Evaluating the HECM product March 26, 2015 Presented by Garrett M. Kolb gkolb@rmsnav.com Senior Managing Director Reverse Mortgage Solutions, Inc. For Mortgage Professionals Only
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Agenda Reverse Mortgage History Reverse Mortgage Product Overview Comparisons of Forward vs. Reverse Marketplace Perceptions Technical Considerations - Integration
Industry Evolution Past Present Future Original reverse mortgage product dates back to 1989. Received a boost from HUD in 1999 when it increased the origination fee from 1 to 2%, and from Fannie Mae when it started paying a premium in 2001. By mid-2010, margins and profitability became robust as reverse mortgages gain wider acceptance and the secondary market vastly expanded. GNMA becomes the primary secondary market for HECM loans, increasing margins and investor base. Low interest rates and high investor demand increase margins significantly. HUD reduces principal limit, but also lowers floor rate, allowing for higher Loan to Value. Competitive landscape has eased, as major commercial banks focus on their core business lines. Non-borrowing spouse protections put in place by HUD. Reverse mortgages continue to gain acceptance which, combined with the ever-growing senior demographic, makes for an attractive market. Return of proprietary and jumbo product development by industry players. Stabilization of home process and reemergence of non-government securitization will open door for new proprietary products. Margins may improve as secondary market acceptance of the reverse mortgage product increases.
How a Reverse Mortgage Works Borrower pledges home equity to guarantee loan repayment. Based on age, interest rate, and home value the maximum principal amount is established Borrower receives regular or periodic payments from lender Borrower occupies home until death or default, even if all principal has been paid out At death of last borrower property is sold by estate to pay off loan or the property is acquired and sold to investor If proceeds from sale are less than debt, lender files a claim with FHA
Product Overview
Forward vs. Reverse Forward Mortgage Purpose of loan is to purchase property or refinance. Prior to closing, borrower has limited-to-no equity. Must have sufficient income-to-debt ratio to qualify for the loan. During life of the loan: Pay monthly installments, loan balance decreases, and equity increases. Falling debt, rising equity. Amount borrowed is determined by requirements for income, credit worthiness and appraised value of homes. Counseling is not required. Reverse Mortgage Purpose of loan is to generate cash or purchase property. Prior to closing, borrower has significant level of equity in property. Financial assessment of income and creditworthiness to support ability to maintain mandatory housing and living expenses. During life of the loan: Receive monthly payments, loan balance increases, and equity gets reduced. Rising debt, falling equity. Amount borrowed is determined by considering age, current interest rate, and appraised value of home. Requires HUD Approved Counseling.
Product Specifications HUD Product-National lending limit: $625,500 (MCA) Loan amount is determined by the HUD (PLF) factor Single family primary residence 2-4 unit properties, approved condo and manufactured Refinance and Purchase Minimum age 62 Protection for eligible non-borrowing spouses No monthly mortgage payments Taxes, insurance and other property charges must be kept current and property maintained No prepayment penalty Non-recourse Mortgage Insurance required (MIP) HUD-mandated counseling FRM - Single Disbursement ARM - Multiple Disbursement options Tenure payment-lifetime payments Term payments-fixed payout term Line of Credit: Credit limit grows annually Rather than credit- and income-based underwriting used in traditional mortgages, a borrower s age and the amount of equity in the home are the primary factors used to qualify for a HECM. Financial assessment of income and credit history to support ability to maintain mandatory housing and living expenses.
Reverse Mortgage Benefits Pay off an existing mortgage and get cash for any reason. Access remaining equity through lifetime payments, term payment and/or line of credit. No monthly mortgage payments for as long as you live in the home and continue to meet the property obligations. Minimal out-of-pocket closing costs; e.g., counseling and appraisal fee. Other closing costs are usually financed.
Reverse Mortgage Benefits Loan proceeds are not taxable. Social Security and Medicare benefits are not affected. You will never owe more than what your home is worth even if your home decreases in value when it comes time to repay your loan (non-recourse). You or your heirs may have an option to cash out any equity remaining after the loan is paid off.
Perceptions The loan balance increases over time as interest on the loan and fees accumulates. As home equity is used, fewer assets are available to leave to your heirs. Access to additional available funds may be limited during the first year. Mortgage insurance cost may be substantially higher in low-equity scenarios.
Perceptions Eligibility for needs-based government programs, such as Medicaid, may be affected. The loan becomes due when the last borrower or eligible non-borrowing spouse no longer resides in the home; the home is no longer the borrower s principal residence; or the borrower vacates the property for more than 12 months. Loan defaults when property obligations are not paid or the property is not maintained per the terms of the loan agreement.
Statistics Source: Reverse Marketing Insight Industry Trends; www.rminsight.net The reverse mortgage market is about 1% the size of the traditional mortgage market. The number of reverse mortgage originations is likely to increase in upcoming years as the Baby Boom generation those born from 1946 to 1964 retire. 41% of Americans aged 55 to 64 have no retirement savings account. The homeownership rate for those aged 55 to 64 is 74%. Homeowners aged 62 and older hold a combined $3.84 trillion in equity in their homes. 10,000 people turn age 62 daily. 23 million households 6% relocate 20% use mortgage financing 276,000 purchase
Tactical & Technical Recruiting tool Historically profitable Versatile product Purchase Market & Realtor Financial Planners More senior lending options Expand customer base Training Marketing LOS/Technology Operations integration Capital Market Investor Authority Broker Correspondent
Integration
Conclusions & Questions The HECM may not be right for every borrower. The HECM may not be right for every lender. The HECM is unique; there is no other product like it. The HECM is unique and requires a specialized process. When the need exists within the organization, the HECM expands opportunity. Cost of implementation may outweigh the benefits. The cost of not offering the HECM may be immeasurable.