Reverse Mortgages

ellismt · Posted: Thu Sep 01, 2005 5:13 am Post subject: Reverse Mortgages

Hi everyone! My name is Matt Ellis and I'm a Reverse Mortgage Consultant with Wells Fargo here in Newport Beach, Ca. I'm probably not supposed to post a hello and introduction here, but I'm still new to this blog thing.

I've seen a few posts on reverse and I'd like to help with education in any way that I can.

Thanks!!

m2c · Joined: 03 Aug 2005 Posts: 762

Curious about the mechanics of the APR calculation on reverses. Always the issue of a time certain for repayment. Lump sum distribution would be more analogous to what we’re used to as far as “amount financed” but then do you consider the typical non-APR closing costs items a reduction to amount financed or a “time zero” payment to the borrower. I suspect the monthly payment option is even weirder.

Back when FHA started this type of mortgage I recall the monthly fees bordered on “extreme”. I assume the geezers are protected by APR disclosure but maybe you get a pass on giving this type of information.

Don’t run into much demand (at least right now) for this product but I’ve referred a few (very few) people who appear to fit the profile.

So far I've found very few folks in my market area that fit the profile. Referred these out but figure I should at least be aware of the TIL basics.

David · Joined: 19 May 2004 Posts: 703

Hi, welcome Matt. It would be great if you answer questions about reverse mortgages. The way I understand a reverse mortgage is you are slowly giving your property to the bank as they slowly pay you for it. Here would be a couple of my concerns:
1) What if the house appreciates considerably during the reverse mortgage?
2) What percent of the value is received by the bank? In other words, if you had a $300,000 house, how much of that would typically go to the person?

The only thing we discourage is invitations to talk offsite. It's fine if you get to talking to someone, and they make it clear they need your help. But to discourage advertising, and encourage quality information on the site, we asked that phone numbers and emails not be included in posts, though a website in the signature is fine.

ellismt · Posted: Thu Sep 01, 2005 4:14 pm Post subject:

m2c Posted: Thu Sep 01, 2005 11:43 am Post subject:

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Curious about the mechanics of the APR calculation on reverses. Always the issue of a time certain for repayment. Lump sum distribution would be more analogous to what we’re used to as far as “amount financed” but then do you consider the typical non-APR closing costs items a reduction to amount financed or a “time zero” payment to the borrower. I suspect the monthly payment option is even weirder.

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Hi m2c!

I'll try to answer your question, but I'll be honest, I don't understand some of what you posted. And I have a feeling it's because of the program; not you and I.

In regards to the most popular reverse, which is the FHA HECM, the interest rate that is used is based on the 1 year t-bill plus a margin of 2%. We're currently at just below 6%. The rate adjusts monthly and accrues on any amount that the senior has accessed. There is an annually adjusting HECM (which isn't used too often because the start rate is pretty high and it doesn't unlock as much equity as the monthly.)

Time of repayment goes as follows: Any amount that the senior has borrowed in a reverse is repayed when the last borrower in the home dies, moves, or sells. Basically, when the home is not the principal residence, the loan is due. The estate is ultimately responsible for the debt incurred by their parents.

Closing cost items (2% origination, 2% HUD Mortgage Insurance Premium, and about .5% in appraisal, escrow, etc...) are all financed into the loan. Usually the financed costs are $15,200 based on FHA's lending limit of $312,895.

All costs, fees, principal limits etc. are disclosed in a GFE that I send them upon inquiry of a reverse. We are very heavley regulated as this is an FHA program so I'm under a magnifying glass every step of the way.

Monthly service fees to service the loan will range from $25-35$ per month and is plugged into a life expectancy calculation which is then set aside from the proceeds of the reverse.

The monthly, lump sum or line of credit option does not effect the way the loan is set up. It will only effect how much interest is accrued during their lifetime. However much they start to borrow, it will start accruing interest immediately.

I hope I answered some of your questions! Please post again if I haven't and I'll do my best to help!

Thanks!

ellismt · Posted: Thu Sep 01, 2005 4:32 pm Post subject:

David Posted: Thu Sep 01, 2005 2:31 pm Post subject:

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Hi, welcome Matt. It would be great if you answer questions about reverse mortgages. The way I understand a reverse mortgage is you are slowly giving your property to the bank as they slowly pay you for it. Here would be a couple of my concerns:
1) What if the house appreciates considerably during the reverse mortgage?
2) What percent of the value is received by the bank? In other words, if you had a $300,000 house, how much of that would typically go to the person?

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Hi David! Thanks for the warm welcome and the blog etiquette (sp?).

Okay, a senior is not giving their house to the bank. They are taking out a loan on the home without having to pay it back until they die, move, or sell. The bank will never get the house (unless there's no estate to settle the debt once they've passed and then it's the usual probate thing).

What seniors are doing with this program is accessing a portion of the equity in their home. There is no LTV, FICO, DTI or anything like that used in determining how much they can access. The amount they can access is based on 3 things: their age (both must be over 62), the lesser of the homes appraised value or FHA's lending limit, and an interest rate.

If the house appreciates considerabley during the loan, it won't matter because the maximum that they are able to qualify for is usually FHA's lending limit (which in most parts of CA is $312,895.) There is no equity sharing when the loan becomes due. The bank does not participate in any home appreciation.

When the loan is due, the estate can do 2 things: 1. Take out a traditional mortgage, pay off their parents' debt from the reverse, and keep the house. 2. Sell the home and keep the difference after paying off their debt. Again, there is no equity sharing on a reverse. Unfortunately, company's that used to do that have tarnished this program.

Hope that info helps!

m2c · Joined: 03 Aug 2005 Posts: 762

Matt:

WOW! I can see the fees are still VERY high. On the other hand this is a very specialized loan product.

Now I’m starting to wonder if you even give TIL disclosures on the reverses. Also I assume you do “standard” mortgage and are therefore familiar with TIL calculations.

Maybe an example would help clarify my question. Lets assume a lump sum payment reverse of, say, $200,000. Of the costs you cited the 2% origination and 2% UFMIP would be in the thinking if “standard mortgages” as TIL items and therefore deducted from the loan amount to determine the “amount financed” on the TIL form. No sweat with a “standard” mortgage – future PAYMENT streams are discounted back against the “amount financed” to make the IRR calculation. Well, actually then further discounted back to take into account the prepaid interest but we’ll ignore that in this example.

If you follow the same procedure with the reverse mortgage, it would seem you’re double counting the TIL items since interest is accumulating on the loan amount, not the “amount financed”. This would make the APR higher than otherwise and usually “higher is safer” but the double count issue bothers me.

So in this example, we know “amount financed” and growth in principal balance but don’t have an exact number of month to figure the final repayment amount. I guess you use the same life expectancy figures used to the lump sum amount calculation. Just not sure.

Again I'm assuming you do "standard" mortgages also and will understand the "flip" in thinking I'm having with the reserves. Even if you don't you'd have to fit your explanation of APR to the reverse customers.

ellismt · Posted: Thu Sep 01, 2005 5:51 pm Post subject:

m2c Posted: Thu Sep 01, 2005 5:17 pm Post subject:

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Matt:

WOW! I can see the fees are still VERY high. On the other hand this is a very specialized loan product.

Now I’m starting to wonder if you even give TIL disclosures on the reverses. Also I assume you do “standard” mortgage and are therefore familiar with TIL calculations.

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m2c,

I should have told you that I only do reverse mortgages. Sorry! That would explain why I have no idea what some of that stuff means :)

In your example, the lump sum you are referring to would be the amount the borrowers would access after all fees, costs and set asides were taken out (typically $15,200). If they infact did take that lump sum of $200,000 (mind you they would have to be about 80 and have no mortgage balance to pay off to access that much) the beginning loan balance as of day one would be around $216,000. That amount starts accumulating interest immediately.

I believe the APR that you are talking about is as follows: HUD requires us to disclose that should the borrower not be the principal occupant after different years, this is how much the loan will end up costing. If they aren't the principal resident after year one, the amount it cost them to do this loan is like 15-17% (or some astronomical number like that). If they stay in the home for more than 15 years, the cost obviously drops.

Hope that helps. Again, I don't do any forward mortgages so I hope this hasn't been insulting or anything like that.

Thanks!!

Haplo · Joined: 20 Jan 2005 Posts: 2406 Location: Springfield, IL

Matt,

I have some questions for you if you don't mind looking me up in homescene and giving me a call or sending me an email. I work with a reverse mortgage specialist out here and I'd like to kind of compare notes on perhaps how some things are different :)

m2c · Joined: 03 Aug 2005 Posts: 762

Methinks there’s some sort of exemption from Reg Z for reverses. Strange how the government can speak out of both sides of the mouth. Some need APR “protection; others don’t. Perhaps the government just doesn’t care about old folks!

Also sounds as if a LO in CA doesn't need a license to sell reserves. Certainly any required LO course would include Reg Z and at least how to spell APR

lenderama · Joined: 08 Aug 2005 Posts: 22

m2c wrote: Strange how the government can speak out of both sides of the mouth. Some need APR “protection; others don’t. Perhaps the government just doesn’t care about old folks!

The required counseling class that each borrower has to take is way beyond what little information a TIL could provide.

m2c · Joined: 03 Aug 2005 Posts: 762

Lenderama.

Still trying to figure out if an APR is given on reverses. From your answer and that of Matt, I strongly suspect not. Simple yes or no would be great. For a product I have no intention of originating I really don’t want to wade through the dryness of good ole 12CFR226.

In the past I’ve had no “guilt” referring people to others who do this product when there was a strong profile fit. Now I’m starting to have some hesitancy on the “guilt” issue. From Matt’s comments, it’s likely that this is a VERY high margin product from the LOs point of view. Given the usual inelasticity of demand with many of the potential borrowers and resultant temptation to abuse this situation, some standard measure of the “true cost of money” to compare offers would seem even more important than with “standard” mortgages.

Since there is already an established and fairly well understood indicator in the APR, I’m surprise it (apparently) has been abandoned with the reverses. Admittedly some of the parameters, e.g. “term” for the IRR calculation, but this could be overcome by some standardized method based on, say, age. This was my original question when I naively assumed an APR was given.

Now you state that there is some “way beyond” method for the comparisons and information the APR normally gives. I would have assumed that the counseling would have focused more on such items as appropriateness of the reverse relative to other types of borrowing given the borrowers’ circumstances, interest deduction implications (if any), potential estate tax implications (forgiveness income in foreclosures – upside issue), calculating loan balances, etc. Now I’m curious on what this “government approved”, superior method is. When Reg Z was first introduced, the industry argued, “ the applicants know the rate and points, why do they need this new crazy figure?” Yeah, that argument went real far! Don’t understand why the government would reverse positions on the reverses.

I’m still going to refer folks out to this program if their profile is “right”; just may have to add some caveats to keep my guilt meter down.

chow · Posted: Fri Sep 02, 2005 3:57 pm Post subject:

Mrc2,

I think you're criss crossing the APR with different allowable closing costs that are figured into the APR. The Reverse mortgage loan is a heavy regulated product, along with the fact that most of us who put someone in that require another family member attend the class with the borrower(s) in the event they choose to look at it or take one.

I have wrote a few of these in my time, I have GIVEN other LO's my family member's loans to do, and attended with the kids, or who ever they wanted with them-at the class.

Sure, the fee's are a little high, but you are placing the property in a negative am situation. (I guess the high side is, is the market value goes to hell, and they have a line of credit-Your senior wins!) :wink:

HUD has a limit on the fee's. If you think the fee's are high on this loan-You'd better not knock on my door for a stated 100% commercial loan. Or a Equipment loan, with rehab to a leased area, for a franchise.

I'd rather my parent's live in a home they love, stay there as long as possible, and not worry about how they can buy medication, food and go on trips. They paid for the home, I don't want it, and they earned the right to do this, and get paid for having it.

After all, if you're worried about an inheritance-what have you done for yourself? I keep telling my parents to spend every dime they saved. You worked hard to raise us-now go enjoy it- I found a way for you to own a Condo-without a payment, and you can draw on that too! I figure I have a few days to go in and collect the "Stuff."

8)

:wink:

chow · Posted: Fri Sep 02, 2005 4:00 pm Post subject:

oh-I forgot, in the case You are a broker- a pure broker, you don't have to give a TIL on this transaction until you have the bank in line. If you think you have one lined up, they can give you some information.

The servicing fee's on these things-are understandably higher.

I have to zip off to tour a few Frank Lloyd homes. I'm just on tour-like I could afford one? :roll:

"Falling River" would make a nice nest egg..... :wink:

duh-it's a neg am.......here's the site to calulate...sorry~

http://www.reverse.org/

egads...it's looks like the website went into some political upchuck..... :roll:

I know-Wells Fargo does them.....I can't support any party who sponsors this site. It's just information.

You can also run over to HUD.Gov they have a list too.

I went to a session with them, and they attempted to steer my family referral to another company, with a loan that wouldn't have worked. (Now kids-Do you think I would want my 72 yr old- Mother in law living with me-if I was making a mistake?)

Pick your poisen.

ellismt · Posted: Fri Sep 02, 2005 5:59 pm Post subject:

I think I've figured it out m2c! Alright, I assume to calculate an accurate APR, you would need some sort of maturity date on the security, correct? The IRR calculation (if I remember my finance classes) has to have a period (n).

If that is so, that is the reason an APR wouldn't be included; there is no set maturity date on a reverse mortgage. It's all up to the senior when they die, move or sell. That's why I mentioned above that we disclose that should the senior only remain in the home for a different amount of years, here's what it will cost them (a sort of APR).

Am I getting close?