Explain vital application doc calculations, including: Amortization Schedule TALC TIL (Fixed Rate)

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2 Illustrate how reverse mortgage interest rates are calculated. Explain vital application doc calculations, including: Amortization Schedule TALC TIL (Fixed Rate) Describe reverse mortgage loan growth Loan Balance Line of Credit Partial Repayments Review how to read a monthly statement

3 Interest Rates Expected Rates and Look Up Floor Note Rates Principal Limit Factors Payment Plan Math Ongoing MIP Amortization Schedule TALC TIL Loan Growth Line of Credit Expected Rate Initial Rate + Yield Curve Monthly Statements

4 Interest Rates, PLFs, MIP, and Payments

5 Used to calculate loan proceeds (Principal Limit). Does not change during the life of the loan. Based on the 10-year SWAP from the previous week s average as published on the Federal Reserve s website. Expected rates of 5.06 or less will maximize proceeds. As expected rates increase, PL amounts will decrease. The PL Lock feature of HECM loans allow the expected rate at application or closing to be used which provides the most money. Instruments Week Ending Mar Mar Mar Mar Mar Feb Mar 21 Mar 14 Interest rate swaps 13 1-year year year year year year year year CLICK HERE for the 10 year SWAP Rates

6 Used to calculate the loan balance. Based on the 1-month LIBOR + the applicable margin. The rate is published in The Wall Street Journal on Monday, will go into effect Tuesday through the following Monday. Adjusts the first day of the third month after funding. Becomes the Note or Applied Rate. On ARM loans, there is a 10% lifetime cap above the initial rate. 1-Month LIBOR Rates HERE! The Wall Street Journal, March 26 th, 2014

7 Principal Limit tables determine the percentage of the maximum claim amount borrowers will receive. Standard loans have unique PLF tables. The youngest borrower s age (within 6 months of closing), and expected interest rate determines what factor will be used. From time to time HUD changes these factors; raising or lowering factors depending on the projected performance of the HECM portfolio. HUD has an Effective Interest Rate Floor of 5%. This means expected rates of less than 5.06% (rounded) will provide the same principal limit. Principal limit factors stop increasing at age 90.

8 Tenure payments are calculated using: Available funds Age of the borrower Expected rate When available funds are equal, products (rates) with a higher expected rate will provide higher monthly tenure payments.

9 All HECM loans (Saver and Standard) have ongoing MIP added to their loan balance each month. The rate is 1.25% annualized (set by HUD). The chart to the left illustrates how MIP and other fees are calculated monthly. Monthly Loan Balance* 1.25 / 12 = MIP added to Loan Balance Adding 12 months will return the same totals as the Amortization Schedule.

10 Amortization Schedule, TALC and TIL

11 Uses expected rate by default; most likely average long-term rate over a period of several years. Although projections are shown annually the rate is applied monthly. The property value growth rate assumes 4% annual growth. Assumptions can be changed, but the final Amortization Schedule should use the expected rate and 4% property appreciation. LOAN BALANCE EXPECTED X RATE + MIP

12 Projections go to the youngest borrower s 99 th birthday. May show biannually depending on the borrower s age. Will always show at least 5 years, regardless of age.

13 The TALC provides an estimate of the loan s APR using a given set of conditions. Disclosure periods vary based on the youngest borrower s age. They will always be 2 years, ½ life expectancy, life expectancy and 1.4 times life expectancy. The APR is affected by the appreciation rate and the length of the time of the loan is outstanding. Calculated on a non-recourse formula assuming the property might be sold at 93% of the projected property value.

14 Only when the loan balance surpasses the value, is the APR affected. Because of the loan s non-recourse provision, the borrower has received the full benefit of the loan but is only responsible to pay back the value of the property. Property Value $ 300, Beginning Loan Balance $ 150, Loan Balance Year Estimated Property Value 0% 4% 8% $ 169, $ 300, $ 324, $ 349, $ 230, $ 300, $ 394, $ 514, $ 353, $ 300, $ 519, $ 881, $ 509, $ 300, $ 657, $ 398, Disclosure Period (Years) Appreciation Rate % Balance Balance Property Value Property Value 4% Balance Balance Balance Balance 8% Balance Balance Balance Balance This chart shows whether the loan balance or the property value must be paid back. When the loan balance must be paid back, the APR is not effected by property appreciation. The APR will decrease when the loan balance becomes greater than the property s value.

15 Only on Closed-end products. APR is calculated using the fees that are considered Finance Charges. Reg Z allows some fees to not be considered APR fees, such as a credit or appraisal report. Amount financed is calculated by adding the lump sum and the fees NOT considered finance charges. The due date is based on the youngest borrower s life expectancy. Since there is no actual due date, all figures are proceeded by an e.

16 LOC Growth, Loan Growth, Prepayments

17 The growth is determined by the Note Rate on the last day of the previous month % / 12. LOC Growth allows borrowers to take advantage of the anticipated property value growth. The growth of the line is similar to an increase on a credit card. It is not interest. The growth rate will change in tandem with the note rate. Note Rate on 5/ % % LOC Growth Rate for June 4.20% LOC Balance $ 150, x 4.20% LOC Growth (annualcalc) $ 6, Monthly LOC Growth - June $

18 Reverse Mortgage in 2023 Home Value: $444,073 Scenario / Assumptions 72 year old borrower LIBOR 250 STD $300,000 Max Claim $60,666 UPB - $142,434 LOC No LOC withdrawals 4% property appreciation Expected rate (AM Sch. Default) 2023 Line of Credit Balance: $262,517 Loan balance grows to $111,813 in year 10 The LOC available is $262,517 Remaining equity is $331,560

19 Reverse Mortgage in 2023 Home Value: $444,073 Scenario / Assumptions 72 year old borrower LIBOR 250 STD $300,000 Max Claim $60,666 UPB - $142,434 LOC No LOC withdrawals 4% property appreciation Initial rate increase of 1% annually for 10 years 2023 Line of Credit Balance: $359,301 With a 1% rate increase each year, the loan balance grows to $153,035 in year 10 The LOC available is $359,301 Remaining equity is $291,760

20 Reverse Mortgage in 2023 Home Value: $444,073 Scenario / Assumptions 72 year old borrower LIBOR 250 STD $300,000 Max Claim $60,666 UPB - $142,434 LOC No LOC withdrawals 4% property appreciation Yield Curve 2023 Line of Credit Balance: $255,038 Using the yield curve, the loan balance grows to $108,627 in year 10 The LOC available is $255,038 Remaining equity is $334,746

21 Partial repayments can be made on HECM loans at any time. Like traditional mortgages, when a repayment is made on a closed-end product, funds cannot be re-drawn. Partial repayments on ARM loans, however, go directly to reducing the loan balance and increasing their LOC. Although, the borrower sees a direct increase in their LOC and decrease in their loan balance, behind the scenes the payment is applied to the loan balance in a specific way: Accrued MIP Accrued monthly service fees (if applicable) Accrued interest Principal When a partial repayment is made that is large enough to reduce accrued interest borrowers will receive a 1090 interest statement according to IRS regulations.

22 Reverse Mortgage in 2013 Home Value: $300,000 Reverse Mortgage in 2018 Home Value: $364,996 Loan balance in 5 years with $6,000 annual payments. Balance: $42,077 Loan balance with no payments or withdrawal s in year 5. Balance: $76,842 Reverse Mortgage in 2018 Home Value: $364,996 Proceeds decrease by $6,000 annually Accumulated Proceeds

23 All HECMs have two interest rates, Expected and Note; used to determine proceeds and loan balance. Principal Limit tables determine the amount of proceeds; taking into look up floor into account. Although displayed annually, Amortization calculations are calculated monthly. APRs remain unchanged until the loan balance surpasses property value. Partial repayments can be redrawn on ARM loans.