Understanding Reverse Mortgages Their Role in Our Economy and the Business Opportunities Created Peter Bell President & CEO National Reverse Mortgage Lenders Association
Demographics Household Wealth Profiles Presentation Overview What is a Reverse Mortgage Originating HECM Loans Business Opportunities
Demographics
Source: Joint Center for Housing Studies, Housing and Tenure Projections 2016
The number of Americans age 65 and older will more than double by 2060 (US Census Bureau, 2014)
By 2030, there will be more than 74 million adults aged 65 and older in the U.S., accounting for 20% of the population. Aging in America For the first time in our nation s history, the 65 and older cohort will eclipse the total number of Americans who are under 18 years old. This aging population will have longer lifespans and more years spent in retirement, outside of the paid workforce -- one in four 65- year-olds today are expected to live past age 90 and one in 10 are expected to live past 95.
Household Wealth Profiles
Falling Short: 50% of households are at risk of being unable to maintain their pre-retirement standard of living in retirement.
Retirement Insecurity For many older Americans, making their meager resources last over an unknown period of time is a primary stress factor. They are one mishap away from facing a personal financial crisis.
Retirement Insecurity Social Security provides most of the retirement income for about half of households 65 and older But replaces only 40% of pre-retirement earnings
Only 29% of households on the cusp of retirement (aged 50-64) will leave the workforce with a traditional pension, compared to 49% of today s 65-and-older households. Retirement Insecurity A majority, 60%, of US workers report that their total household savings and investments, excluding the value of their home and any defined benefit pension, is less than $25,000.
Household Demographics # in Millions Total Households 116M Owner Occupied 74M Aged 65 & Older 21M Mortgage Free 15M
Home Equity
Home equity has the potential to enhance retirement security because the homeownership rate generally exceeds ownership rates for most financial assets. According to the Federal Reserve s 2013 Survey of Consumer Finances: 65.2 percent of American households owned their primary residences 49.2 percent had retirement accounts 19.2 percent had cash-value life insurance policies 13.8 percent had stocks, and 10 percent had savings bonds (Bricker et al. 2014)
Senior Home Equity The equity accumulated in a home, to many American families, represents the largest component of personal wealth. Typical retiree households might have one or two incomes from Social Security, a modest pension and/or limited income from low-yielding fixedincome instruments, and, perhaps, a diminished 401(k) account. The equity they have built up in their home is often, by far, their greatest asset, an important resource for funding their future. The homeownership rate among older Americans is nearly 80% and in the fourth quarter of 2016, homeowners aged 62 and older held a combined $6.2 trillion in home equity, a $170 billion increased over the previous quarter. Since Q1 2000, home equity has increased more than $4 trillion, since the National Reverse Mortgage Lenders Association and data analytics firm Risk Span, Inc. first reported the aggregate amount of senior home equity as part of the Reverse Mortgage Market Index.
Senior Home Equity
Reverse Mortgage Market Index
Equity Extraction Tools
You spend a career supporting your home and then when you retire, your home supports you What is a reverse mortgage?
What is a reverse mortgage? A reverse mortgage, in simple terms, is a home equity loan that creates liquidity for older homeowners and does not need to be repaid until the borrower moves, sells the house, or passes away.
What is a reverse mortgage? Loan amounts are determined by a formula based on the home s appraised value, the youngest borrower s age, and current interest rates.
What is a reverse mortgage? Borrowers, or their heirs, typically repay the loan with either proceeds from the sale of the house or with funds available from other assets.
What is a reverse mortgage? Reverse mortgages were designed to help seniors, aged 62 and older, convert equity into cash that could be used to supplement a fixed retirement income and pay for medical and other daily expenses.
What is a reverse mortgage? Over time and with the help of financial planning experts, we ve learned reverse mortgages are a versatile and beneficial tool in a comprehensive retirement income plan
What makes a reverse mortgage a good way to access home equity? Borrowers can use loan proceeds without restriction Flexibility Borrowers choose when to make P&I repayments (Monthly or wait until they are required to do so at the end of the loan) Borrowers choose how they want to receive loan proceeds
What s a HECM? HECMs are reverse mortgages that are insured by the Federal Housing Administration Home Equity Conversion Mortgage
The National Housing Act of 1987, Section 255 outlined the specifics of the demonstration program. The purpose of the program was: Brief History of HECM To meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by increasing costs of meeting health, housing and subsistence needs at a time of reduced income, through insurance of home equity conversion mortgages to permit the conversion of a portion of accumulated home equity into liquid assets. Among the requirements contained in the original statute were: Adequate third-party counseling including explaining other financial options A fixed or variable interest rate or future sharing of property appreciation A list of disclosures to be delivered at least 10 days before closing Borrower protection against disappearance of lender & obligations beyond fair market value of their home at sale Scheduled reports to Congress
HECM & FHA Insurance HUD s HECM program offers FHA insurance for lenders who originate reverse mortgages to senior homeowners. Subject to the FHA s loan limit of $679,650 Some lenders offer proprietary loans including jumbo reverse mortgages for high value homes
HECM and FHA Insurance Borrower pays the insurance fees, and those charges are added to the borrower s outstanding principal balance. Private sector lenders, not the federal government, make reverse mortgages.
Insurance protects lenders against losses on their loans. These lenders must be FHAapproved, and the program statute and regulations determine the loan amounts available to borrowers. HECM and FHA Insurance The borrower is required to pay an upfront Mortgage Insurance Premium, as well as an annual Mortgage Insurance Premium.
Insurance protects lenders against losses on their loans. These lenders must be FHAapproved, and the program statute and regulations determine the loan amounts available to borrowers. HECM and FHA Insurance The borrower is required to pay an upfront Mortgage Insurance Premium, as well as an annual Mortgage Insurance Premium.
HECM is a Non-Recourse Loan Source: Understanding Reverse At the resolution of the loan, if the loan balance exceeds the value of the collateralized property, HUD reimburses the lender for the difference, up to a Maximum Claim Amount.
The Basics Homeowner maintains ownership and title, not the lender One homeowner must be 62 or older Non-borrowing spouses may be under 62 Monthly mortgage payments are not required SS or Medicare are not affected by draws The borrower can sell the home at any time Age, interest rates, and home value determine principal limits
Borrower Requirements & Responsibilities Pay property taxes Pay home insurance Pay all other property charges Occupy home as primary residence Maintain home
What are the Costs? Out of pocket costs Appraisal fee and Counseling fee Closing costs Origination fee Initial Mortgage Insurance Premium (IMIP) Traditional third party fees Ongoing Costs Mortgage insurance Interest Servicing fees (if applicable)
Borrower costs & obligations Upfront costs: Initial FHA mortgage insurance premium (IMIP) Origination fee Third party costs Ongoing costs: Interest charges FHA mortgage insurance premiums Servicing fees if charged
Key Terms 1 2 Principal Limit Maximum Claim Amount
Principal Limit Calculations Principal Limit Factors (PLFs) Not the same as Loan-to-Value (LTV) Based on Age and Expected Interest Rates Older borrowers GENERALLY have higher PLFs Borrowers with younger spouses may have lower PLFs Expected Rates are calculated using the 10-year LIBOR SWAP Principal Limit Factors - Percentages (%) Principal Limits - Dollars ($)
PLF Table Age R0 PLF0 R1 PLF1 R2 PLF2 R3 PLF3 R4 PLF4 R5 PLF5 R6 PLF6 R7 PLF7 4% Interest Rates 62 4.000 0.470 4.125 0.462 4.250 0.454 4.375 0.447 4.500 0.439 4.625 0.431 4.750 0.424 4.875 0.417 63 4.000 0.477 4.125 0.469 4.250 0.461 4.375 0.453 4.500 0.446 4.625 0.438 4.750 0.431 4.875 0.423 64 4.000 0.483 4.125 0.475 4.250 0.468 4.375 0.460 4.500 0.452 4.625 0.445 4.750 0.438 4.875 0.430 65 4.000 0.490 4.125 0.482 4.250 0.474 4.375 0.467 4.500 0.459 4.625 0.452 4.750 0.444 4.875 0.437 66 4.000 0.497 4.125 0.489 4.250 0.481 4.375 0.474 4.500 0.466 4.625 0.459 4.750 0.452 4.875 0.445 67 4.000 0.504 4.125 0.496 4.250 0.488 4.375 0.481 4.500 0.473 4.625 0.466 4.750 0.459 4.875 0.452 68 4.000 0.511 4.125 0.503 4.250 0.496 4.375 0.488 4.500 0.481 4.625 0.474 4.750 0.467 4.875 0.460 69 4.000 0.518 4.125 0.510 4.250 0.503 4.375 0.496 4.500 0.488 4.625 0.481 4.750 0.474 4.875 0.467 70 4.000 0.522 4.125 0.515 4.250 0.507 4.375 0.500 4.500 0.493 4.625 0.486 4.750 0.479 4.875 0.472 71 4.000 0.522 4.125 0.515 4.250 0.507 4.375 0.500 4.500 0.493 4.625 0.486 4.750 0.479 4.875 0.472 72 4.000 0.524 4.125 0.516 4.250 0.509 4.375 0.502 4.500 0.494 4.625 0.487 4.750 0.480 4.875 0.474 73 4.000 0.532 4.125 0.524 4.250 0.517 4.375 0.510 4.500 0.503 4.625 0.496 4.750 0.489 4.875 0.482 74 4.000 0.539 4.125 0.531 4.250 0.524 4.375 0.517 4.500 0.510 4.625 0.503 4.750 0.496 4.875 0.490 75 4.000 0.547 4.125 0.540 4.250 0.533 4.375 0.526 4.500 0.519 4.625 0.512 4.750 0.505 4.875 0.499 76 4.000 0.553 4.125 0.546 4.250 0.539 4.375 0.532 4.500 0.525 4.625 0.518 4.750 0.511 4.875 0.505 77 4.000 0.562 4.125 0.555 4.250 0.548 4.375 0.541 4.500 0.534 4.625 0.527 4.750 0.521 4.875 0.514 78 4.000 0.571 4.125 0.564 4.250 0.557 4.375 0.550 4.500 0.544 4.625 0.537 4.750 0.531 4.875 0.524 79 4.000 0.576 4.125 0.569 4.250 0.562 4.375 0.555 4.500 0.549 4.625 0.542 4.750 0.536 4.875 0.530 80 4.000 0.585 4.125 0.578 4.250 0.572 4.375 0.565 4.500 0.559 4.625 0.553 4.750 0.546 4.875 0.540 81 4.000 0.595 4.125 0.588 4.250 0.582 4.375 0.575 4.500 0.569 4.625 0.563 4.750 0.557 4.875 0.551 82 4.000 0.605 4.125 0.598 4.250 0.592 4.375 0.586 4.500 0.580 4.625 0.574 4.750 0.568 4.875 0.562 83 4.000 0.615 4.125 0.609 4.250 0.602 4.375 0.596 4.500 0.590 4.625 0.585 4.750 0.579 4.875 0.573 84 4.000 0.625 4.125 0.619 4.250 0.613 4.375 0.607 4.500 0.601 4.625 0.596 4.750 0.590 4.875 0.584 85 4.000 0.636 4.125 0.630 4.250 0.624 4.375 0.618 4.500 0.613 4.625 0.607 4.750 0.602 4.875 0.596 86 4.000 0.647 4.125 0.641 4.250 0.635 4.375 0.630 4.500 0.624 4.625 0.619 4.750 0.614 4.875 0.608 87 4.000 0.658 4.125 0.652 4.250 0.647 4.375 0.641 4.500 0.636 4.625 0.631 4.750 0.626 4.875 0.621 88 4.000 0.667 4.125 0.662 4.250 0.657 4.375 0.651 4.500 0.646 4.625 0.641 4.750 0.636 4.875 0.631 89 4.000 0.679 4.125 0.674 4.250 0.669 4.375 0.664 4.500 0.659 4.625 0.654 4.750 0.649 4.875 0.644 90 4.000 0.691 4.125 0.686 4.250 0.681 4.375 0.676 4.500 0.672 4.625 0.667 4.750 0.662 4.875 0.658 91 4.000 0.703 4.125 0.698 4.250 0.694 4.375 0.689 4.500 0.685 4.625 0.680 4.750 0.676 4.875 0.672 92 4.000 0.715 4.125 0.711 4.250 0.707 4.375 0.703 4.500 0.698 4.625 0.694 4.750 0.690 4.875 0.686 93 4.000 0.728 4.125 0.724 4.250 0.720 4.375 0.716 4.500 0.712 4.625 0.708 4.750 0.704 4.875 0.701 94 4.000 0.741 4.125 0.737 4.250 0.734 4.375 0.730 4.500 0.726 4.625 0.723 4.750 0.719 4.875 0.715 95 4.000 0.750 4.125 0.750 4.250 0.747 4.375 0.743 4.500 0.740 4.625 0.737 4.750 0.733 4.875 0.730 96 4.000 0.750 4.125 0.750 4.250 0.750 4.375 0.750 4.500 0.747 4.625 0.744 4.750 0.741 4.875 0.737 97 4.000 0.750 4.125 0.750 4.250 0.750 4.375 0.750 4.500 0.750 4.625 0.749 4.750 0.746 4.875 0.743 98 4.000 0.750 4.125 0.750 4.250 0.750 4.375 0.750 4.500 0.750 4.625 0.749 4.750 0.746 4.875 0.743 99 4.000 0.750 4.125 0.750 4.250 0.750 4.375 0.750 4.500 0.750 4.625 0.749 4.750 0.746 4.875 0.743
Reverse Mortgage Payment Plan Options Payment Plan Description Line of Credit Borrower funds are available as needed upon written request. Tenure Borrower receives all funds in fixed monthly payment. Modified Tenure Borrower receives a lower fixed monthly payment and a line of credit. Term Borrower receives fixed monthly payment for a fixed period or term. X amount per month for Y months. Modified Term One-Time Lump Sum Borrower receives a fixed monthly payment for a fixed period or term and a line of credit. Borrower receives all funds at funding. Only available with a fixed rate.
Disbursement Limits Mandatory Obligations Items that must be paid at closing (or the first year of the loan) like existing liens and closing costs. Examples: Lien payoffs Initial Mortgage Insurance Premiums (IMIP) Loan origination fee Third party closing costs First year distributions from a fully-funded LESA Repair set-asides And more
Disbursement Limits Maximum Disbursement is the GREATER of: 60% of the Principal Limit, or Mandatory Obligations + 10% of PL FIXED One time at closing ARMs Within the first year Example: Principal Limit $200,000 Disbursement Limit $120,000, or MO + $20,000
Originating HECM Loans
Eligible homeowners obtain reverse mortgages for many reasons including: Repairing or modifying the home to meet the physical needs of getting older Supplementing retirement income to meet expenses Managing the costs of in-home care Paying off an existing mortgage Paying bills Paying property taxes Providing a source of funds for living expenses in lieu of liquidating financial investments during times of market downturn or disruption Establishing a line of credit for use as a financial safety net Helping retirement savings last longer Purchasing a retirement home
Getting Started All borrowers must be 62 years old, or older. All borrowers must be US citizens or legal residents. HECMs are federally insured. Only primary residences qualify. The property must be owner-occupied. The maximum claim amount is $679,650 renewable annually All borrowers must receive counseling. The reverse mortgage professional provides a list of 12 counseling agencies to the borrower.
Property Eligible Properties Eligible property types include the following: New or existing single family homes New or existing 2-4 units, as long as one unit is the borrower s primary residence FHA-approved condominiums Manufactured homes that meet FHA standards
Property Ineligible Properties Ineligible property types include the following: Investment properties Vacation homes Properties with illegal accessory units, or mixed-use properties with more than 49% commercial use. Cooperatives Bed and breakfasts Single-wide manufactured homes
Vesting All properties must be vested in the name of the borrower only in one of the following ways: Fee Simple: Absolute title to land, and the most common type of vesting. Life Estate: An estate whose duration is limited to the life of the party holding it, or some other person. Leasehold: A kind of rental agreement where the owner gives another the right to occupy or use the land for a period of time. Trust: A relationship in which one or more persons hold the individual s property, subject to certain duties to use and protect it, for the benefit of others. Land Trust: An agreement whereby one party agrees to hold ownership of a piece of real property for the benefit of another party.
The Workflow Process Counseling Application Processing Underwriting Closing
Non-Borrowing Spouse, Guardians or Power of Attorney s etc. Completed over phone or face to face Check state requirements Program eligibility, financial implications and repaying loan Borrower is mentally competent in understanding HECM product Until counseling is completed, signed and dated, the LO is not legally permitted to incur any costs on borrower(s) behalf Can be completed before or after initial application Counseling Application Processing Underwriting Closing
Information entered into loan origination software Authorization to process HECM loan Fees, interest rate, amount Includes required upfront general and state specific disclosures Financial assessment information gathered from the borrower(s) Upfront disclosures to be signed by non-borrowing spouse Counseling Application Processing Underwriting Closing
Order the HECM FHA Case Number Assignment Order appraisal and other third party services Borrower(s) income, assets, credit history, property charge payment history and other items needed After loan fully processed and third party services received, moves to Underwriting Counseling Application Processing Underwriting Closing
Borrower(s) and subject property fall within HECM guidelines Financial Assessment Borrower(s) willingness/capacity to continue paying obligations Residual income of borrower(s) after all expenses accounted for, review credit history and property charge payment history Issue an initial loan decision Conditions may apply After final approval, moves to Closing Counseling Application Processing Underwriting Closing
Notify file is cleared for closing Final closing figures obtained from title/settlement company Closing date set Three(3) day right of rescission (for all refi transactions) Right to cancel loan with no penalty Lender disburses HECM funds to title/settlement company Borrower receives proceeds (if applicable) from title/settlement company Counseling Application Processing Underwriting Closing
The loan funds Counseling Application Processing Underwriting Closing
When is the Loan Due? When the home is sold When the last owner permanently vacates When the last borrower passes away* *Note: Eligible Non-Borrowing Spouses may still occupy the home by deferring the due and payable status of the loan.
HECM HMBS
HECM Mortgage Backed securities (HMBS) Ginnie Mae s Home Equity Conversion Mortgage (HECM) securities program Ginnie Mae as guarantor HMBS securities
HECM Mortgage Backed securities (HMBS) A Participation is that portion of a HECM loan securitized into an HMBS security. One HECM loan may have multiple Participations in various HMBS securities throughout the life of the loan. Although HMBS securities will likely contain many Participations from many different HECM loans, there may only exist a one-to-one relationship between any one Participation and the HMBS security for which it serves as pool collateral.
HECM Mortgage Backed securities (HMBS) Issuers are responsible for purchasing any Participation when the outstanding principal balance of the related HECM loan is equal to or greater than 98% of the Maximum Claim Amount If a HECM loan is found to be defective at any time after the related Participations have been pooled, the Issuer must cure the defect or purchase all related Participations. Substitutions of Participations related to HECM loans in HMBS pools are not permitted Issuers are required to pay a monthly guaranty fee to Ginnie Mae for each HMBS security for which the Issuer is Issuer of record.
HECM Mortgage Backed securities (HMBS) Each pool must have an original principal amount of at least $1,000,000 Each HMBS pool must include at least 3 Participations, each of which is related to a distinct HECM loan HMBS security holders are not entitled to scheduled payments of principal or interest The issuer may, at that issuer s option, purchase any pooled participation from GNMA once the associated HECM becomes due and payable.
Support for Reverse Mortgages
Business Opportunities
Equity Extraction Tools Home Equity Loan Home Equity Line of Credit Cash-Out Refinancing Selling the home and buying a less expensive one Selling the home and renting
HECM or HELOC? Benefits of a HELOC: Lower interest rates in most cases Lower upfront costs May be more suitable for short term-needs Benefits of a HECM: Loan does not become due as long as all the loan obligations are met Line of credit cannot be frozen due to changing market values No monthly p&i mortgage payments
Generational Lending
Referral Partners Real Estate Agents H4P Home Builders of 55+ H4P Financial Planners Certified Divorce Financial Analysts Care Managers In-Home Care Executives National Aging in Place Council
NRMLA as a Resource
Nrmlaonline.org
Reversemortgage.org
Reverse Mortgage Self-Evaluation: A Checklist of Key Considerations What You Need to Know About Your HECM After Closing What Do I Do When My Loan is Due?
Demographics Household Wealth Profiles Presentation Summary What is a Reverse Mortgage Originating HECM Loans Business Opportunities
Q&A
Peter Bell President & CEO National Reverse Mortgage Lenders Association National Reverse Mortgage Lenders Association 1400 16th St., NW Suite 420 Washington, DC 20036 202-939-1760 (p)