom, the largest reverse mortgage bank and to the newly formed Countrywide reverse mortgage program. In fact, Bank of America’s reverse mortgage jumbo program was, at least until recently, arguably the most competitive program in the business.

But the credit crunch has had battered all mortgage lenders over the past 6 months and Bank of America is no exception. Reverse mortgage lenders have, one by one, recently been making their jumbo reverse mortgage programs more restrictive and less competitive. Bank of America has now followed suit with their announcement this month to their brokers that jumbo reverse mortgage loan amounts will be reduced by 5% is most major California markets. The move applies to many other markets across the country that are deemed to be declining in value.

This means that seniors will be able to take out 5% less cash, or have a 5% lower credit line on their jumbo reverse mortgage than they could last month. In addition, Bank of America will no longer offer the no-fee reverse mortgage option that was available to seniors who had a large initial loan balance.

I will keep an eye on new developments in the reverse mortgage marketplace and report them here on this reverse mortgage blog. You can also check here for more info on California reverse mortgages.

Financial Freedom, the reverse mortgage subsidiary of mortgage lending giant Indy Mac Bank, has dramatically increased the interest rate on its fixed rate reverse mortgage.

As many brokers discovered recently when they updated their Reverse Mortgage Analyzer (RMA) software with Financial Freedom, the leading lender has bumped their fixed-rate reverse mortgage interest rates from the mid 5% range up to 6.81% (rate current as of Friday).

Other reverse mortgage banks are still offering the fixed rate reverse mortgage below 6%, though their rates have recently been increasing too.

With all the recent turmoil in the credit markets, it is no wonder that lenders are tightening their belts and increasing the rates that they offer to consumers. As their balance sheets bleed red ink and their stock prices drop, lenders are forced to make up their losses wherever and however that they can. So they have turned to their reverse mortgage programs to find more profit. As such, even the adjustable rate reverse mortgage programs have seen an increase in the margins – the profit margin – to the lender.

A few months ago, a 1% margin added to the treasury bill rate was common for the FHA Home Equity Conversion Mortgage (HECM). Today, a 1.5% margin is standard. This situation is likely to continue, and perhaps even get worse, until banks are able to recover. And that is not likely to happen until the real estate market recovers – a turning point in the future whose timing is anyone’s guess.

The following are today’s reverse mortgage interest rates for the most popular reverse mortgage products:

HECM Reverse Mortgage rate: 2.85% (Index is the 1 Year CMT at 1.35% plus a margin of 1.5%)

Fixed rate Reverse Mortgage - HECM: 5.79% to 6.81% (depending on the lender)

Independence Plan 360 jumbo reverse mortgage: 6.13938% (Index is the 6 month LIBOR at 2.53938 plus a margin of 3.6%)

Independence Plan 210 jumbo reverse mortgage: 4.63938% (Index is 6 month LIBOR at 2.53938 plus a margin of 2.10%)

Cash Account Advantage jumbo reverse mortgage: 6.040% (Index is 6 month LIBOR at 2.54% [rounded] plus margin of 3.5%)

Interest rates are not an APR and do not account for closing costs, click here for a Reverse Mortgage Quote