Reverse

Originating: The New HECM Math: Teaching an Old Dog New Tricks

Written by Jim Milano, as originally published in The Reverse Review.

With FHA Mortgagee Letters 2013-27 and 2013-33, originating FHA-insured HECMs now comes with new intricacies. Loan officers, counselors and those who market HECMs have been and will continue to raise their game on how they present these products to seniors.

Mortgagee Letter 2013-27 introduced the concept of the initial disbursement limit and mandatory obligations; a first 12-month disbursement period; an additional 10 percent of the principal limit above mandatory obligation; and a new single disbursement lump sum option. Further, depending on a senior’s mandatory obligations, and whether the senior elects to take more than 60 percent of the principal limit as part of the initial disbursement limit, the up-front mortgage insurance premium (MIP) will be either 50 basis points (.50 percent) or 250 basis points (2.50 percent). Therefore, these calculations and elections will be very important.

As we know, a FHA-insured Home Equity Conversion Mortgage allows a senior to borrow against the equity in their home without having to make regular monthly repayment obligations until the loan matures. Senior HECM borrowers of course do have to pay their real property taxes and hazard insurance and maintain their home.

The amount of money available to a senior under a FHA-insured HECM loan is called the principal limit. The principal limit is generally determined by the home’s appraised value, subject to an overall program limit of $625,500. The lesser of the home’s appraised value—the

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sales price of the home (for purchase money HECM loans) or the HECM program loan limit of $625,000­­—is called the maximum claim amount (MCA). The principal limit is calculated by multiplying the MCA by a principal limit factor (PLF), which is based on information published by HUD and varies based upon certain factors, including the age of the youngest borrower and the interest rate on the HECM loan.

Pursuant to the Reverse Mortgage Stabilization Act of 2013 and FHA Mortgagee Letters 2013-27 (September 3, 2013) and 2013-33 (September 25, 2013) for HECM loan applications logged in FHA’s records effective on or after September 30, 2013, the amount of the principal limit that a senior can access at the closing of a HECM loan and/or during the first 12 months of the loan is now further limited. The senior must make important elections prior to the closing of their HECM loan.

The amount of principal limit that a senior can access at the closing of their loan and/or during the first 12 months of the loan (or the first 12-month disbursement period) is further limited to the initial disbursement limit. After the first 12 months of a HECM loan, a senior can obtain the remainder of his or her available principal limit.

The initial disbursement limit is equal to the greater of 60 percent of the principal limit, or the sum of the senior’s mandatory obligations plus 10 percent of the principal limit. Mandatory obligations include items such as paying off a current mortgage loan secured by the senior’s home and any closing costs and mortgage insurance due with the HECM loan. Disbursements cannot exceed the principal limit established at closing.

If a senior’s mandatory obligations are greater than 50 percent of his or her principal limit, they may elect to take up to an additional 10 percent of his or her principal limit at closing and/or during the first 12 months of their HECM loan. If the mandatory obligations are greater than 50 percent of the principal limit, the borrower must decide, prior to loan closing, whether and what amount of this additional 10 percent of the principal limit, if any, the borrower wishes to receive, and if so, under which type of payment plan. If mandatory obligations are greater than 60 percent of the principal limit, the borrower must decide under which type of payment plan they wish to receive this additional 10 percent of the principal limit. The borrower must make this election and inform the lender of their choice prior to the closing of their HECM loan.

Under certain circumstances, electing to receive or have access to additional principal limit during the initial disbursement limit period may increase the cost of the HECM loan. If the amount the senior has access to and elects to receive at closing or during the first 12 months of the HECM loan exceeds 60 percent of the principal limit, the initial MIP will be 2.5 percent of the MCA. For example, this could occur if the mandatory obligations exceed 50 percent of the principal limit and the borrower elects to take all of the additional 10 percent of their principal limit at closing and/or during the first 12 months of their HECM loan. This also could occur if mandatory obligations exceed 60 percent of the principal limit (regardless of the senior’s election as to the additional 10 percent). However, if the amount the senior has access to and elects to receive at closing or during the first 12 months of their HECM loan is equal to or less than 60 percent of the principal limit, the cost of the HECM loan will be lower because the initial MIP will be 0.5 percent of the MCA.

It is possible in some scenarios, for instance, where a senior’s mandatory obligations equal 61 percent, that a senior could bring cash to close (or a lender could waive or reduce an origination fee or offer credits), thereby bringing mandatory oblations to or below 60 percent. Savvy originators will work these scenarios into their informational processes and presentations. Of course, such pricing options will have to be offered pursuant to clearly documented plans that are offered and applied consistently in a neutral manner, and such borrower elections will have to be memorialized in the loan file.

Further, subject to the initial disbursement limit described above, a senior may receive HECM loan proceeds as monthly payments, a line of credit or a combination of both. With the revisions under Mortgagee Letter 2013-27, a HECM loan now allows a senior to limit the amount he or she borrows to a single disbursement lump sum option. The single disbursement lump sum cannot exceed the initial disbursement limit described above. However, if a senior elects a single disbursement lump sum option, he or she will receive the available loan proceeds only at closing, and the borrower will not be able to receive any further disbursements under the loan (other than amounts disbursed from a repair or property charge set-aside), nor elect payment plan changes after closing.

Reverse mortgages were never truly a product that merely could be sold. Marketing of such loans has always been more conducive to an iterative informational process. Users of the product have to be informed, as opposed to being sold. For HECMs, with Mortgagee Letter 2013-27, as updated and revised by Mortgagee Letter 2013-33, this informational and educational process has now become even more important. Loan officers who were previously merely selling loans will now have to educate and inform seniors more than ever before about this dynamic loan program and its new, more intricate features and important up-front elections.

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