Introduction to Reverse Mortgages

Transcription

1 Introduction to Reverse Mortgages Reverse Mortgages for Attorneys Revised May, 2017 Finance of America Reverse Slide 1

2 Reverse Mortgage Basics How the Program Works Types of Products Financial Assessment HECM to HECM Refinance Reasons/Uses for Reverse Mortgage Products Financial Safeguards for Older Adults Summary and Resources Learning Objectives Finance of America Reverse Slide 2

3 Reverse Mortgage Basics Finance of America Reverse Slide 3

4 Reverse Mortgages A reverse mortgage is a non-recourse loan that allows older adult homeowners (62+) to access a portion of their home equity. This product is also know as a HECM, which is an acronym for Home Equity Conversion Mortgage The borrower can access available equity as either: Upfront cash Term or tenure payments A line of credit Any combination of these. Finance of America Reverse Slide 4

5 Origins and History Ken Sholen, Wisconsin Board of Aging, presents the concept to the government. FHA insures the first HECM, then observes the program closely. The first lenders are approved as HECM DE. Lenders can now underwrite their own loans. NRMLA is formed. Wall Street investors enter the market. Fannie Mae exits. Ginnie Mae now guarantees loans. Financial Assessment is implemented to ensure borrower obligations to taxes and insurance can be met.

6 Regulatory Bodies and Agencies Regulatory bodies and agencies include: HUD administers federal programs dealing with better housing and urban renewal. It was created in FHA is a government agency whose primary purpose is to insure residential mortgage loans. NRMLA is an association that serves as the national voice of the reverse mortgage industry, and acts as an educational resource, policy advocate, and public affairs center for lenders and related professionals. It was established in 1997 to enhance the professionalism of the reverse mortgage business. Finance of America Reverse Slide 6

7 How the HECM Program Works

8 Initial Eligibility Requirements Borrower To qualify, borrowers must: Be age 62 or older Live in the house as their primary residence Be able to pay property taxes, insurance, and property maintenance costs Property Eligible properties types include: Single family homes Two-to-four unit buildings the borrower owns and occupies Manufactured homes that meet HUD requirements FHA-approved condominiums

9 FHA Insurance FHA mortgage insurance provides lenders with protection against losses that result when homeowners default on their mortgage loans. The lenders bear less risk because FHA pays a claim to the lender in the event of homeowner default. FHA mortgage insurance protects the borrower if there is not enough money from the sale of the home to repay the loan in full. When that occurs, FHA Insurance pays the difference. This non-recourse feature ensures that the borrower is not liable for the difference between the sale price and the loan balance at the end of the reverse mortgage. Note: Reverse mortgage proprietary products are not FHAinsured. Please ask for additional details. IMPORTANT: The non-recourse feature is exclusive to FHA reverse mortgages. Finance of America Reverse Slide 9

10 Borrower Proceeds The Principal Limit Factor (PLF) is based on three components: The age of the youngest borrower, or non-borrowing spouse if the non-borrowing spouse is under age 62. The Maximum Claim Amount (MCA), which is the lesser of the lending limit or the appraised value of the property. The chosen product, fixed or adjustable rate HECM. Finance of America Reverse Slide 10

11 Benefit Limits Borrowers must retain sufficient equity to pay taxes and insurance throughout the life of the loan. To ensure this, disbursements at loan closing, and throughout the first 12 months, cannot exceed the GREATER of: 60% of the Principal Limit, Or, Mandatory obligations (closing costs, repairs, etc.) plus 10% of the Principal Limit. Finance of America Reverse Slide 11

12 Costs The cost to the borrower includes: Traditional third-party closing costs A possible origination fee Mortgage Insurance Premium (MIP): o 2.50% of the MCA, if first year distributions exceed 60% of available funds. o 0.50% of MCA if first year distributions are LESS than 60% of available funds. o 1.25% annually of the outstanding balance.

13 Government Oversight - Counseling In order to protect consumers, HUD requires the following: Prospective borrowers must receive counseling before submitting an application for a reverse mortgage. Counseling is conducted by independent, third-party advocacy organizations and housing counseling agencies. Counselors are HUD-approved, exam-qualified professional housing counselors. Borrowers receive documentation to prepare for the session. Finance of America Reverse Slide 13

14 Types of HECM Products

15 HECM Product Options FHA-Insured Programs The national lending limit is $636,150 for products that include: Fixed Rate Monthly Adjustable (10-point cap) Annual Adjustable (5-point cap) Proprietary HomeSafe Product FAR s HomeSafe jumbo product has a maximum loan amount of $2,250,000. HomeSafe is only available as a fixed rate product. Finance of America Reverse Slide 15

16 HECM Proceeds Distribution Fixed Rate Products Fixed rate products permit lump sum distribution ONLY. This distribution cannot exceed the GREATER of: Mandatory obligations plus 10% of the Principal Limit, Or, 60% of available funds. LIBOR Adjustable Rate Products This is the most appropriate product for strategic planning purposes: Distributions can be cash, term or tenure payments, line of credit (HECLOC), or any combination of these. The borrower can change the distribution method at any time. The product allows for partial future withdrawals. Finance of America Reverse Slide 16

17 What is LIBOR? The London Interbank Offered Rate (LIBOR) is the average interest rate the bank would be charged if it were borrowing from other banks. The leading banks in London estimate this interest rate. LIBOR is the most important benchmark in the world for short-term interest rates. LIBOR rates are calculated for 10 currencies and 15 borrowing periods, ranging from overnight to one year. Finance of America Reverse Slide 17

18 LIBOR Line of Credit Adjustable rate HECMs offer a credit line growth rate, so the unused portion of the credit line increases. The growth rate is always the initial mortgage rate plus 1.25%. It compounds monthly, at the same rate as the loan balance. Example: A 62-year-old borrower s home in Las Vegas was worth $400,000 in At that time he qualified for a HECM LIBOR loan of $235,000. He left all cash proceeds in his line of credit and made no subsequent withdrawals. His home lost value, and by 2011 was worth only $262,000. Because of the growth rate, his line of credit increased to $281,720 in Finance of America Reverse Slide 18

19 LIBOR Tenure or Term Payments Tenure Payment: A tenure payment is monthly payments throughout the life of the loan. Term Payment: A term payment is a set amount for a specified period of time. Finance of America Reverse Slide 19

20 HECM for Purchase A 70-year-old couple sells their home for $500,000, and purchase a new home for $350,000. They do not want any monthly mortgage payments. Downsizing Without a HECM for Purchase Sale price (old home) $500,000 8% closing costs $ -40,000 Net Proceeds $460,000 New Home Price $350,000 Funds remaining $110,000 Downsizing with Liquidity With a HECM for Purchase Sale price (old home) $500,000 8% closing costs $ -40,000 Net Proceeds $460,000 New Home Price $350,000 HECM for Purchase $207,304 Down payment $142,696 (from sale proceeds) Funds remaining $317,304 Finance of America Reverse Slide 20

21 HomeSafe HomeSafe is FAR s proprietary, jumbo reverse mortgage, which is available for either single family homes or condos. HomeSafe allows borrowers 62 and older to maximize home equity or access more loan benefits. It is available for both refinances and purchase transactions in several states, with new states added all the time. The features of HomeSafe include: Maximum loan amount of $2,250,000 Lower fees, with no mortgage insurance premium Fixed Rate Flexible terms and underwriting Required counseling and disclosures Note: A separate training webinar on HomeSafe loans provides more details.

22 Distribution of Proceeds Borrowers can choose to receive their reverse mortgage proceed as: A line of credit Monthly term payments Monthly tenure payments A combination of these Fixed Rate: All funds up front Note: Proceeds are not taxable because they are considered home equity rather than income. Finance of America Reverse Slide 22

23 Meeting Retirement Goals Reverse mortgages offer homeowners increased likelihood of meeting their retirement goals because they can: Avoid selling assets to maintain cash needs during a bear market. Use funds to purchase a vacation property without depleting significant amounts of assets. Receive tax-free proceeds to assist with daily living expenses. Use the proceeds as an emergency line of credit. Use the proceeds to fund long-term care services. According to studies, 58% of men and 79% of women will require some form of long-term care in their lifetime. The average cost of nursing home care, not including therapy, rehabilitation or medication is $94,000. Finance of America Reverse Slide 23

24 Strategic Usage of the HECM New academic research demonstrates how HECMs can play a vital role in retirement planning not just as a tool of last resort but as a strategic way to provide greater financial flexibility to seniors with ample savings. Source: Salter, Pfeiffer and Evensky, Standby Reverse Mortgages: A Risk Management Tool For Retirement, Journal of Financial Planning, Finance of America Reverse Slide 24

25 Financial Assessment

26 Financial Assessment Purpose Mortgagee Letters and , which included the HECM Financial Assessment and Property Charge guide, were issued on November 10, FAR uses the Financial Assessment (FA) to evaluate whether a borrower qualifies for the HECM loan, and under what conditions. The FA specifically looks at willingness and capacity of the borrower to meet his or her financial obligations and meet HECM requirements. Willingness: Past performance and credit history. Capacity: Using income, assets and expenses to calculate residual cash flow. The Financial Assessment became effective, industrywide, on April 27, Finance of America Reverse Slide 26

27 Calculating Residual Income Include all members of the household when you calculate family size, including non-borrowing spouse and any other individuals who depend on the borrower for support. Omit individuals who have a source of verified income, and do not rely on the borrower for support. Refer to the table to calculate and enter Residual income by region. Finance of America Reverse Slide 27

28 Credit History Summary FAR considers the following in the borrower s overall pattern of credit behavior: There are no tax arrearages in the last 24 months prior to loan application. All property charges are current at application. Homeowner insurance (and flood insurance, if applicable) was in place for a minimum of 12 months prior to the date of application, and the borrower has a satisfactory history of maintaining it. FAR determines if the borrower paid insurance and taxes directly. There is a satisfactory payment history on mortgages, installment accounts and revolving credit, in that order. Finance of America Reverse Slide 28

29 Traditional Income Sources FAR calculates and documents income for all borrowers. We then determine if the borrower has sufficient residual income equal to, or in excess of, the required amount, based on geographic region and family size, per the Residual Income tables on the previous slide. The analysis takes federal taxes into account, so nontaxable income cannot be grossed up. The types of traditional income we consider include: Employment income Rental income Pension/retirement benefits (based on period of continuance) VA benefits Social Security, disability, workman s comp, public assistance Finance of America Reverse Slide 29

30 Types of Income Effective income is income we can use to calculate residual income. It must be reasonably likely to continue through at least the first three years of the HECM, and includes: Employment Employer Housing Subsidy Commission Self-Employment Non-Employment sources Disability Benefits Alimony, Child Support and Maintenance Social Security Retirement Pension IRA and 401K Rental and other Real Estate Holdings Investment Capital Gains and Losses Expected Income Trust Accounts Annuities Notes Receivable Government Assistance and Case Benefits Finance of America Reverse Slide 30

31 Asset Dissipation/Imputed Income Imputed income is the amount of estimated monthly income available from the borrower s assets after dissipation of liquid assets. Liquid assets can convert to cash within one year without payment of an IRS penalty. FAR must use either 100% or 85% of the asset, based on the type of asset, and the table in the HECM Financial Assessment and Property Charge Guidelines, section If the borrower and a non-borrowing spouse or household member jointly hold the asset, we can count that asset if the borrower provides documentation that the he or she has unrestricted access to it. You can do the calculation manually, in ReverseVision, or by using FAR s Financial Assessment Worksheet. The underwriter will also calculate it. Finance of America Reverse Slide 31

32 Asset Sources There are a variety of sources that can be used to dissipate assets, including: Checking and Savings Accounts: We need a Verification of Deposit (VOD) and the most recent statement for each account. Cash on Hand: We need a Letter of Explanation (LOE) on how the funds were accumulated and the amount of time it took to save. Retirement accounts including 401Ks and IRAs: We need the most recent statement that verifies amounts and availability. Stocks and Bonds: We need the most recent brokerage statement for the most recent two months. Private Savings Clubs: We might require the club s account ledgers and receipts, and verification that the club is still active. Finance of America Reverse Slide 32

33 Non-borrowing Spouse income Non-borrowing spouses (NBS) or other non-borrowing household members (ONBHM) might not need to provide income information. However, they can voluntarily provide income information. We can use the NBS s income to reduce the family size by one, or as a compensating factor, provided he or she discloses Social Security information and meets the same documentation and verification standards as the borrower. Non-taxable income cannot be grossed up, and we do NOT include imputed income from dissipated assets. Finance of America Reverse Slide 33

34 Non-borrowing Spouse income Non-borrowing spouses (NBS) or other non-borrowing household members (ONBHM) might not need to provide income information. However, they can voluntarily provide income information. We can use the NBS s income to reduce the family size by one, or as a compensating factor, provided he or she discloses Social Security information and meets the same documentation and verification standards as the borrower. Non-taxable income cannot be grossed up, and we do NOT include imputed income from dissipated assets. Finance of America Reverse Slide 34

35 Other Non-borrower Income Other Non-Borrower Household Members (ONBHM) are people who occupy the subject property, but are not the spouse of the borrower, and are also not borrowers. ONBHM can voluntarily submit income documentation to demonstrate that they do not rely on the borrower for support. If they can prove that they have enough residual income based on one person for the applicable geographic area we can then reduce the family size by one. The ONBHM must meet all documentation requirements. Non-taxable income cannot be grossed up, and we do NOT include imputed income from dissipated assets. Finance of America Reverse Slide 35

36 Other Non-borrower Income Uses We calculate the other non-borrowing household member s residual income to determine if he or she has enough income to help the borrower. We pull a credit report to see which obligations the non-borrower is responsible for. We document income minus expenses for the ONBHM. We then compare that amount for one person in the area of the country of the subject property. If the individual meets or exceeds the required amount, we accept it as proof that the non-borrower does not depend on the borrower, and has enough income to pay his or her own expenses. Finance of America Reverse Slide 36

37 Other Non-borrower Income Uses We CANNOT use the other non-borrowing household member s income as a compensating factor. We do NOT use the credit history of either non-borrowing spouses or other non-borrowing household members. We pull the credit report only to determine their obligations and calculate their residual income. We cannot combine the other non-borrowing household member s income with the borrower s income to help the borrower qualify. Finance of America Reverse Slide 37

38 Definition of LESA A Life Expectancy Set-Aside (LESA) is an amount withheld from the proceeds of the HECM loan for the payment of property charges during the borrower s lifetime. A LESA can be either fully-funded or partially-funded, based on a variety of factors. When a LESA is necessary, it is one of the conditions of the HECM loan, and the borrower must qualify for enough principle limit to fund it. If the borrower is short to close, he or she brings funds to closing. Finance of America Reverse Slide 38

39 Definition of LESA, cont. We base our decision to require a LESA on the borrower s ability to demonstrate a willingness to keep up financial obligations by examining: Credit History Property Charge payment history We also base our decision on the borrower s ability to demonstrate the capacity to handle his or her monthly obligations by calculating: Income Expenses Residual Income Finance of America Reverse Slide 39

40 Life Expectancy Set-Aside For the fully-funded LESA, FAR calculates the amount of a LESA by first calculating the Projected Life Expectancy Property Charge Cost. This formula includes: The projected sum of: o Current property taxes o Homeowners insurance premiums o Flood insurance premiums A factor to reflect increases in tax and insurance rates The HECM expected average mortgage interest rate Life expectancy of the youngest borrower, NOT the eligible nonborrowing spouse. Finance of America Reverse Slide 40

41 LESA Formula Calculation Fully-Funded LESA The projected life expectancy property charge cost formula is: (1.2 x PC 12) x {(1 +c) m+1 (1+c)} {c x (1+c) m } PC (Property Charges) 12 is the current total monthly property charge for property taxes, homeowners insurance and flood insurance. m is the TALC life expectancy in years of the youngest borrower x 12 Example: A 75-year-old borrower has a TALC life expectancy of 12 years, so 12 years x 12 months = 144 months. c is the monthly compounding rate, which is (the expected rate) + (the annual MIP rate) X PC 12 increases the amount of PC by a factor of 1.2 to cover expected increases in property taxes and hazard and flood insurance over the life expectancy of the youngest borrower. Finance of America Reverse Slide 41

42 Life Expectancy Set-Aside For the partially-funded LESA, FAR calculates the amount of a LESA by first calculating the Residual Income Shortfall. This formula includes: The Residual Income Shortfall amount. The shortfall is the difference between the borrower s monthly residual income and the standard residual income for the borrower s geographic region and family size, based on the Table of Residual Income. A factor to reflect increases in tax and insurance rates. The HECM expected average mortgage interest rate. Life expectancy of the youngest borrower, NOT the eligible non-borrowing spouse. If the partially-funded LESA is 75% of the calculation for a fully-funded LESA, or less, FAR must set aside the entire fully-funded amount. Also, borrowers with zero or negative residual income might not qualify for the HECM loan if they still have insufficient residual income after we subtract their property charges from the calculation. Finance of America Reverse Slide 42

43 LESA Formula Calculation Partially-Funded LESA Projected Life Expectancy Property Charge Cost = (1.2 x MRIS) x {(1 +c) m+1 (1+c)} {c x (1+c) m } MRIS (Monthly Residual Income Shortfall) is the residual income gap, or the difference between the borrower s monthly residual income, and the required amount of the residual income for the geographic area and family size using the Table of Residual Income. m is the TALC life expectancy in years of the youngest borrower x 12. So, for a 75-year-old borrower, TALC life expectancy is 12 years x 12 months = 144 months. c is the monthly compounding rate, which is (the expected rate) + (the annual MIP rate) x MRIS 12 increases the amount of MRIS by a factor of 1.2 to cover expected increases in property taxes and hazard and flood insurance over the life expectancy of the youngest borrower. Finance of America Reverse Slide 43

44 LESA: Fully or Partially-Funded Fully-Funded LESA FAR always requires a fully-funded LESA when a borrower does not demonstrate the willingness to meet financial obligations. This is true even when the borrower has enough residual income to demonstrate the capacity to meet them. FAR uses HECM proceeds to pay property taxes and insurance premiums to the respective entities on behalf of the borrower. Partially-Funded LESA When FAR determines the borrower has demonstrated the willingness to meet financial obligations, but has not demonstrated the capacity to do so, the LESA must be partiallyfunded. IMPORTANT: FAR disburses semi-annual payments to the borrower from HECM proceeds when a LESA is partially funded. The borrower must use these funds to pay property taxes and insurance premiums, and remains responsible for timely payment of all property charges. Finance of America Reverse Slide 44

45 HECM to HECM Refinance

46 Seasoning Requirement During refinance of an existing HECM loan, the date of FHA case number assignment for the new HECM must be at least 18 months after the closing date of the prior HECM. Finance of America Reverse Slide 46

47 Three Tests to Qualify In addition to the seasoning requirement, the borrower must meet three additional tests, UNLESS he or she sends a written request for a new HECM in order to: Add a non-borrowing spouse (NBS). Add another family member residing in the subject property to the loan. Note: All persons added must meet age and other HECM qualifications. Finance of America Reverse Slide 47

48 Closing Cost Test We conduct this test to determine that the refinance factor is sufficient. This is the increase in the borrower s principal limit from the prior HECM to the new HECM. It must equal or exceed five (5) times the borrower s closing costs. In this example, the refinance factor is greater than 5, so it is sufficient. Principal Limit Increase Closing Costs = Refinance Factor Closing Costs $6,500 Principal Limit Increase $33,800 Refinance Factor ($33,800 $6,500 = 5.2) 5.2 Finance of America Reverse Slide 48

49 Loan Proceeds Test The Principal Limit from the new refinancing HECM, minus closing costs and the remaining balance on the prior HECM, equals the Available Benefit amount on the refinancing HECM. The available benefit amount must equal or exceed 5% of the HECM refinance Principal Limit. In this example, the benefit percentage is 11.75%, so the borrower qualifies. 1. HECM Refinance Principal Limit (Closing Costs + Prior Loan Balance) = Available Benefit 2. Available Benefit HECM Refinance Principal Limit = Benefit Percentage HECM Refinance Principal Limit $200,000 Closing Costs $6,500 Prior HECM Loan Balance $170,000 Available Benefit Amount $23,500 Benefit Percentage ($23,500 $200,000 = ) 11.75% Finance of America Reverse Slide 49

50 Loan Type Test Changing the product type in a HECM refinance loan does NOT BY ITSELF provide a bona fide advantage to the borrower. The loan must also meet the requirements of either the Closing Cost Test or the Loan Proceeds Test. A change in loan type includes, but is not limited to: A change from a fixed rate to an adjustable rate loan. A change between a monthly and an annual adjustable rate loan. A change in rate cap. All HECM to HECM refinance loans must adhere to these requirements. Finance of America Reverse Slide 50

51 Reasons/Uses for a Reverse Mortgage

52 Biggest Fear The biggest fear during retirement is running out of money. According to the Boston College Center for Retirement Research: Fifty-three percent of households are at risk of not having enough to maintain their living standards during retirement. A reverse mortgage lowers that risk. Finance of America Reverse Slide 52

53 Common Questions Does the lender take ownership of the home? A reverse mortgage is a loan. The homeowners retain full ownership. Can I be forced to leave my home? Homeowners can stay in the home until a loan maturity event occurs, such as death, moving out, or selling the home. The property must be the homeowners primary residence. The homeowners must pay taxes and insurance, and must maintain the home. If they do not, the loan becomes payable. Finance of America Reverse Slide 53

54 Common Questions What are the borrower s options? To terminate the loan at any time, whether or not it is due and payable, the borrower can: Pay the mortgage debt in full, and retain ownership of the property. Sell the property for at least the lesser of the mortgage debt or the appraised value. When the mortgage is due and payable, the borrower or estate can: Repay the debt in full to retain the property. Lenders can assist the borrower (or estate) in obtaining other financing to pay off the HECM loan. Sell the property for at least the lesser of the unpaid mortgage balance, or 95% of the appraised value. Finance of America Reverse Slide 54

55 Common Questions Must my home be free and clear to obtain a reverse mortgage? No. However, you must have enough equity in the home to pay off any existing loans. Can I ever owe more than my home is worth? The HECM is a non-recourse loan. This means that the HECM borrowers, or their estate, will never owe more than the loan balance or value of the property, whichever is less. In other words, with a non-recourse loan the borrowers (or their estate) can pay the loan balance when it comes due. If they do not, the lender s only remedy is to foreclose. The borrower is not personally liable for any loss resulting from the foreclosure. Finance of America Reverse Slide 55

56 How can a reverse mortgage help? Older adult homeowners have an increased probability of meeting their retirement goals with reverse mortgages because they can: Avoid selling assets to maintain cash needs during a bear market. Use funds to purchase a vacation property without depleting significant amounts of assets. Receive tax-free proceeds to assist with daily living expenses. Use the proceeds as an emergency line of credit. Use the proceeds to fund long-term care services. Finance of America Reverse Slide 56

57 Long-Term Care Clients can use HECMs to address long term care planning, which is a concern for older Americans. Obamacare will not impact long term care planning, and makes no changes to long term care insurance. ~American Association for Long-term Care Insurance 58% percent of men, and 79% of women will require some form of long term care in their lifetime. ~ National Insurance Institute Average cost of nursing home care, not including therapy, rehabilitation or medication: $94,000 Source: John Hancock s 2013 Cost of Care Survey Finance of America Reverse Slide 57

58 Reverse Mortgages Your clients can use a reverse mortgage as: A fixed income retirement planning product. A risk management tool that enables them to retain ownership of their home. An option to extract home equity, as opposed to liquidating other assets. A supplement to investment income. A hedge against declining real estate values. A component of Social Security planning. A way to manage tax liabilities. New home purchase. Finance of America Reverse Slide 58

59 Common Uses Source: Borrower survey conducted in August 2012 on behalf of National Reverse Mortgage Lenders Association (NRMLA) by ORC International, a global market research firm

60 Financial Safeguards for Older Adults

61 Why is this topic important? This issue is important to you personally and professionally. We, as professionals who advocate for older adults, are in a position to observe potential problems and concerns. Fighting fraud and financial abuse is a responsibility we must take seriously. Above all, assisting older adults is the right thing to do. Finance of America Reverse Slide 61

62 Types of Financial Abuse Fraud: A deception deliberately practiced in order to secure unfair or unlawful gain. Scam: To swindle by means of a trick. ~The American Heritage Dictionary There are three types of abuse: Occasion/Opportunity: The perpetrator wants something the older adult has, and seeks to take it. Desperation: Family, friends or caregivers become so desperate their morals or character become affected. They rationalize the act against the older person, or feel entitled to take from that person because they have provided some type of assistance. Predation: This is typically premeditated predatory and often comes in the form of a scheme that might be very sophisticated. The activity is planned and detailed, and often scripted to prey on the goodness and values of older adults. Finance of America Reverse Slide 62

63 Reverse Mortgage Protections How has the Reverse Mortgage Industry Protected Seniors Against Elder Abuse? The reverse mortgage industry has been regulated by the government since Because of this, lending institutions have a variety of safeguards that protect older adults from financial abuse. Older homeowners may be targets for scam artists who offer too-good-to-betrue real estate or investment deals. Sadly, there are also cases where seniors are talked into a reverse mortgage by family members who want to get their hands on the cash. That s why reverse mortgage counseling is so critical. The counselor will help you look at the long-term responsibilities of a loan, not just the short-term benefits. Older adults should always avoid any unsolicited offers for a reverse mortgage, or for help with these loans. If you suspect that someone has been targeted by a scammer, call to file a complaint with HUD. Finance of America Reverse Slide 63

64 Home Equity Reverse Mortgage Benefits and Safeguards There are many financial resources and products available to benefit older adults and enhance their financial security. For example: A HECM (or Reverse Mortgage) is one of the products available to older adults aged 62 or older, which provides monetary resources through the equity available in their home. Prospective clients are required to receive third party counseling. Mortgage Insurance is incorporated into the program to protect the client. The amount of equity a client can use is limited based on age, product and interest rate. Finance of America Reverse Slide 64

65 Appendix

66 Glossary ARM: Adjustable Rate Mortgage. A HECM with an interest rate that is subject to adjustments. FHA: Federal Housing Administration. Fixed Rate HECM: A HECM loan with an interest rate that does not change for the life of the loan. Good Faith Estimate: A list of the approximate closing costs to obtain a loan. HECM for Purchase: A HECM that helps finance the purchase of the borrower s principal residence. Finance of America Reverse Slide 66

67 Glossary, cont. HUD: US Department of Housing and Urban Development. Lender: A bank or institution licensed to originate residential mortgage loans. LIBOR: London Interbank Offered Rate. The average interest rate that leading banks in London charge when lending to other banks. It is the index used for adjustable rate HECMs. LOC: Line of Credit. Also called a credit line. The borrower chooses how much money to borrow from the HECM loan, and when to borrow it. Finance of America Reverse Slide 67

68 Glossary, cont. Lump Sum: A distribution method that gives the client all proceeds at once at loan closing. MIP: Mortgage Insurance Premium. Protects the borrower and lender if the loan balance grows higher than the home value. NRMLA: National Reverse Mortgage Lenders Association. The national voice of the reverse mortgage industry, founded in It serves as an educational resource, policy advocate, and public affairs center. Finance of America Reverse Slide 68

69 Glossary, cont. Non-Recourse Loan: A HECM loan provision that states a borrower or the borrower s heir will not be responsible for more than the sale price of the home, or the loan balance, whichever is less. Originator: The person or firm that originates a loan on behalf of the borrower. Principal Limit: The lesser of the home s appraised value or the FHA 203b HECM lending limit of $679,650. Proprietary Reverse Mortgage: A non-hecm reverse mortgage that is owned by a private company. Finance of America Reverse Slide 69

70 Glossary, cont. Reverse Mortgage: A home loan for older clients that is based on home equity. It does not need to be paid back until the borrower moves out of the property, sells it, fails to pay taxes and insurance or maintain the property, or dies. Right of Rescission: A time period of three business days after loan closing during which the borrower has the right to revoke the loan. Servicing: The maintenance of the loan after loan origination. It includes providing regular statements, updating information, and providing funds to the borrower on request. Finance of America Reverse Slide 70

71 Glossary, cont. Tenure Payments: Monthly payments throughout the life of the loan. Term Payments: Monthly payments for a specified period of time. TALC Rate: Total Annual Loan Cost Rate. The estimated cost of the loan expressed as an annual rate. Finance of America Reverse Slide 71

72 Resources Familiarize yourself with these resources. National Committee for the Prevention of Elder Abuse National Do-Not-Call registry at or National Fraud Information Center-Internet Fraud Watch National Reverse Mortgage Lenders Association U.S Postal Inspection Service Better Business Bureau Wise Giving Alliance American Institute of Philanthropy AARP Local Adult Protective Services (refer to your state s Department of Human Services) Finance of America Reverse Slide 72

73 RMS Name: Title: NMLS#: Phone: This presentation was created by Finance of America Reverse LLC (FAR) Learning and Development Finance of America Reverse Slide 73