HOME EQUITY CONVERSION MORTGAGE (HECM) COUNSELING
Presented by Ken Scholen Bronwyn Belling
Neighborworks Training Institute
May 2006
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TABLE OF CONTENTS
TAB 1 INTRODUCTION ........................................................................... pp. 4 - 9 Introduction Learning Objectives Instructors Key Resources Process & Agenda INTRODUCTION TO REVERSE MORTGAGES ...................….pp. 10 - 16 Definitions Features Insurance INTRODUCTION TO HECMs .................................................... pp. 17 - 20 Eligibility Features Costs SELF-TEST #1 ON TABS 2-3.................................................... pp. 21 - 23 HECM PAYMENT OPTIONS ......................................................pp. 24 - 31 Five Options Payment Amounts Payment Choices HECM PAYMENT CALCULATIONS.......................................... pp. 32 - 39 Software Demonstration Key Terms Interest Rate Choices Software Lab HECM LOAN AGREEMENT ...................................................... pp. 40 - 42 AGING RESOURCES................................................................. pp. 43- 49
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TAB 2
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TAB 3
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TAB 4 TAB 5
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TAB 6
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TAB 7 TAB 8
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TAB 9 TAB 10
2ND-DAY HOMEWORK ASSIGNMENT...................................... pp. 50 - 51 (Self-Test #2 on Tabs 10-11) OTHER HOME EQUITY CONVERSION OPTIONS .................. pp. 52 - 55 Sale Plans & Loan Plans Single-Purpose Reverse Mortgages Proprietary Reverse Mortgages REVERSE MORTGAGE ANALYSIS.......................................... pp. 56 - 64 The Reverse Mortgage Machine Total Annual Loan Cost (TALC) Rates Model Specifications for Comparing Reverse Mortgages Other Financial Implications OPTIONS OTHER THAN HOME EQUITY CONVERSION........ pp. 65 - 69 Selling and Moving Public Benefits The Aging Network HECM COUNSELING................................................................ pp. 70 - 74 Requirements Principles AARP Foundation Protocol (see Appendix E) Certificate CASE STUDIES..........................................................................pp. 75 - 80 APPENDIX A - KEY HECM MORTGAGEE LETTERS ............pp. 81 - 109 APPENDIX B - HECM CALCULATIONS ........................................ pp. 110 APPENDIX C - THE REVERSE MORTGAGE MACHINE............... pp. 111 APPENDIX D - TOTAL ANNUAL LOAN COST TUTORIAL...... pp. 112-119
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TAB 11
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TAB 12
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TAB 13
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TAB 14 TAB 15 TAB 16 TAB 17 TAB 18
TAB 19 APPENDIX E - AARP FOUNDATION REVERSE MORTGAGE EDUCATION PROJECT – HECM COUNSELING PROTOCOL ................pp. 120-140
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INTRODUCTION • PROGRAM The Housing and Community Development Act of 1987
established a federal mortgage insurance program, Section 255 of the National Housing Act, to insure "Home Equity Conversion Mortgages" (HECMs). Since then, HECMs have become the most widely available type of "reverse" mortgage. Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD).
• ADMINISTRATION The HECM program is administered by the Federal
• PURPOSE The HECM program is designed to meet the special needs
of elderly homeowners by insuring mortgages that turn their home equity into cash.
• These "home equity conversion mortgages" (HECMs) do not
have to be repaid for as long as borrowers live in their homes.
• HECM loans must be repaid when the last surviving borrower
dies, sells the home, or permanently moves away.
• COUNSELING REQUIREMENT To be eligible for a HECM, a homeowner
must receive counseling from a HUD-approved counseling agency. certifying that the homeowner has received counseling.
• The counseling agency issues a certificate to the homeowner • The homeowner must submit this certificate to a lender for
submission to HUD as part of the lender's application for HECM insurance.
• COUNSELING FEATURES • HECM counseling must cover HECM loans and other options. • The issuance of a HECM counseling certificate is not an opinion
or a decision by a counseling agency about the suitability of a HECM for a homeowner.
• The decision to apply for a HECM is the homeowner's, and the
decision about the homeowner's eligibility is the lender's and HUD's.
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LEARNING OBJECTIVES • Develop an understanding of reverse mortgages in general • Become familiar with the key features of the federally-insured
Home Equity Conversion Mortgage (HECM) program
• Learn how use HUD's HECM loan calculation software • Become familiar with other programs and services for older persons • Learn the importance of analyzing and comparing reverse mortgage products • Develop an understanding of the HECM counselor's role and responsibilities • Practice applying new knowledge to case studies of sample clients
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INSTRUCTORS
Bronwyn Belling has spent the last 25 years encouraging consumers to take a closer look at reverse mortgages as a possible tool to remain more independent. Her present focus is to improve the quality of and increase access to reverse mortgage counseling across the U.S. For the past 15 years, Bronwyn has managed the Reverse Mortgage Education Project at the AARP Foundation, with primary funding from the U.S. Department of Housing and Urban Development (HUD). During this time, she has trained over 6,000 housing counselors, lenders, HUD staff, aging network representatives and elder law attorneys about reverse mortgages and their alternatives. AARP Foundation, Reverse Mortgage Education Project 601 E Street, NW, Room B4-435 Washington, DC 20049 202-434-6044 (phone) 202-434-6068(fax) Email: bbelling@aarp.org Web: www.aarp.org/revmort and www.hecmresources.org
Ken Scholen, "the leading authority on reverse mortgages" (L.A. Times), directs the AARP Foundation’s Reverse Mortgage Education Project (www.aarp.org/revmort). He founded the National Center for Home Equity Conversion (www.reverse.org) and has written critically-acclaimed consumer guides to reverse mortgages. He led the effort to develop federal insurance for reverse mortgages, developed the total loan cost disclosure required by Truth-in-Lending, and received the Federal Housing Commissioner's Award for his work in the field. AARP Foundation Reverse Mortgage Education Project 1005 E. Traveler’s Trail Burnsville, MN 55337 951-808-0285 (phone and fax) Email: scholen@aol.com Web: See above plus www.reverse.org
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KEY RESOURCES
• HECM Handbook - A copy of the HECM program's official operating handbook
(HUD Handbook 4235.1 REV-1, "Home Equity Conversion Mortgages") is included in this course's materials. Counselors should read this handbook, and use it as a technical reference.
• HECM Mortgagee Letters - Included as Appendix A are key HUD mortgagee letters
that revise and update the HECM Handbook. Counselors should read this material, and periodically check for new program regulations and mortgagee letters online.
!
For instructions on finding HECM documents and announcements online, go to www.hecmresources.org and click on "Resources."
• HOME MADE MONEY: A Consumer's Guide to Reverse Mortgages - A copy of
this AARP consumer publication (2/05) is included in this course's materials. It is also available in Spanish (see www.aarp.org/espanol).
. INTERNET WEBSITES:
• www.aarp.org/revmort - this section of AARP's Webplace is the most
recent online version of Home Made Money (see above); scroll to the bottom of the page and click on “See all Reverse Mortgages Articles”
• www.hecmresources.org - a HECM counselor resource provided by the
AARP Foundation’s Reverse Mortgage Education Project
• www.reverse.org - this website is devoted exclusively to reverse mortgages, and complements the consumer information provided at AARP's Webplace
• www.hecmexam.org – this website is devoted exclusively to information on
how HECM counselors can study and sit for the national examination that is available indefinitely. Counselors that meet the qualifying score on this exam are eligible to join the AARP Foundation’s HECM Counselors Network.
Specific references to these key resources are made throughout this training material. Generic references are also made at the beginning of some of the tabbed sections. These boxed references indicate that more information on the subject matter covered in the section is available from these sources.
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AGENDA – DAY ONE
8:00 - 8:30 am 8:30 8:30 - 9:00 9:00 - 10:15 Registration/Self Test #1/Coffee Training Begins Welcome/Introductions/Agenda: TAB 1 Introduction to Reverse Mortgages & HECMs: TABS 2-3 (Review of Self-Test #1 - TAB 4) 10:15 - 10:30 10:30 - 11:30 11:30 - 1:00 pm 1:00 - 2:30 2:30 - 2:45 2:45 - 3:15 3:15 - 3:45 3:45 - 4:00 pm Break HECM Payment Options: TAB 5 Lunch (on your own) HECM Payment Calculations & Software Lab: TAB 6 Break HECM Loan Agreement: TAB 7 Aging Resources: TAB 8 Wrap-Up & Homework Assignment: TAB 9
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AGENDA – DAY TWO
8:00 - 8:30 am 8:30 - 8:45 8:45 - 10:30 10:30 - 10:45 10:45 - 11:30 11:30 - 1:00 1:00 - 1:45 1:45 - 2:30 2:30 - 2:45 2:45 - 3:45 3:45 - 4:00 4:00 pm Coffee and Study Hall Overview of Agenda Other Home Equity Conversion Options: TAB 10 Break Options Other Than Home Equity Conversion: TAB 12 Lunch (on your own) HECM Counseling: TAB 13 Case Studies: TAB 14 Break Case Studies, continued Reverse Mortgage Game Adjourn
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HECM Counseling – INTRODUCTION TO REVERSE MORTGAGES - TAB 2
INTRODUCTION TO REVERSE MORTGAGES
Also see:
• Home Made Money: Part 1 (or www.aarp.org/revmort; pp. 1-6) • www.reverse.org - Basic Q & A
The structure and purpose of reverse mortgages are different from those of standard "forward" mortgages. This section introduces the general concept of reverse mortgages and discusses the basic features of these loans. 2-1 DEFINITION A reverse mortgage is a loan against home equity providing cash advances to a borrower, and requiring no repayment until a future time. A. Home equity means the value of a home minus any debt against it. But reverse mortgages are different from "home equity loans" in two important ways: 1) 2) B. You do not need an income to qualify for a reverse mortgage. You do not have to make monthly repayments on a reverse mortgage.
Cash advances provided by a reverse mortgage are referred to in various ways, and are paid out to borrowers in various ways. 1) Cash advances are also known as "loan advances," "payments," "disbursements," and - in the case of line of credit reverse mortgages - "draws." Cash advances can be paid out in a single "lump sum" of cash, a series or "stream" of periodic advances (for example, monthly), a line of credit that the borrower controls, or any combination of these types of advances.
2)
C.
Repayment of principal (cash advances), interest, and loan costs is not required until the borrower dies, sells the home, or permanently moves away.
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HECM Counseling – INTRODUCTION TO REVERSE MORTGAGES - TAB 2
2-2
COMPARISON The purpose and operation of a reverse mortgage are different from those of a standard "forward" mortgage. A. B. The purpose of a forward mortgage is to purchase a home. The purpose of a reverse mortgage is to generate cash. In a forward mortgage, the borrower's equity increases over time. The loan balance (amount owed) decreases as payments are made to the lender. Meanwhile the value of the home is usually increasing (see Table 2-a and Figure 2-a). Forward mortgages are "falling debt, rising equity" transactions. In a reverse mortgage, the borrower's equity generally decreases over time. The loan balance rises as loan advances are made to the borrower, interest is added to the outstanding loan balance, and no repayments are made. Unless the home appreciates (grows in value) at more than a moderate rate, the loan balance starts "catching up" to the home value (see Table 2-a and Figure 2-b). Reverse mort-gages are typically "rising debt, falling equity" transactions.
C.
2-3
EXAMPLE A simple example of a reverse mortgage loan is presented in Table 2-b. Note how the $300 monthly loan advances plus monthly interest at 1% equal the loan balance. Note also that the loan balance is subtracted from the home's value (assumed to be growing at 4% per year) to give the amount of net home equity.
• Column C shows the "rising-debt" nature of a reverse mortgage. • Column (D - C) shows the "falling equity" held by the borrower.
2-4 BASIC FEATURES All reverse mortgages share certain common characteristics relating to homeownership, loan advances, loan cost financing, loan balances, repayment, and debt limits. A. The borrower retains title to the home. The lender does not own the home, and does not "get" the home when the borrower dies. The borrower is still responsible for taxes, insurance, and upkeep. The borrower's estate must pay off the loan upon the borrower's death. The amount of the loan advances generally depends on the value of the home, the age of the borrower, and the cost of the loan (that is, the loan fees and interest rate). The greatest amounts are generally available to the oldest borrowers with the most valuable homes who take loans that have the lowest costs.
B.
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HECM Counseling – INTRODUCTION TO REVERSE MORTGAGES - TAB 2
Table 2-a Comparison of Typical "Forward" and Reverse Mortgages
Item Purpose of loan Before closing, borrower has. At closing, borrower...
"Forward" Mortgage to purchase a home no equity in the home owes a lot, and has little equity
Reverse Mortgage to generate income substantial equity in the home owes very little, and has substantial equity receives payments from the lender loan balance rises equity declines borrower owes substantial amount has much less, little, or no equity -----------Rising Debt Falling Equity
During the loan, borrower...
makes monthly payments to the lender loan balance goes down equity grows
At end of loan, borrower...
owes nothing has substantial equity -----------Falling Debt Rising Equity
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HECM Counseling – INTRODUCTION TO REVERSE MORTGAGES - TAB 2
Table 2-b Simplified* Reverse Mortgage Example Assumptions: Monthly Loan Advance.........$300 Monthly Interest Rate...….....1.0% Original Home Value......…...$80,000 Appreciation Rate.........…….4% per year
A End of Year 1 2 3 4 5 6 7 8 9 10 Principal Advances $ 3,600 7,200 10,800 14,400 18,000 21,600 25,200 28,800 32,400 36,000
B Interest + (1%/mo.) $ 243 973 2,252 4,150 6,746 10,127 14,394 19,658 26,046 33,702
C Loan Balance $ 3,843 8,173 13,052 18,550 24,746 31,727 39,594 48,458 58,446 69,702
D Home Value $ 83,200 86,528 89,989 93,589 97,332 101,226 105,275 109,486 113,865 118,420
(D - C) Net Equity $ 79,357 78,355 76,937 75,039 72,586 69,499 65,681 61,028 55,419 48,718
* Illustrative example only; does not include closing costs and fees.
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HECM Counseling – INTRODUCTION TO REVERSE MORTGAGES - TAB 2
Figure 2-a: Forward Mortgage
Home Value
$
Home Equity
Loan Balance
time $
Home Value
Figure 2-b: Reverse Mortgage
Home Equity
Loan Balance
time
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HECM Counseling – INTRODUCTION TO REVERSE MORTGAGES - TAB 2
C.
Loan fees can generally be "financed," that is, added to the loan balance at loan closing. This means, in effect, that some or all of the cost of setting up the loan (closing costs, origination fee, insurance premium) can be paid with an extra loan advance at closing. The loan balance (amount owed) rises over time. It grows because the borrower keeps getting loan advances and being charged interest on the outstanding balance while making no repayment until a future time. No repayment is required on most reverse mortgages for as long as the borrower lives in the home as a principal residence. When the last surviving borrower dies, sells the home, or permanently moves away, then the full loan balance becomes due and payable. There is a "non-recourse" limit on the borrower's repayment obligation. This important consumer safeguard means that the total amount owed by the borrower can never exceed the value of the home at the time the loan becomes due and payable. In seeking repayment, the lender does not have recourse to anything other than the home's value. 1) 2) Even if the loan balance grows to be greater than the home's future value, the borrower's debt is limited by the value of the home. The non-recourse feature protects the borrower and the borrower's estate and heirs from "deficiency judgments," that is, from being required to pay back more than the home's value.
D.
E.
F.
2-5
REVERSE MORTGAGE INSURANCE A. The purpose of reverse mortgage insurance is to permit borrowers to remain in their homes for as long as they choose, to protect borrowers with a non-recourse loan limit (see 2-4-F), and to protect lenders from the risk that some loan balances may exceed home values. 1) 2) 3) As shown in Figure 2-b, a reverse mortgage loan balance could grow to exceed the value of a home. But the non-recourse feature of these loans (see 2-4-F) limits the borrower's liability to the value of the home. Without reverse mortgage insurance (or some other method of "pooling" or spreading out the risk), lenders would face the loss of expected interest and, in some cases, principal.
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HECM Counseling – INTRODUCTION TO REVERSE MORTGAGES - TAB 2
B. The risk of loss is managed by reverse mortgage insurance (and other riskpooling methods) in two basic ways: 1) controlling the risk of loan losses by controlling the amount of the loan advances, and 2) charging a premium on all loans to create a reserve fund for covering loan losses. 1) Loss risk is controlled by relating the amount of the loan advances to the life expectancy (age) of the borrower, the value of the home, and the cost of the loan: a. b. c. 2) the longer the life expectancy (that is, the lower the age), the smaller the loan advances; the greater the home value, the greater the loan advances; and the greater the loan costs, the smaller the loan advances.
A loan loss reserve is created by charging a premium on all loans sufficient at a minimum to cover expected losses. The type of premium or risk-pooling charge can be structured in various ways.
2-6
BASIC TYPES OF REVERSE MORTGAGES There are three basic types of reverse mortgages. Tab 10 discusses these different types in detail. A) Single-purpose reverse mortgages are offered by some state and local government agencies. Each loan can only be used for a single purpose. For example, some are limited to home repairs, others to paying property taxes. These plans generally have maximum income eligibility requirements, but the cost is usually very low or moderate. B) Federally-insured reverse mortgages are Home Equity Conversion Mortgages (HECMs). C) Proprietary reverse mortgages are developed, owned, and insured by private companies. They are the most expensive type of reverse mortgage, and generally only provide competitive loan advance amounts on the most highly valued homes. At present, one of these plans is available nationwide, and the other is available in the most populous states.
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HECM Counseling – INTRODUCTION TO HECMS - TAB 3
INTRODUCTION TO HECMS
See also
• HECM Handbook, Chapter 1 • Home Made Money, Part 2
• PROGRAM SUMMARY The summary on the next three pages highlights the main
features of the HECM program for consumers. This document can be used in the counseling process to review these major points with clients.
• NOT REQUIRED HUD PAPERWORK The summary does not have
to be given to counseling clients. Use of the summary is optional, but is encouraged by AARP. (Only one form, HUD 92902 – Certificate of HECM Counseling - is required to be signed by both counselor and borrower. This form is covered later - in Tab 13 and shown on page 74.)
• PROGRAM DETAILS More details on the HECM program are provided in
Tabs 5-14
• Tabs 5-7 provide more details on HECM payment options, payment
calculations, key HECM terms, interest rate choices, and the HECM loan agreement. disclosure required by federal Truth-in-Lending law, reverse mortgage analysis, and other financial implications. than HECM.
• Tab 11 provides information on the specialized reverse mortgage cost
• Tabs 8, 10, and 12 provide information on homeowner options other • Tab 9 is a self-test on Tabs 10 and 11. • Tab 13 covers a variety of topics related to HECM counseling. • Tab 14 presents case studies that illustrate issues that HECM
counseling clients may encounter.
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HECM Counseling – INTRODUCTION TO HECMS - TAB 3
Home Equity Conversion Mortgage (HECM) Program Summary
ELIGIBLE HOMEOWNERS (see HECM Handbook: 4-3, 4-4, 4-5, and 4-6) • • • Age 62 and over (all owners) Occupy home as principal residence (live in home 6 months of year); at least one owner must be residing in the home at the time of closing Own home - existing mortgage must be paid off before or at closing, or must be subordinated to the HECM st - HECM must be 1 mortgage, but can be used to pay off existing debt
ELIGIBLE PROPERTIES (see HECM Handbook: 3-4, 3-5, and 3-6)
• Home must be a single-family, 1 to 4-unit, owner-occupied dwelling
- some condominiums are already FHA approved; otherwise up to 10% of all units may be eligible by “spot approval” secured by lender from FHA - manufactured homes are eligible if they meet FHA standards, including: * borrower owns land beneath the home, and * home is permanently affixed to a foundation * home was built after June 15, 1976 (and has sticker to so indicate) - planned unit developments may be eligible - mobile homes are not eligible - cooperatives are not eligible
• Home must meet FHA minimum property standards (HECM loan may
be used to make required repairs if the cost is within program limits) PAYMENT OPTIONS Approved borrowers can choose from 5 payment options:
• TENURE: Borrower receives monthly payments from the lender for as long as
the home is occupied as the principal residence. months selected by the borrower.
• TERM: Borrower receives monthly payments from the lender for a period of • LINE OF CREDIT: Borrowers can draw up to a maximum amount at times and
in amounts they choose until the creditline is exhausted. The amount of cash available grows larger each month until then. payments for fixed number of months (term option).
• MODIFIED TERM: Borrower may combine a line of credit with monthly • MODIFIED TENURE: Borrower may combine a line of credit with monthly
payments for as long as one borrower remains in the home (tenure option).
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HECM Counseling – INTRODUCTION TO HECMS - TAB 3
• Borrowers may also change between these payment options during the loan
term. The maximum charge for each change is $20. REPAYMENT: A HECM does not have to be repaid until the last surviving borrower dies, sells the home, or permanently moves from the home. Borrowers may partially or fully repay the loan balance at any time without any penalty. COSTS Except as noted, all costs can be financed, that is, added to the loan balance (amount owed). • • • • Property Appraisal: generally an advance payment of about $350, but may be refunded to borrower and added to loan balance at loan closing Credit Report: generally an advance payment of about $25 for a simplified credit report, but may be refunded to borrower and financed with the loan. Standard Local Closing Costs: title search and insurance, surveys, required inspections, recording fees, mortgage taxes, etc. Hazard or Flood Insurance Premiums: replacement value coverage is required; may require advance premium to be paid at closing if coverage is increased. Origination Fee: varies by lender, but cannot exceed the greater of $2,000 or 2% of the Maximum Claim Amount (MCA), which is the lesser of the home’s appraised value or HUD's maximum mortgage insurance limit for the area, which is also known as HUD's 203(b)(2) limit. Mortgage Insurance Premium: up-front payment equals two percent of the Maximum Claim Amount, paid or financed at closing, plus an annual premium of 1/2 percent, or 50 basis points, charged on the rising loan balance. Servicing Fee: flat monthly charge, if not included in interest rate; cannot exceed $30 per month for HECMs with annually adjusting interest, and $35 per month for HECMs with monthly adjustable interest. (Mortgagee Letter 98-3). Interest is charged on all payments made to the borrower and on all loan costs that have been added to the loan balance. Borrower may select a rate that is subject to change either once a year or once a month. • Annually adjustable interest cannot vary by more than 2 percentage points per year, or 5 points over the life of the loan. Monthly adjustable interest has no annual cap and a current lifetime cap of 10%. Interest rate adjustments do not affect the amount of a monthly advance, but they do change the rate at which a creditline grows larger. They also affect how quickly the HECM loan balance grows.
•
•
•
•
•
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HECM Counseling – INTRODUCTION TO HECMS - TAB 3
For more details, see HECM Handbook, part 1-8; Home Made Money, pp.16, 31-33; and www.reverse.org on "Interest Rates." FEDERAL GUARANTEES
•
• In the event of lender default, HUD will continue to make payments to the
borrower based on the original terms of the loan.
• A HECM is a "non-recourse" loan, which means that a borrower can never
owe more than the value of the property at the time the loan is repaid. BORROWER OBLIGATIONS • Continue to maintain, insure, and pay taxes on the property. Unless borrowers choose to pay and provide evidence of paying property taxes and insurance, lenders are authorized to make these payments from HECM proceeds. Lenders are also authorized to use the loan to pay for property repairs if they are needed to maintain HUD property standards Continue to occupy the property as primary residence (where at least one borrower spends the majority of the time). Borrower may reside elsewhere for a maximum of 12 consecutive months, due to physical or mental illness. At this point, if a determination is made that it is unlikely that the borrower would return, the home would no longer be considered owner-occupied and the loan could become due and payable.
•
LENDER PARTICIPATION • Any FHA-approved lender may originate HECM loans. Lenders offering HECM loans are listed on HUD’s website at www.hud.gov/ll/code/llplcrit.html See also the National Reverse Mortgage Lenders Association’s website for a list of their members (www.reversemortgage.org) . Lenders earn an origination fee and either earn servicing fees or sell servicing rights to other companies. Fannie Mae purchases HECM loans, and several companies offer loan servicing systems or services. Lenders are protected against loan losses that occur because the nonrecourse feature (see Tab 2 - section 2-4-F) limits how much a borrower must repay. • • HECM loans may be assigned to HUD when the total loan balance equals 98% of the Maximum Claim Amount. HECM insurance benefits may equal up to that amount
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• • •
HECM Counseling –SELF-TEST #1 - TAB 4
SELF-TEST #1 (on Tabs 2-3)
1) A reverse mortgage is a) a loan against equity in a home b) a loan providing cash advances to a borrower c) a loan requiring no repayment until a future time d) a and b above e) a, b, and c above 2) A reverse mortgage is different from a home equity loan because a) you do not need an income to qualify for a reverse mortgage b) you do not have to own a home to qualify for a reverse mortgage c) you do not have to make monthly repayments on a reverse mortgage d) a and b above e) a and c above 3) A reverse mortgage must be repaid a) by the 10th of every month b) when the borrower dies c) when the borrower sells the home or permanently moves away d) b and c above e) a, b, and c above 4) The purpose of a reverse mortgage is a) to buy a home b) to sell a home c) to generate cash d) a and b above e) b and c above 5) Reverse mortgages are typically loans with a) rising debt and falling equity b) falling debt and rising equity c) rising debt and rising equity d) a and b above e) none of the above
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HECM Counseling –SELF-TEST #1 - TAB 4
6) When a reverse mortgage becomes due and payable a) the lender gets the house b) the federal government gets the house c) the area agency on aging gets the house d) a and b above e) none of the above 7) The “non-recourse” limit on a reverse mortgage means a) the lender cannot seek repayment from anything other than the home’s value b) the borrower’s estate and heirs are protected against deficiency judgments c) the borrower cannot owe more than the value of the home d) all of the above e) a and c above 8) The purpose of reverse mortgage insurance is a) to protect lenders against loan losses b) to protect borrowers with a non-recourse limit c) to let borrowers remain in their homes as long as they choose d) a, b, and c above e) b and c above 9) Reverse mortgage insurance controls the risk of loan losses by a) controlling the amount of the loan advances b) limiting loan advances to 28% of income c) charging a premium on all loans to create a reserve fund d) limiting loan balances to 80% of home values e) a and c above 10) To qualify for a HECM loan a) at least one owner must be aged 65 or over b) a mobile home or cooperative must be FHA-approved c) a home must be debt free prior to loan application d) all of the above e) none of the above
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HECM Counseling –SELF-TEST #1 - TAB 4
11) To qualify for a HECM loan a) the home must meet FHA minimum property standards b) the home must have been originally financed with an FHA “forward” mortgage c) the borrower must live in the home as a principal residence d) a and c above e) a, b, and c above 12) A HECM loan must be repaid a) when the last surviving borrower dies, sells, or permanently moves b) when the last surviving borrower moves to a nursing home for 7 months c) when the loan balance becomes greater than the home’s value d) a and c above e) a, b, and c above 13) The payment options in the HECM program (everywhere but Texas) include a) a fixed monthly advance for as long as a borrower lives in the home b) a fixed monthly advance for a period chosen by the borrower c) a line-of-credit that lets the borrower select the timing and amount of the advances d) a or b and c above e) all of the above 14) The HECM loan may be used to pay for a) repairs needed to meet FHA minimum property standards b) standard closing costs c) 2% mortgage insurance premium d) the origination fee e) all of the above 15) When the adjustable interest rate on a reverse mortgage goes up a) the monthly payments to the borrower go down b) the rate at which the creditline grows goes up c) the loan balance grows faster d) a and c above e) b and c above
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HECM Counseling – HECM PAYMENT OPTIONS - TAB 5
HECM PAYMENT OPTIONS
5-1 INTRODUCTION The flexibility of the HECM program is designed to accommodate a wide range of income needs. This tab section explains how the program controls the amount of the loan payments to the borrower. It describes the program's various loan payment options. It also shows how the amount of the loan advances varies with the borrower's age, home value, loan costs, and payment plan. LIMITING LOAN ADVANCES The HECM insurance program manages the risk of loan loss (see Tab 2, sections 2-4-F and 2-5) by controlling the amount borrowers may receive. This is done by calculating a "principal limit" for each loan. This figure increases each month, and limits the amount a borrower may receive at any given time. A. At origination, the principal limit is based on the maximum claim amount, the expected average mortgage interest rate, and the age of the youngest borrower (see Tab 6 for calculation methods). 1) The maximum claim amount is the lesser of the appraised value of the home or the maximum mortgage that HUD will insure on a single family home under section 203 (b)(2) of the National Housing Act. (The maximum claim amount is the maximum amount that HUD will pay on a lender's claim for reverse mortgage insurance benefits.) The expected average mortgage interest rate is the constant rate used to calculate loan advances. For a fixed rate loan, the expected rate is the same as the fixed rate. For an adjustable rate loan, the expected rate is the sum of the lender's margin and the U.S. Treasury Securities rate adjusted to a constant maturity of ten years. The lender's margin is the difference between the 1-year Treasury rate and the initial rate on the loan. a. The 10-year Treasury index is used because it represents the financial market's best current estimate of what interest rates are likely to average during the course of the loan. Treasury rates are officially published in Federal Reserve Board Publication H15 (519) issued every Monday. These rates are also published every Tuesday in the "Money & Investing" section of the Wall Street Journal in a small box called "Key Interest Rates."
5-2
2)
b.
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HECM Counseling – HECM PAYMENT OPTIONS - TAB 5
An online source for these rates can be found at: http://www.federalreserve.gov/releases/h15/update/ B. C. The principal limit is used to determine the various loan payment amounts for each borrower. After origination, the principal limit increases each month at a rate equal to one-twelfth of the mortgage interest rate in effect at that time, plus onetwelfth of one-half percent (0.5%, the periodic mortgage insurance premium [MIP]). This total rate is known as the “compounding rate”. If the loan balance grows to equal the principal limit, the borrower will generally not be able to receive additional loan advances (see HECM Handbook 5-8-C for exceptions). Here is how the loan balance (amount owed) grows in relation to the principal limit on the three basic payment options discussed in the next section. 1) The balance on a term loan increases quickly for as long as monthly advances are made. When the advances stop, the balance equals the principal limit, and then increases at the same rate as the principal limit. 2) The balance on a tenure loan increases at a steady rate - less quickly than in the early stages of a term loan (because the advances are smaller than on a tenure loan), and more quickly than in the later stages of a term loan (because advances are no longer being made on a term loan). 3) The balance on a line-of-credit loan increases sharply each time the borrower receives an advance. When the balance reaches the principal limit, the credit line is exhausted and no more advances can be made. 5-3 PAYMENT OPTIONS AT CLOSING At the start of the HECM, the borrower may select any one of five payment plans: tenure, term, line of credit, modified tenure or modified term. A. The tenure option provides monthly payments to the borrower for as long as the borrower lives in the home as a principal residence. 1) This plan provides the long-term security of a monthly income supplement that lasts until the borrower dies, sells, or moves.
D.
E.
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HECM Counseling – HECM PAYMENT OPTIONS - TAB 5
(Although the loan balance is scheduled to equal the principal limit when the youngest borrower reaches age 100, payments continue for as long as the borrower lives in the home as a principal residence.) 2) The payments are fixed; they do not change from month to month. In the future, they will probably buy less than today because of inflation.
B.
The term option provides monthly payments to the borrower for a fixed period of time chosen by the borrower at closing. 1) 2) This plan can provide greater monthly payments than the tenure plan. The shorter the term, the larger the payments will be. But the payments stop on a specific date. (Repayment is not required, however, for as long as the borrower lives in the home as a principal residence.)
C.
The line of credit option lets the borrower select the timing and amount of the loan advances on a request basis, until the line of credit is exhausted. 1) This plan may be attractive to persons who do not have a monthly income shortfall, but who do have difficulty paying for irregular or unexpected expenses. 2) For example, the borrower could use it now to repair a roof, and two years later to pay for home care or durable medical equipment. Some borrowers use it to pay off a current mortgage, thereby eliminating their monthly payments. In so doing, some have stopped a lender from foreclosing on a delinquent forward mortgage or home equity loan. Note: An initial lump sum advance first becomes available to HECM borrowers 3 days after closing, when their 3-day right of recission (cancellation) ends. 3) Some borrowers will like being able to control the line of credit, activating it as they choose. Others may not like this responsibility, and may prefer the certainty of a monthly payment plan. 4) If a line of credit reverse mortgage is not used very much, the cost of setting it up and insuring it could be expensive relative to the amount of cash received by the borrower.
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HECM Counseling – HECM PAYMENT OPTIONS - TAB 5
5) The amount of cash remaining available to the borrower in a HECM creditline grows larger every month until all remaining funds have been withdrawn by the borrower. a. The remaining available creditline grows at the rate currently being charged on the loan balance, which is the 1year Treasury rate plus the lender's margin plus 0.50%. Example: if the 1-year Treasury rate is 2% and the margin is 1.5%, then the creditline growth rate is 4%. This rate is divided by twelve to obtain the monthly rate at which the creditlitne grows. When a borrower withdraws all currently available funds, a HECM creditline is exhausted, and the borrower can no longer obtain additional cash advances from it.
b.
c.
D. The modified tenure and modified term options combine either monthly payment plan cited above with a line of credit. 1) 2) Adding a line of credit to a tenure or term plan reduces the monthly payment. Consumers thinking about a monthly payment plan should consider the added flexibility that a modified plan provides. a. b. The line of credit creates a personal cash reserve for emergency for occasional expenses. A cash reserve may be needed if the borrower must leave the home permanently for health reasons. Since this would make the loan due and payable, the borrower might be left with little or no funds to pay for relocating and ongoing living expenses. With a line of credit, the borrower could withdraw the remaining cash prior to moving.
5-4
FUTURE CHANGES IN PAYMENT PLANS The HECM program permits the borrower to change from one payment plan to another at any time for a small fee (now limited to $20). The borrower may also change the terms of a payment plan, suspend payments, or request an unscheduled lump sum payment at any time. A lump sum may be as large as the difference between the current loan balance and principal limit (the "net" principal limit).
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HECM Counseling – HECM PAYMENT OPTIONS - TAB 5
5-5
PAYMENT AMOUNTS The amount of the loan advances depends on four factors; the age of the borrower, the value of the home, the cost of the loan, and the payment plan selected by the borrower. A. The impact of borrower age and home value on a HECM creditline is shown in Table 5-a on page 30. Note that the greatest creditlines are provided to the oldest borrowers with the highest-valued homes. 1) 2) When there is more than one borrower, the age of the youngest borrower is used to determine the loan payments. 203-b Limits There is a limit to the amount of home value that can be used to calculate loan advances. a) The limit varies by city or county or may be set for an entire "Metropolitan area." The present limits (1/06) range from a low of $200,160 in areas with lower-valued homes to a high of $362,790 in areas with the highest-valued homes (HUD calls them "high cost areas") in the continental U.S. Limits in Alaska, Hawaii and other US Territories may be higher. b) These limits are known as "203(b)" limits because that is the section of the National Housing Act that defines them. They are also known as HUD's "maximum mortgage limits for single family residences". The limits are set by HUD and adjusted each January. They may also change at any time during the year c) For the current 203(b) limit in any specific area, go to https://entp.hud.gov/idapp/html/hicostlook.cfm or call your nearest HUD field office. d) These limits do not mean that homes of greater value are ineligible for HECM insurance. Instead, they limit the amount of home value that can be used to determine the loan advances. e) For example, the creditlines for a $200,000 home and a $250,000 home would be the same if the 203(b) limit is $200,000. In other words, even though the higher valued home is based on more total equity, the loan payments are limited by the maximum mortgage insurance (203-b) limit, if it is less than the home's value. f) "Maximum claim amount" is the lesser of a home's appraised value or the area's 203(b) limit.
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HECM Counseling – HECM PAYMENT OPTIONS - TAB 5
B.
The impact of interest rates on creditlines is also shown in Table 5-a on page 30. Note that the greater the rate, the smaller the creditline will be - and vice versa. If more of the home's equity goes to pay for the loan, there will be less available to pay out to the borrower - and vice versa. The impact of the payment plan selected is shown in Table 5-b on page 30. Note that term plans provide greater payments than the tenure plan. The longer the term, however, the smaller the monthly payment will be. Note also how the addition of a line of credit reduces a monthly payment plan. The larger the line of credit, the more the monthly payment is reduced.
C.
D.
Other considerations affecting the amount of the loan payments include the cost of required repairs, and the borrower's decision regarding payment of taxes and insurance. 1) If the home does not meet HUD's Minimum Property Standards, the borrower must complete required repairs. If the cost of the repairs is estimated to be less than 15% of the maximum claim amount, then the borrower may complete the work after closing. In these cases, the lender attaches a "repair rider" to the Loan Agreement, certifying that the work will be completed as required. See HUD's HECM Handbook, Chapter 3, section 3-5 for more details. 2) At closing, the borrower may choose to be responsible for paying property taxes and insurance OR request that the lender make these payments from the loan.
5-6
PAYMENT CHOICES Can you guess what percent of HECM borrowers choose each payment options? Write your guesses in this table: Per cent choosing Term Tenure Modified Term Modified Tenure Line of Credit Your Guess (%) Actual %
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HECM Counseling – HECM PAYMENT OPTIONS - TAB 5
Table 5-a HECM Creditlines at Home Values, Ages, and Interest Rates Expected Interest Rate Age 65 75 85 $200,000 65 75 85 7% $38,423 $50,815 $64,544 $83,323 $107,715 $134,344 8% $30,455 $43,948 $59,532 $66,955 $93,648 $124,132
Home Value $100,000
Table 5-b HECM Monthly Advance + Lump Sum or Creditline for a 75-Year-Old in a $150,000 Home Any combination of lump sum & credit-line totaling 0 $20,000 $40,000 $60,000 $68,798 Plus a monthly advance for . . . tenure $550 390 230 70 0 15 years $673 477 282 108 0 5 years $1,402 994 587 179 0
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HECM Counseling – HECM PAYMENT OPTIONS - TAB 5
Advantages & Disadvantages of HECM Payment Options
Payment Option Definition Term Advantages Disadvantages
Tenure
Line-of-Credit (LOC)
Modified Term
Modified Tenure
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HECM Counseling – HECM PAYMENT CALCULATIONS - TAB 6
HECM PAYMENT CALCULATIONS
6-1 INTRODUCTION This part of the training begins with a software demonstration and ends with a software lab. To supplement these activities, this tab section presents information on calculating HECM loan payments using HUD software. This information provides background for the software demonstration and can be used as a reference during the software lab. HUD-HECM SOFTWARE The Windows-based software provided by HUD to calculate HECM loan payments can be obtained by downloading it from www.hud.gov/offices/hsg/sfh/hecm/hecminst.cfm This software can be learned by clicking on the "Help" menu at the top of the screen, and then reading each item in the "Contents" file. It can also be learned by following the instructions at the very bottom of the screen. 6-3 KEY ENTRY TERMS In making entries into the software, users encounter a variety of key terms. A) Expected Interest Rate means the "expected average mortgage interest rate," which is the constant rate used to calculate loan advances. This rate is never charged on the loan; it is only used to determine the loan payments to the borrower. (The interest rate charged on the loan is called the "initial" or "note" rate.) 1) For an adjustable rate loan, the expected rate equals the current U.S. Treasury Securities rate adjusted to a constant maturity of 10 years (also known as the 10-year Treasury rate) plus the "lender's . margin." 2) As the only current purchaser of HECM loans, Fannie Mae sets the margin at which it will purchase HECMs. At present (04/06), the margin for HECMs with annually adjustable interest is 310 basis points or 3.1%. The margin for monthly adjustable HECMs is 150 basis points or 1.5%. a) The 10-year Treasury index is used because it represents the financial market's best current estimate of what interest rates are likely to average during the course of the loan. b) The Treasury rates are published every Tuesday in the "Money & Investing" section of the Wall Street Journal in a small box called "Key Interest Rates."
6-2
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HECM Counseling – HECM PAYMENT CALCULATIONS – Tab 6
B)
Maximum Claim Amount is whichever is less: 1) the appraised value of the home, or 2) HUD's 203(b) limit for the area in which the home is located. This maximum claim amount is the greatest amount HUD will pay to a lender on a claim for insurance benefits (see page 27 of this training manual, and HECM Handbook, section 1-11). Upfront Premium is the first part of the HECM insurance premium (MIP), which is calculated at 2% of the "Maximum Claim Amount." Enter a "O" if the borrower intends to pay this fee in cash at closing. Otherwise, press the "enter" key without entering anything in the field, and "FINANCED" will appear. The premium will then be calculated by the software program. Note: the other part of the MIP is 50 basis points (one-half of one percentage point), which are added to the interest rate charged on the loan balance.
C)
D)
Other Closing Costs includes all closing costs being financed by the borrower (title search & insurance, appraisal fee, required inspections, etc.) PLUS the origination fee. The origination fee may not exceed the greater of $2,000 or two percent of the “Maximum Claim Amount”. The origination fee is what the lender earns for completing all HUD mortgage requirements through closing. Initial Draw means the amount of cash a borrower elects to receive at closing. -- Enter the total amount of any cash the borrower chooses to receive at closing. 1) At closing, a borrower may choose to receive a lump sum of cash in addition to any scheduled payments. 2) A borrower may also request the lender to "set aside" funds to pay for required repairs or for taxes, insurance, special assessments, or ground rents. "Set asides" are not added to the loan balance until they are paid out.
E)
F)
Monthly Servicing Fee is the fixed dollar amount that is added to the loan balance each month to pay for all services performed by the lender after the loan closes. Lenders may also sell servicing rights to another company that specializes in HECM servicing. 1) The monthly servicing fee may not exceed $30 for HECMs with annually adjusting interest, and may not exceed $35 for HECMs with monthly adjusting interest. 2) For more information on servicing, see 6-5-A-3.
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HECM Counseling – HECM PAYMENT CALCULATIONS – Tab 6
6-4
ACTIONS After completing all the required entries, the user selects the "Actions" menu, and then clicks on "Calculate." Other actions on this menu enable the user to compare one loan to another, and to generate reports on individual loans. KEY OUTPUT TERMS After selecting "Calculate" or "Reports," a software user sees a variety of key outputs. A) Calculate 1) Prin Lim - Shared Prem Fac -- The 3-digit decimal (.XXX) to the left of the hyphen is the Principal Limit Factor. It is used to determine the maximum Principal Limit (see below) for any given mortgage. These factors are determined by the expected interest rate and the age of the youngest borrower. For a complete set of these factors, select "Factor Table" from the "Reports" menu or see Appendix 20 of the HECM Handbook. The 2-digit figure to the right of the hyphen is the Shared Premium Factor. It represents the percentage of the insurance premium that lenders may retain if they elect not to assign a HECM to HUD. This option has rarely, if ever, been selected by lenders. 2) Principal Limit is the current maximum permissible mortgage balance for this borrower. Put another way, it is the most cash a borrower could get in a lump sum at closing if she paid for all loan costs (except interest) in cash. a) At closing, the principal limit is determined by multiplying the Principal Limit Factor times the Maximum Claim Amount. b) After closing, the principal limit increases each month at a rate equal to 1/12th of the sum of the "note" rate (the interest rate actually being charged on the loan) plus the annual rate of the monthly insurance premium, which is 50 basis points (0.5%). 3) Monthly Servicing Fee The dollar figure in the "Calculated" column equals the "present value" of the monthly servicing fee from closing until the borrower would reach age 100. This amount is NOT added to the loan balance at closing. Instead, it is "set aside," and then the monthly fee is taken from this amount and added to the loan balance once each month. Since very few borrowers live to age 100, the total amount set aside by the HECM program overstates the actual total amount likely to be charged on most HECMs during the life of the loan.
6-5
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HECM Counseling – HECM PAYMENT CALCULATIONS – Tab 6
a) Loan servicers make both scheduled and unscheduled payments to borrowers, accept prepayments from borrowers, make mortgage insurance premium payments to HUD, keep accurate records of mortgage balances, send out regular statements of mortgage activity to borrowers, pay property taxes and insurance if requested by borrowers, ensure that borrowers are in compliance with the loan agreement (including the verification of continued occupancy of the property), and process borrower requests for payment plan changes. b) Most consumers are perplexed by the monthly servicing fee. Hardly any have ever encountered it before, and most wonder why it is charged on reverse mortgages when it is not charged on forward mortgages. In fact, it is charged on forward mortgages, but it is included in the interest rate, so it is never explicitly identified and quantified. c) Forward mortgage balances are greatest in the early years of the loan, and do not begin to decline at a significant rate until many years later. As a result, servicing fees charged as a percent of the loan balance remain substantial for many years, often up to the time the loan is paid back (due to sale of the home) or refinanced. By contrast, reverse mortgage balances are smallest in the early loan years and grow larger at a compounding rate over time. As a result, servicing fees charged as an interest rate add-on would be relatively small in the early years, and then grow much larger over time. d) To even out the amount of the servicing fee, most reverse mortgage lenders charge a flat monthly servicing fee. HECM rules explicitly permit lenders to include the cost of loan servicing within their interest rates. As more data on HECM loans become available for analysis, it is likely that loan servicers will investigate the technical mechanics and potential competitive advantages of a "no servicing fee" loan. 4) Net Principal Limit at origination is the principal limit minus any initial payments to or on behalf of the borrower, e.g., closing costs, upfront MIP, cash payments, set-aside funds. Put another way, it is the most cash a borrower could get in a lump sum at closing if she finances all of her loan costs, that is, if she adds these costs to her loan balance. Net Principal Limit also equals the maximum line of credit available at closing if the borrower finances all loan costs and does not want any regularly scheduled monthly advances.
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HECM Counseling – HECM PAYMENT CALCULATIONS – Tab 6
B) Reports 1) The Annual and Monthly Amortization reports project the loan balance. They assume that the loan balance will grow larger by the "expected rate" used to calculate the loan's principal limit. a) Loan Balance This column shows what the future loan balance would be based on any initial draw, monthly advances, and the expected interest rate. It does NOT include any creditline draws. (Other software described in Tab 11 does include creditline draws specified by the borrower.) Even though this printout may show that the Loan Balance may eventually be greater than the projected future home value, the borrower's debt is limited by the value of the home. In other words, this "Loan Balance" figure does not take the loan's nonrecourse limit into account. It shows what the loan balance would be without the nonrecourse limit. In reality, a borrower would not be required to repay any more than the home's future value, even if a theoretical "loan balance" is greater than the home's value. b) Line of Credit This column shows how the creditline would grow if the borrower takes no creditline draws. (Other software described in Tab 11 shows how much creditline would remain based on creditline draws specified by the borrower.) c) Property Value This figure assumes that the home's value will grow at a rate of 4% every year. Software users may not enter any other appreciation assumption. (Other software described in Tab 11 lets users specify a range of different appreciation assumptions. 2) Shared Appreciation This report covers an optional feature of the original HECM program that no lender has chosen to implement. 3) Total Annual Loan Cost (TALC) This report provides a cost disclosure required by Truth-in-Lending law that is covered later in Tab 11. 6-6 INTEREST RATE CHOICES HECM borrowers can choose an interest rate that can change one a year, or once a month. Various aspects of this choice are discussed
• on pp. 16-19 and 31-32 of Home Made Money; HECM counselor
trainees should be certain to read these pages
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HECM Counseling – HECM PAYMENT CALCULATIONS – Tab 6
A summary of these discussions is presented in this table: Annually Adjusted Expected Rate (used only to determine loan amounts) Net Principal Limit (maximum loan proceeds available to borrower at closing) Initial Rate/Current Rate/Note Rate (interest rate charged on the loan balance) Interest Rate Cap 10-year Treasury rate (index) plus margin Monthly Adjusted 10-year Treasury rate (index) plus margin
Smaller
Larger
Subject to change once per year; equals 1-year Treasury rate (index) plus margin 2 points per year; 5 point over the life of the loan
Subject to change once per month; equals 1-year Treasury rate (index) plus margin No periodic cap; 10 points over the life of the loan
Compounding Rate (total periodic rate charged on loan balance) Creditline Growth Rate Monthly creditline growth is Finding the Rates • •
Note rate plus .5% Note rate plus .5% for periodic mortgage for periodic mortgage insurance premium insurance premium (MIP) (MIP) Same as compounding rate larger Same as compounding rate smaller
For current rates, go to www.federalreserve.gov/releases/h15/update/ For historical rates, go to www.stls.frb.org/fred/data/irates.html From this page you can download the most recent 13 months of interest rate data, or the complete historical file
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6-7
OTHER CALCULATION RESOURCES A. B. Chapter 5 of the HECM Handbook provides a detailed explanation of payment calculations. A good way to learn the mathematical structure and logic of the HECM program is to use a hand-held financial calculator, such as the HewlettPackard 12C (HP-12C), to determine loan payments. Appendix 21 of the HECM Handbook provides specific HP-12C key-strokes and screen displays. Appendix 22 of the HECM Handbook provides the calculation formulas. Tab 11 presents information on other software programs for calculating HECM loans and other reverse mortgages.
C. D.
6-8
SOFTWARE LAB The HECM Calculation Exercise on the next page provides an opportunity to practice the HUD-HECM software that has demonstrated. Use the inputs at the top of the page to generate the figures specified at the bottom of the page.
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HECM Counseling – HECM PAYMENT CALCULATIONS – Tab 6
HECM CALCULATION EXERCISE
Examples Use this information: Age of Youngest Borrower.... Expected Interest Rate......... Property Value...................... 203 (b) limit........................... Other Closing Costs............. Initial Draw............................ Servicing Fee (Monthly)........ To calculate: Maximum Line of Credit (LOC) (= Net Principal Limit) Monthly Payment/Tenure Monthly Payment/Term 10 years 15 years Monthly Payment/Modified Tenure $10,000 LOC $30,000 LOC _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______
A
70 7.0% $125,000 $125,000 $4,100 -0$30
B
75 7.5% $150,000 $132,000 $4,500 $5,000 $35
C
85 8.0% $200,000 $239,250 $5,500 $10,000 $35
Monthly Payment/Modified Term (10 yrs.) $10,000 LOC $30,000 LOC _______ _______ _______ _______ _______ _______
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HECM Counseling – HECM LOAN AGREEMENT – TAB 7
HECM LOAN AGREEMENT
7-1 HECM AGREEMENT This document is the primary contract that binds the borrower and the lender. Because it is required to be distributed by a lender to all prospective applicants, the counselor may receive preliminary questions concerning the content of this document. While counselors are NOT expected to be attorneys, it is useful to be familiar with the key features of this document. A. The HECM Loan Agreement that appears as Appendix 7 of the HECM Handbook serves as generic language recommended by HUD, to be modified by state laws that might require revisions. Lenders may also reproduce the text on their letterhead. All documents may not look or read exactly alike. B. The key sections of the loan agreement are as follows: 1) Article 1 includes all definitions used in the document. Take particular note of the "Expected Average Mortgage Interest Rate" used by lenders to set monthly payments for adjustable rate HECMs. Also review the concept of the "Maximum Claim Amount" and the exact definition of "Principal Residence" -- all of which define eligibility and potential payments to a borrower. Article 2 covers details on the Loan Advances made to borrowers from closing to maturity. The requirements for lenders in delivering payments to homeowners on a monthly or line of credit basis are also clearly spelled out. Changes in payments due to initial repairs and property charges (i.e., taxes and insurance, etc.) are also covered in this section. Article 3 describes a late charge to the lender in the event that a payment to a homeowner is not made as described above. Article 4 describes the conditions under which a lender is no longer required to make loan advances to a borrower. Article 5 spells out HUD's commitment to assume all rights and obligations to make loan advances (except for insurance premiums) in the event of lender default. Article 6 covers miscellaneous items not mentioned elsewhere.
2)
3) 4) 5)
6)
C. Counselors are also encouraged to review HUD Handbook Appendix 8 covering repairs to a HECM-insured property. (If the cost of repairs exceeds 15% of the Maximum Claim Amount, they must be made prior to closing; otherwise they can be made after closing and 150% of repair estimate is set aside for this purpose in case there are increases in repair costs when completed.)
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HECM Counseling – HECM LOAN AGREEMENT – Tab 7
D. RESEARCH ASSIGNMENT Find the answers to these questions about the HECM Loan Agreement in Appendix 7 of the HECM Handbook. Write on this page the section of the Agreement in which you found each answer. 1) A “principal residence” is the place where borrowers: a) b) c) d) e) Spend the majority of the calendar year Spend most weekends and holidays Maintain their permanent place of abode a and c above b and c above
2) “Set-asides” that do not bear interest may be made for: a) b) c) d) e) Required repairs Taxes and insurance Monthly servicing fees Any of the above Only b and c above
3) Monthly payments to borrowers must be paid: a) b) c) d) e) On the first business day of a month By the fifth business day of a month By the 10th business day of a month By the 15th business day of a month By the last business day of a month
4) Line-of-credit payments must be paid to the borrower within: a) b) c) d) e) 5 calendar days of a written request 5 business days of a written request 7 business days of a written request 10 calendar days of a written request 10 business days of a written request
5) The charge for changing a payment plan may not exceed: a) b) c) d) e) 1.0% of the maximum claim amount 1.0% of the principal limit 1.0% of the net principal limit 1.0% of the current loan balance $20
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HECM Counseling – HECM LOAN AGREEMENT – Tab 7
6) If the actual cost of required repairs completed after closing is different from the amount set aside for this purpose: a) Any excess amount remains set aside for future repairs b) Any excess amount is available to the borrower as a creditline advance c) Any deficit amount must be paid from the loan, which decreases the borrower’s line-of-credit or monthly advance d) a and c above e) b and c above 7) Borrowers can choose to have their payments made: a) b) c) d) e) By a check sent to them By electronic transfer into their bank account Directly to a third party Any of the above a or b above
8) Lenders may use loan proceeds to preserve and protect the property if: a) b) c) d) e) The borrower abandons the property The borrower fails to pay governmental charges The borrower vacates the property Any of the above a or c above
9) If a lender’s payment to a borrower is late (see questions 3 and 4), the late charge the lender must pay to the borrower can be as much as: a) b) c) d) e) 1% of the payment 2% of the payment 4% of the payment 6% of the payment 10% of the payment
10) A lender’s legal obligation to make payments to a borrower ends when: a) b) c) d) e) A borrower reaches age 100 The loan balance exceeds the home value A co-borrower permanently moves to a nursing home The First Security Instrument is assigned to the Secretary The Second Security Instrument is assigned to the Administrator
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HECM Counseling – HECM LOAN AGREEMENT – Tab 7
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HECM Counseling – AGING RESOURCES – TAB 8
AGING RESOURCES
8-1 INTRODUCTION This tab describes the printed materials included in the inside pockets of this training. It also provides a quiz to promote reexamination of assumptions about growing older. 8-2 AARP PUBLICATIONS: A sample of the AARP consumer guide, Home Made Money, [Stock #D12894], is included in the back right pocket of your training manual. This booklet describes the various types of reverse mortgages and is also available in Spanish [Stock #D17956]. 8-3 ORDERING MULTIPLE COPIES. For additional copies of the consumer guide, write: AARP Foundation, Reverse Mortgage Education Project, 601 E Street, N.W., Room B4-433, Washington, D.C. 20049, specifying title, stock number and quantity when ordering. Up to 88 copies of Home Made Money are available to HUD-approved housing counseling agencies at no cost at one time. (Up to 25 copies of the Spanish version are available per order.) Please specify the stock number for the version you wish to receive, confirm your housing counseling agency approval from HUD and allow 2-3 weeks for delivery. See also http://www.hecmresources.org/project/proje_consumer_materials.cfm 8-4 FACTS ON AGING QUIZ. Beginning on the next page is a true/false quiz provides interesting data on the elderly.
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Facts on Aging Quiz Circle True (T) or False (F) for each of the following statements: T F 1. The majority of persons aged 65 or more are senile (have defective memory, are disoriented, or demented). The five senses (sight, hearing, taste, touch and smell) all tend to weaken in old age. The majority of old people have no interest in, nor capacity for, sexual relations. Lung vital capacity tends to decline in old age. The majority of old people feel miserable most of the time. Physical strength tends to decline in old age. At least one-tenth of the aged are living in long-stay institutions (such as nursing homes, homes for the aged, mental institutions). Aged drivers have fewer accidents per driver than those under age 65. The majority of old people are unable to adapt to change. Old people usually take longer to learn something new. The majority of old people live alone. Older people tend to react slower than younger people.
T
F
2.
T
F
3.
T T T T
F F F F
4. 5. 6. 7.
T
F
8.
T T T T
F F F F
9. 10. 11. 12.
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T T
F F
13. 14.
In general, most old people tend to be pretty much alike. There are proportionally more old persons in public office than in the total population. The majority of old people are socially isolated. Poor nutrition may produce mental illness among the elderly. Over 20% of the U.S. population are now age 65 and over. The majority of medical practitioners tend to give the aged low priority. The majority of older persons have incomes below the poverty line (as defined by the federal government). Isolation and hearing loss are the most frequent causes of paranoid disorders in old age. Older people tend to become more religious as they age. The proportion of African Americans among the aged is growing. Older persons have more injuries in the home than younger persons. The majority of old people say they are seldom irritated or angry. The health and economic status of old people will be about the same or worse in the year 2010 (compared with younger people).
T T T T
F F F F
15. 16. 17. 18.
T
F
19.
T
F
20.
T T T
F F F
21. 22. 23.
T T
F F
24. 25.
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Facts on Aging: Quiz Answers and Sources
The source of these quiz questions and answers is The Facts on Aging Quiz (Second Edition), by Erdman Palmore, Ph.D., 1998, Springer Publishing Co., New York. Three quizzes have been excerpted, as noted at the end of each answer as follows: (Facts on Aging Quiz 1 [FAQ1], Facts on Aging Quiz 2 [FAQ2] and Facts on Aging and Mental Health Quiz [FAMHQ] followed by a slash and the question number in the specific quiz.) Most answers have been abbreviated; for formal research sources, footnotes and citations, see the book referenced above. 1. FALSE. The majority of people aged 65 or over are not senile; that is, they do not have defective memories, or are they disoriented or demented. Only about 2% of persons aged 65 or more are institutionalized with a primary diagnosis of psychiatric illness. In fact, fewer of the elderly have mental impairments than do younger persons. (FAQ1/1) TRUE. All five senses do tend to decline in old age. Most studies of taste and smell show that taste and odor sensitivity decrease with age, although some of these decreases may be the result of other factors, such as disease, drugs and smoking. Nearly all studies of touch, hearing and vision agree that these senses tend to decline in old age. (FAQ1/2) FALSE. The majority of persons aged 65 continue to have both interest in and capacity for sexual relations. Most elderly report that sex after 60 is as satisfying or more satisfying than when they were younger. The Duke Longitudinal Studies found that sex continues to play an important role in the lives of the majority of men and women through the seventh decade of life. (FAQ1/3) TRUE. Lung vital capacity does tend to decline in old age. This decline is even greater for smokers. (FAQ1/4) FALSE. The majority of old people do not feel miserable most of the time. Studies of happiness, morale, and life satisfaction either find no significant difference by age group or find about 1/5 to 1/3 of the aged score "low" on various happiness or morale scales. (FAQ1/5) TRUE. Physical strength does tend to decline in old age. Physiological, biochemical, anatomic and histocytological measurements of muscle all exhibit decreased levels with age from about the third decade. About 1/3 of the muscle mass is lost by age 80. [FAQ1/6]
2.
3.
4. 5.
6.
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7.
FALSE. Only 5% of persons aged 65 or over are residents of any long-stay institution at any one time. Even among those aged 75 or over, only 9% are residents of institutions. However, about 40% of the elderly spend time in a nursing home at some point in their lives. [FAQ1/7] TRUE. Aged drivers 65 or over do have fewer accidents per driver than drivers under age 65. Older drivers have about the same accident rate per 100 as middle aged drivers, but a much lower rate than drivers under age 30. [FAQ1/8] FALSE. The majority of older persons are able to adapt to change. It is clear that most older persons do change and adapt to the many changes that occur in old age, such as retirement, children leaving home, widowhood, moving to new homes and serious illness. Their political and social attitudes also tend to shift with those of the rest of society and with approximately the same rate of change. [FAQ1/11] TRUE. Old people usually do take longer to learn something new, compared with their performances when they were younger or with performances of a younger cohort. However, much of these differences can be explained by variables other than age (illness, motivation, learning style, lack of practice). When these other variables are taken into account, chronological age does not provide a significant amount of influence on learning ability. [FAQ1/12] FALSE. Two thirds of non-institutionalized persons over 65 live in a family setting. Only 28% live alone. [FAQ2/20] TRUE. The reaction time of most old people does tend to be slower than that of younger people. This is one of the best-documented facts about the aged on record. It appears to be true regardless of the kind of reaction that is measured. [FAQ1/14] FALSE. Old people are not pretty much alike. There is at least as much variation among older people as there is at any age; there are the rich and poor, happy and sad, healthy and sick, and those of high and low intelligence. [FAQ1/15] TRUE. There are proportionately more older persons in public office, and this is even more true of the higher officials. The generally positive relationship between old age and high political office is found throughout history and across types of political systems. [FAQ2/17]
8.
9.
10.
11. 12.
13.
14.
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15.
FALSE. The majority of old people are not socially isolated. About 2/3 live with their spouse or family. Only about 4% of the elderly are extremely isolated; and most of these have had lifelong histories of withdrawal. Most elders have close relatives within easy visiting distance, and contacts between them are relatively frequent [FAQ1/17] TRUE. Poor nutrition may produce depression, confusion, apathy, and other mental symptoms. This can become a vicious cycle, with poor nutrition causing mental symptoms that in turn cause even worse nutrition. [FAMHQ/l8] FALSE. Only 12% of the U.S. population were aged 65 or over in 1997, although this may increase to 21% by the by the year 2040. (FAQ1/19) TRUE. The majority of medical practitioners do tend to give low priority to the aged. All studies of attitudes toward the aged among medical and human service professionals agree that they tend to believe the negative stereotypes about the aged and prefer to work with children or younger adults rather than with the aged. Few specialize in geriatrics or are interested in specializing in it. The aged are labeled as resistant to treatment, rigid in outlook, senile, unreliable, and unable to learn new things or to change their ways. [FAQ1/20] FALSE. The majority of persons aged 65 or over have incomes well above the poverty level. In 1994, only 10.5% of persons over 65 had incomes below the official poverty level (about $6,500 for an aged individual or $8,000 for an aged couple). This was a lower poverty rate than for persons under 65 (11.4%). The poverty rate for all persons under 65 was even higher: 13.8%. Even if the “near poor” (those with incomes up to 150% of the poverty level) are included, the total in or near poverty was only 29%.[FAQ1/21] TRUE. Paranoid disorders, which are delusions of persecution or grandiosity, tend to occur in old age under adverse conditions such as imprisonment, institutionalization, isolation, disfigurement, infections, drunkenness, or blindness. Isolation and hearing loss that results in misinterpretation of words and sounds are the primary causes. [FAMHQ/17] FALSE. Older people do not tend to become more religious as they age. Although it is true that the present generation of older persons tend to be more religious than the younger generation. This phenomenon appears to be as a result of generational difference (rather than an aging effect) because of the older person’s more religious upbringing. In other words, members of the present older generation have been more religious all their lives, rather than becoming more religious as they aged. (FAQ1/23)
16.
17. 18.
19.
20.
21.
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22.
TRUE. The proportion of African Americans among the aged is growing. In 1960 African Americans were 6% of all persons aged 65 over, and by 2000 this percentage had increased to 9%. It is estimated that by 2025 about 14% of the aged will be African Americans. (FAQ2/18) FALSE. Actually, older persons have fewer injuries in the home than do younger persons: 12.5 per 100 persons over 65 per year compared with 14 per 100 persons under 65. (FAQ2/4) TRUE. The majority of old people do say they are seldom irritated or angry. The Duke Second Longitudinal Study found that 90% of persons aged 65 or more said they were never angry during the past week. Self-reports of anger tend to decrease in old age. (FAQ1/24) FALSE. The health and economic status of old people (compared with younger people) in the year 2010 will probably be much higher than now. Measures of health, income, occupation and education among older people are all rising in comparison with those of younger people. In other words, the gaps between older and younger people on these dimensions will probably be substantially less. (FAQ1/26)
23.
24.
25.
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HECM Counseling – 2nd DAY HOMEWORK ASSIGNMENT – Tab 9
SELF-TEST #2 (ON TABS 10-11)
1) The itemized method of describing reverse mortgage costs makes it difficult to compare the cost of one reverse mortgage with another because a) different reverse mortgages have different types of cost categories b) the true cost of two reverse mortgages will be exactly the same if their itemized costs are exactly the same at closing c) reverse mortgages with identical itemized costs at closing are unlikely to have the same cost to the consumer d) a and b above e) a and c above 2) Total Annual Loan Cost (TALC) rates generally show that a reverse mortgage a) is most expensive if it is repaid within a few years b) becomes less costly over time c) is least expensive if the borrower lives beyond life expectancy and home appreciation is low to moderate d) all of the above e) a and b above 3) TALC rates generally depend on a) b) c) d) e) how long a borrower lives in the home how much the home's value changes during that time the pattern of loan advances to the borrower all of the above a and b above
4) Reverse mortgage borrowers who later on decide to move should determine if their remaining available creditlines are greater than the amount of residual equity likely to be available if they do not use the remaining credit because a) if the residual equity is greater, they may qualify for a toaster from the lender b) if the residual equity is greater, they would get more money by not withdrawing the remaining credit before the loan becomes due and payable c) if the remaining creditline is greater, they may qualify for a watch from the lender d) if the remaining creditline is greater, they would get more money by withdrawing it before the loan becomes due and payable e) a and c above
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HECM Counseling – 2nd DAY HOMEWORK ASSIGNMENT – Tab 9
5) Loan advances will make a borrower ineligible for SSI and Medicaid if they a) b) c) d) exceed $3,000 for a couple or $2,000 for an individual are retained by the borrower in a bank account past the end of the month a or b above exceed $3,000 for a couple or $2,000 for an individual and are spent before the end of the month e) are retained by the borrower in a bank account past the end of the month, causing the borrower's liquid resources to exceed $3,000 for a couple or $2,000 for an individual 6) The two basic forms of home equity conversion are a) b) c) d) e) selling and moving home equity loans and reverse mortgages sale leaseback and property tax deferral second mortgages and life estates loan plans and sale plans
7) In general, single-purpose reverse mortgages a) are offered by state or local governments, or nonprofit groups b) have income eligibility requirements c) must be used for specific purposes such as property taxes or home repairs d) have low or moderate loan costs e) all of the above 8) Deferred payment loans (DPLs) can be combined with HECMs a) b) c) d) e) if the HECM lender agrees to subordinate its loan if the DPL is offered by a city or county housing department if the borrower remains in the home for some prescribed period of time if the DPL lender agrees to subordinate its loan b and c above
9) Proprietary reverse mortgages a) b) c) d) e) generally cost more than HECMs generally provide more cash than HECMs generally are more secure than HECMs can charge a lot more than HECMs for the same cash advances a and d above
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HECM Counseling – OTHER HOME EQUITY CONVERSION OPTIONS - TAB 10
OTHER HOME EQUITY CONVERSION OPTIONS
10-1 INTRODUCTION Prospective borrowers should consider the full range of home equity conversion options available to them. This tab section briefly reviews the basic types of home equity conversion plans and outlines some of the differences between HECMs and the most widely available proprietary reverse mortgages. It also identifies resources providing more detailed information on these plans. BASIC FORMS OF HOME EQUITY CONVERSION A. In theory, there are two basic forms of home equity conversion: loan plans and sale plans. 1) 2) In loan plans (reverse mortgages), you borrow against your equity. In sale plans, you sell your home and then rent it back from the buyer (sale leaseback), or sell the right to ownership of your home upon your death (sale of a "remainder interest").
10-2
B.
In practice, however, reverse mortgages are clearly the dominant -and nearly the exclusive -- form of home equity conversion in the United States. 1) It has always been difficult to find buyers for sale leasebacks, and federal tax law changes have made it much more difficult. Consumers have strongly preferred loan plans to sale plans. a. Retaining ownership and control of the property have been preferred to giving up ownership and, in sale leasebacks, becoming dependent on a landlord. Sales of remainder interests generally involve some element of charitable donation, which is of little benefit to most persons most needing these plans.
2)
b.
3)
Many more reverse mortgages have been transacted than sale plans.
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10-3
BASIC TYPES OF REVERSE MORTGAGES -- The three major types of reverse mortgages are defined in Home Made Money. A. B. C. D. Federally-Insured Reverse Mortgages (HECMs) are described in Part 2 of Home Made Money (see pages 8-19). Single-Purpose Reverse Mortgages such as Deferred Payment Loans (DPLs) and Property Tax Deferral (PTD) programs (see pages 20-22). Proprietary Reverse Mortgages (see pages 22-23 and below). HECM counselor trainees should read Parts 2 and 3 of Home Made Money before completing Self-Test #2 (Tab 9).
10-4
FIXED-TERM REVERSE MORTGAGES must be repaid on a specific date. They are offered by a handful of private lenders in parts of CA, AZ, MA, MN, and NY. A. B. These loans provide fixed monthly advances for a fixed term of years. These loans must be repaid on a specific date - or when the borrower dies, sells, or moves - whichever comes first. The loan term is selected by the borrower at closing, and usually must be at least three but no more than 12 years. No insurance premium or other risk-pooling fee is charged on this loan.
C.
These loans may be appropriate (and much less costly) for persons who intend to sell and move within the loan term. 10-5 WIDELY AVAILABLE PROPRIETARY REVERSE MORTGAGES A. Fannie Mae’s Homekeeper reverse mortgage is available nationwide. LIke the HECM, it is a non-recourse loan that requires no repayment as long as the borrower lives in the home. It differs from the HECM in a variety of ways, including: 1) 2) 3) Multi-family dwellings such as duplexes, triplexes, and 4-unit properties are not eligible. There can be no more than three borrowers per property. HUD 203(b) limits do not apply; instead there is a nationwide cap. In 2006, home values in excess of $417,000 generate the same loan amounts as homes valued at $417,000, which is called the "adjusted property value" (APV) for such homes. No mortgage insurance premium is charged. Instead, risk is managed by limiting loan amounts relative to property value. This effect is especially pronounced for younger borrowers and
4)
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couples. 5) 6) 7) Term payments (monthly for a fixed period of time) are not available. The funds remaining available in a Home Keeper creditline do not grow larger over time. The loan amount for each home is determined by the age(s) of the owner(s) and the home value (or APV, whichever is less). Couples are eligible for less money than an individual of the same age. The current or expected interest rate is not a part of this calculation. The adjustable interest rate is tied to the one-month CD rate and can go up as much as 12%. A "Home Keeper for Home Purchase" feature of the program permits a borrower to purchase a home using a Home Keeper loan.
8) 9)
B.
Financial Freedom’s Cash Account reverse mortgages are available only in some parts of the country. They offer possible advantages primarily for owners of very high value homes. Some of the features that are different from HECMs include: 1) 2) No limit on home values. No mortgage insurance premium is charged. Instead, risk is managed by limiting loan amounts relative to property value. This effect is especially pronounced for younger borrowers and couples. Provides a lump sum at closing and/or a creditline; no monthly term or monthly tenure advances are available Loan amount is determined by the value of the property and the age(s) of the borrower(s). Couples are eligible for less money than an individual of the same age. Remaining available funds in creditline grow by 5% per year Each creditline draw must be at least $500 Adjustable interest rate is 6-month LIBOR index + 5% margin Lifetime rate cap is 6-month LIBOR index + margin (5%) + 6% Equity Choice feature lets borrower limit loan obligation to a stated percent of the home's future full market value; but this decreases the maximum available loan amount at closing. Borrowers can choose to limit their loan obligation to from 50%
3) 4)
5) 6) 7) 8) 9)
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to 90% of the home's future value. 10) Zero Pointtm Option has no origination fee and caps 3rd-party closing costs at $3,500 (not including any state or local taxes), but requires minimum draw at closing of at least 75% of the maximum available loan amount No partial prepayment is allowed for five years. Simply Zerotm Option has no origination fee and no 3rd-party closing costs (except for any state or local taxes), but requires draw at closing equal to 100% of the maximum allowable loan amount. No partial prepayment is allowed for five years.
11)
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HECM Counseling – REVERSE MORTGAGE ANALYSIS - TAB 11
REVERSE MORTGAGE ANALYSIS
11-1 REVERSE MORTGAGES convert home equity into three things: • • • loan advances (to the borrower), loan costs (to the lender), and leftover equity, that is, home equity remaining after the loan is paid off (to the borrower or the borrower's estate).
A simple way to analyze any reverse mortgage, therefore, is to ask these three questions: A. How much does it pay (loan advances)? B. How much does it cost (loan costs)? C. How much is left over (leftover equity)? 11-2 LOAN ADVANCES How much cash a borrower is likely to get from a reverse mortgage depends on a variety of factors. A) Monthly Advances - If a loan provides monthly cash advances, the total amount of cash received by the borrower depends on whether the advances are for a specified term or for as long as the borrower lives in the home. It also depends on how long the borrower then remains living in the home as a principal residence. B) Creditline Advances - If a loan includes a creditline, the total amount of cash depends on whether the creditline is "flat" or "growing." If the remaining available creditline grows larger over time, then the total amount of cash provided depends on how much cash the borrower draws out of the creditline account and when it is withdrawn. 1) Example: An 80-year-old borrower living in a $250,000 home in a county where the HUD 203(b) limit was $154,896 in July of 2003 could get a HECM creditline of $111,760 or a Fannie Mae "Home Keeper" creditline of $118,458. 2) If this borrower withdraws and expends all available funds at closing, the Home Keeper creditline would clearly provide the most total cash, and there would be no funds remaining in any of the creditlines. 3) But if this borrower draws $5,000 per year, here is how much cash would remain available to the borrower in each account at various future times:
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HECM Counseling – REVERSE MORTGAGE ANALYSIS - TAB 11
HECM Initial Creditline Creditline Growth Annual Draw Creditline Remaining Available after 6 years 12 years 18 years $101,898 $90,045 $75,797 $111,760 5.31% variable until all is drawn $5,000
Home Keeper $118,458 none $5,000
$88,458 $58,458 $28,458
4) Results: As the table demonstrates, a borrower withdrawing $5,000 per year in this example would be highly likely to get more total cash from the HECM creditline, which was the smaller of the two at closing. Because the amount of cash remaining available in it grows larger every month until all of it is withdrawn, the HECM creditline, which was about $7,000 smaller than the Home Keeper creditline at closing, could provide about $13,000 more cash after 6 years, about $31,000 more cash after 12 years, and $46,000 more after 18 years. C) Net Cash Advances - A reverse mortgage may affect a borrower's financial situation in several ways. For example, if the loan is used to purchase an annuity from an insurance company, annuity income will reduce the size of any Supplemental Security Income (SSI) payments the borrower receives. These types of financial implications are covered toward the end of this tab section.
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HECM Counseling – REVERSE MORTGAGE ANALYSIS - TAB 11
11-3
LOAN COSTS The cost of reverse mortgage loans can be described in two basic ways: the traditional "itemized" approach, and the Total Annual Loan Cost (TALC) approach. A. The "itemized" approach lists the various categories of cost, and then fills in the blanks. Using the same July 2003 example cited in 11-2 above,
• closing costs = $2,000 • origination fee = 2% of maximum claim amount • HECM insurance = 2.0% at closing + 0.5% charged on the loan
balance • servicing fee = $30 per month • interest = 2.1% over the 1-year U. S.Treasury rate adjusted annually with a 2-point annual cap and a 5-point lifetime cap. (Note: 2.1% margin used in this example was increased to 3.1% in 2004). 1) This approach makes it difficult for consumers to compare the cost of one reverse mortgage to another, because a) different types of reverse mortgages can have different types of cost categories; and b) the true cost of two reverse mortgages with exactly the same itemized costs at closing are highly unlikely to have the same cost to the consumer. 2) 3) This approach does not take into account the non-recourse nature of these loans. Three critically important cost patterns on most reverse mortgages (see next part) are not apparent using the itemized approach to describing reverse mortgage costs. The Total Annual Loan Cost (TALC) rate is the single rate that includes all loan costs. It is the annual average rate that would generate the total amount owed at any point if charged on the loan advances made prior to that time. 1) The TALC includes all financed loan costs and takes into account the loan's non-recourse feature.
B.
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HECM Counseling – REVERSE MORTGAGE ANALYSIS - TAB 11
2)
TALC rates are projections based on an assumed loan term (number of years from closing to maturity) and an assumed average annual home appreciation rate.
3) The TALC is an average annual rate over the loan term, not an average rate in the last year of the loan term. 4) The TALC can be used to compare loans with different costs and with different categories of cost. 5) Three critically important cost patterns on most reverse mortgages become apparent using the TALC approach to describing costs. a) They can be very expensive if they are repaid within a few years. b) The overall annual average cost generally goes down over time. c) The cost can be quite moderate or even inexpensive if the borrower lives in the home beyond her life expectancy and the home appreciates at a moderate to low rate. 6) The table on page 60 shows TALC rates on a HECM tenure loan at various points during the loan and assuming three different home appreciation rates. a) The TALC is greatest in the short term because the loan costs financed at closing are a greater percentage of the total loan balance in the early years. The TALC comes down over time at each of the appreciation rates. The TALC is smallest when the loan term is longest and the appreciation rate is lowest. If the rising loan balance catches up to the non-recourse limit, the TALC rate decreases at a faster rate.
b) c)
7) TALC rates start the highest and decrease most quickly for loans with monthly advances only. If a borrower takes all available funds as a single lump sum, the TALC rates vary much less over time, that is, they start out much lower and do not decrease as fast. 8) Creditline TALCs depend on the amount and timing of the borrower draws. As defined in federal Truth-in-Lending law (Regulation Z), TALC rates on creditlines assume that borrowers take one-half the creditline at closing, and none thereafter.
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HECM Counseling – REVERSE MORTGAGE ANALYSIS - TAB 11
9) A step-by-step tutorial explaining TALC rates is included as Appendix C.
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HECM Counseling – REVERSE MORTGAGE ANALYSIS - TAB 11
Home Equity Conversion Mortgage (HECM) Program TOTAL ANNUAL LOAN COST RATE LOAN TERMS Age of youngest borrower: 75 Monthly advance: $580.80 Initial Draw: $0.00 Line Of Credit: $0.00 Length Of Term: TENURE INITIAL LOAN CHARGES Closing Cost: $4,500.00 Mortgage Insurance Premium: $3,000.00 Annuity Cost: None MONTHLY LOAN CHARGES Monthly Servicing Fee: $ 35.00 Mortgage Insurance: 0.5% annually
REPAYMENT LIMITS: Net proceeds estimated at 93% of projected home sale
Total Annual Loan Cost Rate
DISCLOSURE PERIOD (Yrs) -------------------------------------------------------------------------------------------2 yrs 6 yrs 12 yrs 17 yrs -------------------------------------------------------------------------------------------50.73% 50.73% 50.73% 13.86% 13.86% 13.86% 7.88% 9.00% 9.00% 1.86% 8.00% 8.00%
Appreciation Rate 0% 4% 8%
The cost of any reverse mortgage loan depends on how long you keep the loan and how much your house appreciates in value. Generally, the longer you keep a reverse mortgage, the lower the total annual loan cost rate will be. This table shows the estimated cost of your reverse mortgage loan, expressed as an annual rate. It illustrates the cost for your age, that life expectancy, and 1.4 times that life expectancy. The table also shows the cost of the loan, assuming the value of your home appreciates at three different rates: 0%, 4%, and 8%. The total annual cost rates in this table are based on the total charges associated with this loan. These charges typically include principal, interest, closing costs, mortgage insurance premiums, annuity costs, and servicing costs (but not disposition costs -- costs when you sell the home). The rates in this table are estimates. Your actual cost may differ if, for example, the amount of your loan advances varies or the interest rate on your mortgage changes. You may receive projections of loan balances from counselors or lenders that are based on an expected average mortgage rate that differs from the initial interest rate.
SIGNING AN APPLICATION OR RECEIVING THESE DISCLOSURES DOES NOT REQUIRE YOU TO COMPLETE THIS LOAN.
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HECM Counseling – REVERSE MORTGAGE ANALYSIS - TAB 11
D.
Adjustable interest rates affect reverse mortgages differently than they affect "forward" mortgages. 1) When adjustable rates change on a forward mortgage, the amount of the borrower's monthly payment to the lender goes up or down. 2) When adjustable rates change on a reverse mortgage, the amount and number of monthly payments to the borrower remain the same 3) But the rate charged on the loan balance changes, as does the rate at which the creditline grows.
11-4 LEFTOVER EQUITY The amount of equity left over after a reverse mortgage is paid off can be a very important consideration for borrowers. A. B. C. D. Although most borrowers want and expect to live in their homes for the rest of their lives, not all are able to do so. Borrowers who permanently leave their homes must repay the full loan balance. The amount of equity remaining after the loan is repaid will be available to help pay for the relocation and continuing expenses of the borrower. The amount of leftover equity depends on the loan costs, how much and when the borrower receives cash advances, the rate charged on the loan balance, and changes in the home's value over time. Borrowers considering a monthly advance - especially if they have few resources other than their homes - should consider adding a line of credit. 1) In addition to providing more financial flexibility during the loan, a creditline can also be activated prior to a permanent move to supplement a borrower's leftover equity. 2) Because it grows over time, the HECM line of credit is basically inflationproof. In fact, it is likely to grow at a faster rate than inflation, thereby providing a cash reserve that increases in purchasing power. 3) Creditline borrowers expecting their loans to end soon should determine if their remaining available credit is greater than the amount of residual equity likely to be available if they do not use the remaining credit. If it is, they should consider withdrawing it before the loan becomes due and payable.
E.
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HECM Counseling – REVERSE MORTGAGE ANALYSIS - TAB 11
11-5 COMPARING REVERSE MORTGAGES Under a HUD grant in 2000, the AARP Foundation developed a set of "Model Specifications for Analyzing and Comparing Reverse Mortgages." A general discussion of the model specifications can be found in Part 2 (pp. 18-19) of Home Made Money. A more detailed discussion can be found at http://assets.aarp.org/www.aarp.org_/articles/revmort/modspecs2-6-04.pdf A) SOFTWARE DEVELOPMENT: Two private companies Financial Freedom Senior Funding Corporation, and Wells Fargo Home Mortgage - have developed software that implements these model specifications. B) KEY PRINTOUTS: The printout with the key side-by-side comparisons is called the "Reverse Mortgage Performance" report in the Financial Freedom software, and the "Reverse Mortgage Comparisons" report in the Wells Fargo software. Consumers should ask for these specific printouts to compare a HECM to a proprietary reverse mortgage. C) SOFTWARE AVAILABILITY: Information on the availability of software for counselors that meets the model specifications is presented at the HECM training sessions conducted for HUD by the AARP Foundation. This software is essential for counseling anyone considering a proprietary reverse mortgage. Without the type of information provided by this software, consumers do not have the information they need to evaluate proprietary plans. 11-6 OTHER FINANCIAL IMPLICATIONS According to the law establishing the HECM program, counselors must advise prospective borrowers that a reverse mortgage "may have tax consequences, affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs of the homeowner." A. HUD-approved counselors do not provide legal advice. But they may share and cite information on the general nature of these financial implications that has been published by other sources. B. Taxation: In general, the Internal Revenue Service does not consider loan advance to be income for purposes of taxation. Interest on a reverse mortgage is not deductible for tax purposes until it is actually paid at the end of the loan. If a borrower uses a loan to purchase an annuity, part of the income from the annuity may be taxable. Source: Reverse Mortgages:
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A Lawyer's Guide to Housing and Income Alternatives, American Bar Association, Senior Lawyers Division, 1997, pp. 33-34. C. Social Security & Medicare: A borrower's Social Security and Medicare benefits are not affected by a reverse mortgage. Source: Reverse Mortgages: A Lawyer's Guide to Housing and Income Alternatives, American Bar Association, Senior Lawyers Division, 1997, p. 35. D. SSI, Medicaid, & Other Programs: Benefits from means-tested programs (for example, Supplemental Security Income [SSI], Medicaid, and various state-administered programs) may be affected by reverse mortgages. 1) In general, loan advances are not treated as income. But, if loan advances are retained by the borrower in a readily available form (for example, in a bank account) past the end of the month in which they are received, then they are counted as a "liquid resource." The limit in 2005 for allowable liquid resources in the SSI program, for example, is $3,000 for a couple, and $2,000 for an individual. Source: www.ssa.gov 2) If a borrower uses a loan to purchase an annuity, the income from an annuity is treated as income by SSI, Medicaid, and many other programs. For example, if an SSI recipient has at least $20 in other income, annuity income can reduce SSI benefits dollar-for-dollar. Source: www.ssa.gov
E. Reverse mortgage debt must be repaid before heirs may inherit the home. In many cases, this will require the sale of the home. The amount of debt reduces the net sale proceeds available to the borrower's heirs. If the debt has grown to equal the value of the home, there will be no remaining equity for the heirs. 11-7 LIFE EXPECTANCY Life expectancy is an important factor for consumers to consider. It may affect their decision about taking a reverse mortgage. It may influence them to select a term versus a tenure reverse mortgage. It may affect the length of any term reverse mortgage they choose. And it may also be a factor in choosing and using a line of credit.
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On average, how many more years can males and females of different ages expect to live? In the blanks below, fill in your guesses. Remember, you should write in the number of remaining years of life in each box. For example, if you believe the median 65-year-old male lives until age 72, write in "7". ("Median" means that half of all males each age will live MALE Age 65 Age 75 Age 85 "Median" means the midpoint; in other words, if you write in "7" for 65-year-old males, you are saying you think half of all 65-year-old males will live more than another 7 years, and half will live less than 7 years. FEMALE
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OPTIONS OTHER THAN HOME EQUITY CONVERSION
12-1 INTRODUCTION -- HECM borrowers are seeking to solve some problem using the money from the reverse mortgage. HECM counselors need to understand what that problem is and help the borrower discover possible alternative solutions. To do this, counselors must be aware of the array of resources available to older homeowners and know how to make referrals. This tab section discusses some of the primary options and provides starting points for researching options in your local community. SELLING AND MOVING -- HECM counseling clients should be encour-aged to think about selling their homes and moving. The process of exploring other living arrangements can help clients determine how much they value remaining in their present homes. Considering the financial and other aspects of specific alternatives can also help them evaluate the cost of a reverse mortgage. See Home Made Money, Part 3, pp. 23-24. Clients may not be aware of the range of other housing options that may be available. Apart from the obvious choices of buying a less expensive house or moving in with family, some options may include: A. Subsidized or “affordable” senior apartments. These are restricted to people who are over a certain age (usually 55 or 62) and below a certain income level. They offer rents that may be based on a percentage of the client’s income, or may be fixed but lower than market rates. Sometimes additional services, such as transportation, on-site meals, or recreational programming are provided. Retirement communities. These can be expensive, but offer services such as meals, housekeeping services, transportation and activities. They can allow individuals to keep their independence while being freed from responsibilities that are becoming burdensome. Home-sharing arrangements. Clients may be able to find another senior to share a home with, either through informal networking or, in some communities, through an agency that screens and matches potential home-sharers.
12-2
B.
C.
12-3
MAJOR PUBLIC BENEFITS -- Many low- to moderate-income income homeowners are not aware of the fact that they are eligible to receive benefits from major public programs. A. Supplemental Security Income (SSI) provides monthly cash payments to qualifying low-income persons aged 65 and over. To be eligible in 2006, applicants' liquid resources (cash and savings) cannot be greater than $2,000 ($3,000 for a couple), not counting the value of a home or car. Monthly “countable income” cannot be greater than $603 ($904 for a couple). Some earned income can be excluded from the countable
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total. Some states also provide additional supplements to the federal SSI benefit. See www.ssa.gov/ssi for current details. B. Medicaid is health insurance for low income people, paid for by a combination of federal and state dollars. Medicaid eligibility guidelines vary from state to state, and the program also goes by different names in different states. SSI recipients are automatically eligible for Medicaid, but many states have established higher income limits for Medicaid. Liquid resource limits for Medicaid are the same as for SSI (see above). Medicare Savings Programs can help pay Medicare premiums, copayments and deductibles. Like Medicaid, these have a combination of federal and state funding. These programs are also known by a variety of names (e.g., QMB, SLMB, etc.). Income limits vary, but are somewhat higher than regular Medicaid limits. In 2006, programs that help pay Medicare costs have liquid resource (cash and savings) limits of $4,000 and $6,000 for couples. Income limits vary state-to-state, but can go as high as 150% of federal poverty level or even higher. Medicare Prescription Drug Program (Medicare Part D). Many reverse mortgage clients report prescription drug costs as a major financial strain. Medicare Part D, which began in 2006, is an optional add-on to the regular Medicare health insurance program. In most cases, seniors can save about 50% or more on their drug costs (compared to full retail) by signing up for this program. There is also a Low Income Subsidy program that provides much more substantial savings for clients who meet income and asset criteria. More information and a tool to help clients select a plan can be found at www.medicare.gov. Information about the Low Income Subsidy is at www.ssa.gov.
C.
D.
12-4
BENEFITSCHECKUP.ORG -- At this website you can enter information about a counseling client, and find out which public benefit programs they may be eligible for. The site is operated by the National Council on Aging, and also provides information on applying for these programs. The "AGING NETWORK" is the system of public and private, nonprofit agencies and organizations responsible for implementing the Older Americans Act (OAA). Enacted in 1965, the OAA sets forth objectives for improving and maintaining the quality of life for older Americans. A. The Administration on Aging (AoA) is located within the U. S. Department of Health and Human Services. It serves as a: 1) clearinghouse for information
12-5
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2) source for technical assistance, and 3) catalyst for more effective use of resources for the aged. B. State Units on Aging (SUAs) are the designated state agencies serving the elderly. They coordinate related state activities and administer federal funds at the state level. Area Agencies on Aging: Each state has established planning and service areas known as "area agencies on aging," "AAAs," or "Triple A's." AAAs coordinate the delivery of a variety of services, including: information and referral, outreach, transportation, in-home care, legal and protective services, counseling, socialization, recreation and education -- to meet the needs of the older population.
C.
12-6
WHO'S WHO IN THE AGING NETWORK? Federal funds support the provision of services in local communities via the aging network as follows: A. Federal funds from the Older Americans Act are transmitted to State Units on Aging (SUAs), which channel them to the Area Agencies on Aging (AAAs). Most AAAs are not in the direct service business, i.e., they contract out this work to local agencies who provide such services to the older population. The local agencies may be a county Department of Aging, or a nonprofit Council on Aging, or may have other names. AAA and local agency contact information can be obtained from the Eldercare Locator, at www.eldercare.gov or 800-677- 1116. Three areas benefit the most broadly from federal funding: 1) Information and Referral (I&R): These programs exist to help older adults and their caregivers find specific information on the programs that are available to older adults. Many I&R programs also publish a directory of resources or maintain a website with information about community resources for the elderly. These services may or may not be located in a AAA office, but the AAA office will know where to find them. The I&R number can often be found under Senior Citizens in the blue (government) pages of the telephone book. Senior Centers: Sometimes the I&R office is located in a senior center. These buildings are the focal points for most federallyfunded community-based services for older adults; many senior centers also offer a variety of exercise programs, health screenings, socialization and recreation opportunities, counseling services, hot meals, and other activities. Nutrition Services: A significant portion of Older Americans Act
B.
2)
3)
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funds is targeted to provide hot noontime meals in senior centers, churches and other convenient locations. Home-delivered meals may also be available. C. At the community level, a wide variety of additional services and programs may be offered by local public agencies or nonprofit groups. Some of the most common are: 1) Home repair and adaptation services. These programs provide subsidized minor home repairs, build wheelchair ramps, and help make homes safe for older adults. In-home care, homemaker, and chore services. Many communities have some public assistance available for those who need help with tasks like housekeeping, grocery shopping, or personal care. Adult day care. These group care programs can be an alternative to expensive one-on-one home care for adults who need constant supervision because of memory loss or other illness. Transportation assistance, either via public programs or volunteer groups. Volunteer coordination programs. Volunteers may be available to help older adults with yardwork, house painting, roof repairs, grocery shopping, transportation, social contact, and other needs.
2)
3)
4) 5)
D.
In addition, many alternative agencies and organizations provide resources and support to the senior population. For example: 1) Many corporations know that many of their employees not only care for children but also care for their aging parents. Corporate eldercare programs may provide information and referral for their employees, and may also provide more tangible support such as using a corporate van to deliver meals, or organizing teams of employees to build wheelchair ramps. Many hospitals sponsor wellness events or health fairs that provide free blood pressure checks and materials on nutrition and fitness. Churches have long supported older members of their congregations; among the most popular church programs involve "friendly visiting" of older people who are homebound by another member of the church. Civic groups focus many charitable events to serve older adults;
2)
3)
4)
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some offer lending libraries of durable medical equipment (canes, walkers, wheel-chairs, etc.) for those of limited means. 12-7 MEETING WITH AREA AGENCIES ON AGING -- HECM counselors who are not already familiar with the aging network are strongly encouraged to meet and become familiar with the local organizations that serve this population. This is particularly important if these agencies were not represented at the training counselors attended, or if a counselor is utilizing this training manual without the benefit of formal training. HECM counselors should be able to refer a homeowner to the appropriate agency or agencies to serve what might be a variety of needs. HOW MANY CAN YOU NAME? How many programs serving older persons can you name? Make a list of all the programs you know. See how it compares with lists made by other trainees.
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HECM COUNSELING
13-1 HUD's PROCEDURES & REQUIREMENTS for HECM counseling are presented in Chapter 2 of the HECM Handbook (4235.1 REV-1) and subsequently clarified in detail in Mortgagee Letter 2004-25 and 2004-48 (see Appendix A). A copy of the HECM handbook is included with this course's materials. HUD's procedures and requirements for housing counseling in general are presented in HUD Handbook 7610.1 REV-4 Housing Counseling Program (1/95). Information on downloading and ordering hard copies of this document can be found by clicking on "HECM Documents" at www.reverse.org 13-2 COUNSELING PRINCIPLES A. The key to sound counseling process is understanding the client's overall situation and needs. What problem is the client trying to solve? What has led the client to explore reverse mortgages as a possible solution? B. Counselors should avoid: 1) making ANY direct, specific recommendations, or any referrals to any specific lenders or products; 2) giving ANY "advice" that might be interpreted as influencing the homeowner's decisions;
3) applying their own value system or preferences to the homeowner's situation or needs; and 4) providing any opinion about the suitability of any loan for the client. C. Counselors should stress that 1) the decision to apply for a loan is the client's decision,
2) the decision about the client's eligibility for a HECM is the lender’s and HUD's; and 3) the issuance of a HECM counseling certificate certifies that the client has received counseling.
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D. COUNSELORS SHOULD ALWAYS PROTECT THE CONFIDENTIALITY of the client and the client's advisors. Without client permission, counselors should share personal information about competent clients with no one. 13-3 COUNSELING PROTOCOL A. OPTIONAL USE As presented in section 2-3 of the HECM Handbook and related Mortgagee Letters, HUD's requirements for HECM counseling are not spelled out on a step-by-step basis except in Mortgagee Letter 2004-25 and 2004-48 that clarify many requirements (see Appendix A for verbatim text of MLs). The counseling protocol referenced in this section (and included in its entirety as Appendix E) provides a more detailed look at the counseling process. It is also periodically updated online and can be found by linking to the PDF version at: http://www.hecmresources.org/protocol_915-05.pdf But it is not an official HUD document and its use is NOT REQUIRED by HUD. The protocol was developed by experienced HECM counselors, and is excerpted from a more comprehensive statement of the policies and procedures of the AARP Foundation’s Reverse Mortgage Education Project. See www.hecmresources.org/counselors.cfm for details. Trainees may consult, adapt, and use this protocol as they choose. Use of this protocol is OPTIONAL for HECM counselors. The protocol is divided into three main parts:
• Initial contact • Individualized information packet • Counseling session
13-4 STATUTORY REQUIREMENTS & COUNSELING CERTIFICATE A. REQUIRED INFORMATION The legislation establishing the HECM program outlines the information that must be provided to all prospective borrowers. These requirements are listed specifically on the one single form required by in this process: HUD-92902, called the "Certificate of Borrower Counseling", which is reproduced on page 74 and available as most recently amended in 2004 from www.hudclips.org/. 1) The "estate planning service firms" referenced in the certificate are defined and described in HUD Mortgagee Letter 99-22 (see page 87). 2) Counseling clients must certify by their signature(s) that they have received the counseling as required.
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3) It is recommended that the client(s) keep the original form, but that two copies be made -- one for the borrower's files when the original becomes part of the loan application; the second for the counselor's case file. 4) The client must take the completed Certificate to the lender. The lender must have the completed certificate in hand prior to any processing of the loan application (i.e., securing an FHA case number, accepting any checks or payments for services, etc.). B. TELE-COUNSELING When face-to-face counseling is not possible, (i.e., if it is too far for the homeowner to travel, or if the counselor is unable to travel to a distant area and if this situation is documented) it is acceptable to perform the counseling over the telephone. The Certificate would then have to be mailed to the homeowner, who could then submit it to the lender with the loan application. =================================================================== HECM PRELIMINARY ELIGIBILITY CHECKLIST These questions can used as a quick screening tool to determine if a client is likely to be eligible for a HECM: Yes No " " " " " " Are you and all other owners of your home at least 62 years old? Does at least one owner live in the home at least six months out of the year? Is the home a single family residence, duplex, triplex, or 4-unit residence?
Clients answering "Yes" to each question are most likely eligible for a HECM. Clients answering "No" to the last question may still be eligible if they live in a HUDapproved condominium or planned unit development (PUD), or in certain types of manufactured housing. For more information on these types of housing see the HECM Handbook, sections 3-4, 3-5, 3-6, 4-3, 4-4. 4-5, 4-6, and the Mortgagee Letters in Appendix A. IMPORTANT NOTE: Borrower eligibility is officially determined by the lender when a homeowner applies for a HECM. Property eligibility is officially determined by an FHA approved appraiser whose services are ordered by a lender as part of the homeowner’s loan application.
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13-5 ROLE of FAMILY and PROFESSIONAL ADVISORS A. Counselors should ask if clients want to include any family members in the counseling process. Not all clients will want to involve family members, and this preference should be respected. Nonetheless, it is important to raise family involvement as an option the client may want to consider. B. Unfortunately, very few professional advisors (attorneys, bankers, ministers, accountants, etc.) are well-versed in reverse mortgages. Nonetheless, counselors should welcome the involvement of such advisors if the client chooses to invite their participation.
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US Department of Housing and Urban Development Home Equity Conversion Mortgage Program Certificate of HECM Counseling _ ____________________________________________ Homeowner(s) Name(s) _ ____________________________________________ Property Address City/State/Zip The U. S. Department of Housing and Urban Development (HUD) requires that homeowner(s) interested in pursuing a Home Equity Conversion Mortgage (HECM) receive information about the implications of and alternatives to a reverse mortgage. The HECM counselor must adhere to all of FHA’s guidelines regarding information that must be provided to the potential HECM mortgagor and must tailor the session to address the unique financial circumstances of the household being counseled. COUNSELOR CERTIFICATION: In accordance with Section 255 of the National Housing Act and 24CFR 206.41, I have discussed in detail the following items with the above referenced homeowner(s): 1. Options other than a Home Equity Conversion Mortgage that are available to the homeowner(s), including other housing, social service, health and financial options. 2. Other home equity conversion options that are or may become available to the homeowner(s), such as other reverse mortgages, sale-leaseback financing, deferred payment loans, and property tax deferral. 3. The financial implications of entering into a Home Equity Conversion Mortgage. 4. A disclosure that a Home Equity Conversion Mortgage may have tax consequences, affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs of the homeowner(s). 5. Whether the homeowner has signed a contract or agreement with an estate planning service firm that requires, or purports to require, the mortgagor to pay a fee on or after closing that may exceed amounts permitted by the Secretary or in Part 206 of the HUD regulations at 24 CFR. 6. If such a contract has been signed, the extent to which services under the contract may not be needed or may be available at nominal or no cost from other sources, including the mortgagee. I hereby certify that the homeowner(s) listed above have received counseling according to the requirements of this certificate and the standards of the U.S. Department of Housing and Urban Development, as described in mortgagee letters, handbooks, regulations, and statute. This interview was held: [ ] Face-to-Face [ ] Telephone and the amount of time required to cover the above items was as follows: ___________. _ __________________________________ Counselor Name (Printed and Signature) _____________ Date
_ ____________________________________________________ HUD-Approved Counseling Agency Name and Address (City/State/Zip) and telephone number _ ____________________________________________________ HUD-Approved Counseling Agency Employer Identification Number HOMEOWNER CERTIFICATION: I/we hereby certify that I/we have discussed the financial implications of and alternatives to a HECM with the above Counselor. I/we understand the advantages and disadvantages of a HECM and each type of payment plan, as well as the costs of a HECM. This information will enable me/us to make more informed decisions about whether I/we want to proceed with obtaining a HECM. _______________________________________________ _ ____________ Homeowner Signature Date _______________________________________________ _ ____________ Homeowner Signature Date (All homeowners shown on the deed must sign the mortgage and this counseling certificate.) Date Counseling Completed: _______________ Certificate Expiration Date: _________________ (180 days from date HECM counseling completed.)
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CASE STUDIES The following case studies describe hypothetical situations for homeowners who may be reverse mortgage candidates. The first section (A) describes each situation; the following section (B) raises some of the issues and options that might be discussed in the counseling process. A) CASE STUDY DESCRIPTIONS 1. Mrs. Jones: Mrs. Jones is 83 years old. She lives alone in her own home in a small town on an annual income of $8,000. She is proud of her home, and has always expected to leave it to her four children when she dies. It is now worth about $100,000. But it is also beginning to show signs of wear. The front and back steps are crumbling, and leaks in the roof have forced her to keep pans and towels at the stair landing. Both are safety hazards, as they increase the potential of falls. She also needs some plumbing and electrical work. Mrs. Jones' income provides just enough cash to meet her regular expenses. She has about $6,000 in savings -- not enough to cover the repairs, which are estimated to cost almost $9,000. She doesn't like the idea of asking her children for help. None of them lives anywhere near. Mrs. Jones is also concerned about the future. Each year, she finds it increasingly more difficult to pay her property taxes, which now exceed $1,600. 2. Miss Anderson: Miss Anderson is 78, and has always been able to afford what she really needed. She's worked hard, been frugal, and planned well. As a single person all her life, she takes some pride in being able to take care of herself financially. Recently, however, Miss Anderson's independence has been threatened. A minor stroke has made it difficult for her to perform some routine tasks. She gets along quite well with the help of some housekeeping and home chore services. But the cost is depleting her $20,000 in savings at a much faster rate ($500 per month) than she had planned. And life would be a lot easier if she made some modifications to her home ($8,000) to accommodate her condition.
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Miss Anderson is beginning to wonder how she will cope as her savings dwindle. Should she sell and move? Her home is now worth nearly $200,000. She wants to remain in her home for as long as she can. But she will need at some point to increase her income to pay for the services that are now a necessary part of her life. 3. Mr. & Mrs. Smith: Mr. and Mrs. Smith (aged 79 and 75) are not struggling financially, but they would like to increase their monthly income by about $500. They also want to reserve some of their home equity in a line of credit. Their home has just been appraised at $250,000. They can get a HECM at 7% (expected rate) with a $5,000 origination fee, $2,500 in closing costs, and a monthly servicing fee of $35. What are the Smith's basic payment options? What might happen if Mr. Smith dies before they make a decision? 4. Mrs. Tyson: Mrs. Tyson is an 80-year-old widow with a monthly income of about $800, some of which is SSI. She has several chronic, but not lifethreatening, health problems. Medicaid covers the costs. Her home is worth about $100,000, and she has $1,750 in savings. Mrs. Tyson has heard about reverse mortgages and likes the idea. She intends to take one out as soon as she completes her counseling session. She already knows that she can get over $1,900 a month for five years, which is what she intends to do. At that rate, she estimates, she'll be able to save up enough to fix the plumbing ($6,000) and the roof ($4,000) and make a $10,000 donation to a favorite charity in less than a year. After that, she'll start using some of the money (about $300 to $400 per month) for regular living expenses, and bank the rest for her heirs (or for any emergency that might occur). 5. Mr. & Mrs. Cooper: The Coopers (aged 62 and 65) are thinking about retiring. Their retirement income would be enough to meet their needs, but their assets are tied up in producing that income. They have little in the way of other resources, except for their debt-free home. They would like a reverse mortgage to generate a monthly draw of at least $1,500 for as long as either lives in their home. Their home is valued at $300,000 and the expected rate is 6%.
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6.
Mrs. Gonzalez: Mrs. Gonzalez is 75 and lives alone in a home appraised at $650,000. She has an existing “forward” mortgage balance of $50,000, and is looking for additional funds to take life a little easier. She’d like to give $5,000 per year for 4 years to a grandchild who’s on her way to college. She wants to have some elective surgery done to repair a longstanding injury to her shoulder so she can pick up her younger grandchildren with more ease. She’s also thinking about traveling a bit more around the U. S. Mrs. Gonzalez has heard about reverse mortgages, and come to the counseling agency confused. Someone told her only to consider HUD’s reverse mortgage, but someone else said she should also consider two "proprietary" plans available in her area. What should she do?
7.
Mrs. Miranda: An insurance agent is urging Mrs. Miranda to take out a HECM so she can buy an annuity that will give her monthly payments for the rest of her life. She comes to you for counseling and wants to know if that’s a good idea. What should she know about using a HECM to buy an annuity?
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B) CASE STUDY DISCUSSIONS 1. Mrs. Jones: Is Mrs. Jones eligible for Supplemental Security Income (SSI), Medicaid, fuel assistance, or other public benefit programs? What are Mrs. Jones' specific alternatives for repairing her home and paying her property taxes? Is she eligible for a home repair grant or deferred payment loan from a government program or a non-profit agency? Does her state or local government have a property tax relief or deferral (loan) program? How do the costs of these loan programs compare with the costs of a HECM? Does Mrs. Jones simply want to meet her home repair and property tax needs, or does she also want to prepare for other possible future costs, or cost increases in general? Is she interested in a monthly income supplement, a line of credit, or some combination? Would the public sector providers of a deferred payment loan for home repairs or property tax deferral agree to subordinate their loans to a HECM? If not, would she prefer to get the additional money and flexibility that a HECM would provide? What choices would Mrs. Jones have if she decided to take out a HECM? Assuming an initial draw of $9,000 for the repairs, what would her initial line of credit be if she did not want monthly loan advances? What would it be if she did decide to take monthly loan advances on a tenure basis? What combinations of creditline plus monthly advances could she get? 2. Miss Anderson: Is Miss Anderson eligible for Supplemental Security Income (SSI), Medicaid, fuel assistance, or other public benefit programs? In particular, is she eligible for any program providing in-home services on a no-cost or reduced-cost basis? If she continues to spend her resources at the current rate, when will her savings be gone? At what point might she become eligible for SSI, Medicaid, or other programs? Is there a local home-sharing program? Would Miss Anderson be interested in sharing her home with someone who would provide housekeeping and home chore services? Has Miss Anderson investigated the assisted living facilities in her community? Has she found out how much they cost, and how much she could get for her home if she sells and moves? What choices would Miss Anderson have if she decided to take out a HECM? Could she get $8,000 upfront for home modifications plus a monthly loan advance of $500 to cover her in-home service needs? Would she prefer a line of credit that she could use to meet changing needs and costs?
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3.
Mr. and Mrs. Smith: This couple is most likely not eligible for any public benefit program. They could get about $990 per month on a tenure basis, or a creditline of about $135,000, or a modified tenure plan providing $550 per month plus a creditline of about $60,000. If Mr. Smith dies prior to closing, Mrs. Smith may receive life insurance benefits that could be invested. She may lose part or all of her husband's pension. Since death of a spouse is major cause of stress and anxiety, she may decide not to make any major decisions until she has adjusted to her new situation.
4. Mrs. Tyson: If Mrs. Tyson saves all or some of her monthly loan advances, she will most likely lose her SSI income and Medicaid benefits, as the limit on allowable liquid assets is $2,000. If she is eligible for SSI and Medicaid, she may well be eligible for a home repair grant or a deferred payment loan. Mrs. Tyson needs to understand that the funds remaining in a HECM creditline are likely to grow at a larger rate than she could safely earn by “banking” the advances somewhere. In addition, HECM loan advances deposited in a separate account are added to her loan balance and will accrue interest, but no interest is charged on funds left un-drawn in a HECM creditline. Assuming an initial draw of $10,000 to cover her repairs, what are her basic options for monthly advances (tenure and term) and/or a line of credit? 5. Mr. and Mrs. Cooper: The combination of the Coopers' (relatively young) ages and home value cannot generate the monthly draw they desire. The most they could get would be about $875. They may want to consider other alternatives, such as selling and downsizing, postponing retirement, or switching to part time work. 6. Mrs. Gonzalez: Mrs. Gonzalez should get printouts from software meeting AARP's Model Specifications for Comparing Reverse Mortgages. This will help her understand the cost and benefit differences between HECM and proprietary loans. It will show her at various future times, based on her selected creditline draws, how much of her equity she would have received in loan advances, how much would be consumed by loan costs, and how much would be left over for her or her heirs. It will also allow her to see how these projections might differ with different assumptions about future interest and home appreciation rates.
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7.
Mrs. Miranda: a) An annuity is not a required part of a HECM. b) A HECM without an annuity • can pay you monthly advances for as long as you live in your home, or a creditline that grows larger each month, or some of each; the monthly advance amounts from a HECM may be greater than a monthly annuity advance • if flexible; you can get a monthly amount plus a creditline; or change a monthly amount into a creditline or lump sum; with an annuity you are locked into a monthly advance only • is generally less expensive, and a lot less expensive in the early years of the loan • has the backing of the federal government; annuity companies can and do go out of business. c) Annuity advances are counted as income by SSI and Medicaid, which could cause you to lose SSI benefits and Medicaid eligibility. d) The least costly HECM/annuity transactions combine monthly HECM advances for a fixed term with monthly annuity advances that begin in the month after the last HECM term advance; but these arrangements carry the risk that you may not live long enough to get any annuity payments. e) A 3-page discussion of “Using a HECM to Buy an Annuity” is available in the Counseling protocol online in Appendix E Tab 19
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Appendix A Key HECM Mortgagee Letters
Mortgagee Letter # 96-15 96-41 97-15 Date 4/10/96 8/3/96 4/24/97 Topic Expands HECM eligibility to 2- to 4-unit, owner-occupied properties Improves eligibility for condominiums Changes rate at which principal limit (and creditline) grows from expected rate plus 0.5% to note rate (i.e., the rate currently being charged on the loan) plus 0.5%; revises legal documents; permits life estates Establishes monthly servicing cap of $35 for HECMs with monthly adjustable interest Explains and transmits consumer protections against excessive fees by "estate planners" (this packet includes key excerpts from the federal regulation transmitted by HUD with this letter) Raises origination fee limit to the greater of $2000 or 2% of the maximum claim amount, including any broker or correspondent fees; establishes 180-day limit for counseling certificate Establishes policies for HECMs in Texas (not included in this packet; for information on obtaining copies, go to the "HECM Documents" page at www.reverse.org)
98-3 99-2
1/7/98 2/18/99
00-10
3/8/00
00-9 00-34 00-39 04-25
3/8/00 8/30/00 11/6/00 6/23/04
04-48 05-44 06-06
Addresses when a mortgagor must be referred for counseling, entities who can provide counseling, topics that must be covered in a counseling session, types of counseling that are permissible, acceptable means of documenting that borrower has received counseling, counselors’ responsibility for referring potential borrowers to lenders and how to notify HUD of concerns regarding services of a HECM lender or counselor. (Note: ML 04-27 delayed implementation of this ML for one month, from 7/23/04 to 8/23/04.) 12/30/04 Provides clarification and simplification of ML 2004-25. 11/01/05 Announces expanded network of HECM counselors approved by HUD to provide face-to-face and telephone HECM counseling nationally 03/17/06 Announces changes in HECMs in Texas, to include the
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addition of the line of credit option April 10, 1996 Mortgagee Letter 96-15 SUBJECT: Home Equity Conversion Mortgage (HECM) Insurance Program - Changes in Program Requirements The Department is pleased to announce that the President signed Public Law 104-120 on March 28, 1996, amending Sections 255(d)(3) and (g) of the National Housing Act to implement changes in the Home Equity Conversion Mortgage (HECM) Insurance program. The HECM program, commonly referred to as the FHA Reverse Mortgage program, is designed to enable elderly homeowners to convert the equity in their homes to monthly streams of income and/or lines of credit. The following changes, which are effective immediately, will expand the program and make it available to more elderly homeowners: 1. The mortgage insurance authority is extended to September 30, 2000. 2. The mortgage insurance authority is increased to a maximum of 50,000 units. (A total of 15,000 cases have closed as of February 1996.) 3. Property eligibility is expanded to include two- to four-family properties in which the mortgagor occupies one of the units. Note that the maximum claim amount on a two-, three-, or four-unit property is the lesser of the appraised value of the property or the maximum mortgage amount allowed under Section 203(b)(2) of the National Housing Act for a one-family residential unit in the area. The one-family limit is to be used for the maximum claim calculation in order to minimize the conversion of equity attributable to the income-producing portion of the property. August 1, 1996 MORTGAGEE LETTER 96-41 SUBJECT: Single Family Loan Production - Condominium Units in Non-FHA Approved Projects; Mortgage Insurance On May 29, 1996, in 61 FR 26982, the Department issued a final rule in the Federal Register, permitting the insurance of mortgages on individual units in condominium projects that have not been previously approved by the Department. That final rule established a "spot loan" procedure to provide home mortgage insurance on individual units in condominium projects where there is little likelihood that the project's homeowners association would make the requisite changes to its legal documents (usually to benefit one association member) to obtain FHA approval. This Mortgagee Letter provides further guidance on the use of these spot loans. The Department's requirements for condominium projects are set forth in 24 CFR 234.26 of the Code of Federal Regulations. The spot loan provisions add a sub-section (i) to this section and lists specific criteria that must be met. The new spot loan regulations also add a new section, 24 CFR 206.51, to the Home Equity Conversion Mortgage (HECM) regulations. The HECM program incorporates by reference the project requirements set forth in 24 CFR 234.26(i). Therefore, spot loans may be used under both the Department's Section 234(c) and HECM programs. Cooperatives and planned unit developments (PUDS) are not eligible for spot loans. The following requirements must be satisfied before a spot loan is endorsed:
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The condominium project must be complete. There should be no ongoing or anticipated addition of any units, common elements, and/or facilities. Control of the common areas of the project must have been turned over to the unit owners association for at least one year. The owners association must provide evidence that the project has the appropriate hazard, liability and flood insurance. Individual units in the project must be owned in fee simple or be an eligible leasehold interest. The project's legal documents must provide for undivided ownership of common areas by unit owners. By virtue of this ownership, unit owners must have the right to use all facilities and unrestricted common elements. The project's documents should not place any legal restrictions on conveyance. Any provisions that seek to limit the free transferability of title is generally unacceptable. Such restrictions include rights of first refusal and restrictive covenants. Certain governmental or nonprofit programs designed to assist in the purchase or rental of low-or moderate-income housing are exempted from the restrictions on conveyance provisions. The Department's policy on the free assumability and transferability of property is set forth in 24 CFR 234.66. At least 90% of the units in the project must have been sold. At least 51% of the units in the project must be owner- occupied. No single entity may own more than 10% of the units in a project. "Entity" includes an individual partnership, corporation, limited liability company, limited liability partnership, joint venture, investor group or other natural or legal person qualified to hold an interest in real property. The 10% restriction does not apply when the ownership of less than three units would disqualify an otherwise eligible project. The Department recognized that the 10% cap on the number of units that may secure FHA insured mortgages in a given project can place a small regime at a disadvantage, since only a few units will invoke the limit. Accordingly, a two- tiered system was established. For condominium projects having more than 30 units, no more than 10% of the units may have FHA insured loans at any given time. Condominium projects consisting of 30 units or less, can have up to 20% of the units encumbered by FHA insured mortgages under the spot loan rule. Mortgage lenders underwriting spot loans must perform sufficient investigation and analysis to certify that the condominium project satisfies the eligibility criteria. Under the regulations, mortgage lenders may employ a wide range of approaches to ascertain compliance with the spot loan requirements. Project developers, appraisers, owners, associations, management companies and real estate brokers are among the sources of information lenders may use. To the extent that the Department has information that can be of assistance, it will provide mortgagees with that information. However, it remains the lender's responsibility to ensure the accuracy of the information it relies upon in making its certification. Attachment 1 is a suggested checklist lenders may wish to use in their underwriting analyses. It reflects some key considerations in assessing the eligibility of a project for spot loans. The standard Direct Endorsement Underwriter Certifications applicable to condominiums under standard loan programs and the HECM program are not sufficient for spot loan applications. Some modification is needed. Accordingly, the following certification is added to the list of Direct Endorsement (DE) certifications in Appendix 3 of Handbook 4000.4, Rev. 1, Ch. 1 and to the list of Underwriter Certification (HECM)
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in Appendix 3A of Mortgagee Letter 95-54 : ( ) The property is in a project that has not received prior approval by HUD but the requirements of 26 CFR 234.26(i) are met. This certification requirement will be in effect for all mortgages executed on or after 30 days from the date of this Mortgagee Letter. A similar statement may be used until the requirement for a certification becomes effective. Local HUD Offices and Regional Processing Centers will conduct random reviews of mortgage loans insured under the spot loan program. Mortgage Lenders demonstrating a pattern of abuse will be subject to those enforcement mechanisms and sanctions governing FHA mortgage insurance activity. The spot loan program is designed to relieve a burden on homebuyers in successfully-operating, nonapproved condominium projects where FHA involvement is limited; it must not be used to circumvent the general requirement that a condominium project be approved before a mortgage on any unit in that project can be endorsed for insurance. As previously noted, the approval requirements for condominium projects are found in 24 CFR 234.26, (a)-(h). Additional requirements are set forth in Chapter 11, HUD Handbook 4150.1 Rev 1, entitled "Valuation Analysis for Home Mortgage Insurance" and reiterated in HUD Handbook 4265.1 , entitled "Home Mortgage Insurance - Condominium Units - Section 234(c)". SUGGESTED CHECK LIST FOR SPOT LOAN APPROVALS _______ 1. The legal documents of the homeowners association do not contain a right of first refusal or restrictive covenant. _______ 2. The unit is part of a condominium regime that provides for common and undivided ownership of common areas by unit owners. _______ 3. The project, including the common elements, and those of any Master Association, are complete, and the project is not subject to additional phasing or annexation. ______ 4. (a) There are no special assessments pending. ______ (b) No legal action is pending against the condominium association, or its officers or directors. ______ 5. The common areas have been under the control of the homeowners association for at least one year. ______ 6. At least 90 percent of the total units in the project have been sold. Verified by _________________________. ______ 7. At least 51 percent of the total units in the project are owner-occupied. Verified by ______________________. ______ 8. There are no adverse environmental factors affecting the project as a whole or individual units . ______ 9. No single entity owns more than 10 percent of the total units in the project. Verified by ______________________. ______ 10. The units in the project are owned in fee simple or the units are held under a leasehold acceptable to FHA. Leasehold in file. ______ 11. The owners association has adequate common area insurance coverage. General liability, replacement coverage, etc. reflects the character, amenities and risks of the particular development. Flood and other insurances carried, when applicable. ______12. General maintenance level of common elements is acceptable and there is no deferred maintenance, based on the comments by the Appraiser and/or the pictures. ______ 13. The owners association has a reserve plan and a reserve fund, separate from the operating account, that is adequate to prevent deferred maintenance. The amount of the fund
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is $_________ as of __________. _______14. (a) For projects consisting of over 30 units, no more than 10 percent of the total units are encumbered by FHA insured mortgages. Verified by ___________________. _______ (b) For projects consisting of 30 units or less, no more than 20 percent of the total units are encumbered by FHA insured mortgages. Verified by _______________. ___________________________________ ________________________ (Mortgagee) (Reviewer) ___________________________________ _______________________ (Address) (Title) ____________________________________ ________________________ (Date) _______________________ ___________ _______________________ (Condominium Project Name) (FHA case number) (Address) April 24, 1997 MORTGAGEE LETTER 97-15 SUBJECT: Home Equity Conversion Mortgage (HECM) Insurance Program - Implementation of Final Rule and Other Information The purpose of this Mortgagee Letter is to advise lenders about changes resulting from the Final Rule that was published on September 17, 1996. Changes in that Final Rule were effective October 17, 1996, with the exception of the change in definition of "principal limit", which is effective on May 1, 1997. Copies of the Final Rule and subsequent, related Federal Register publications are attached to this Mortgagee Letter as Attachments 1, 2, and 3. 1. "PRINCIPAL LIMIT" DEFINITION The definition of "principal limit" in the regulations, 24 CFR 206.3, has been revised for all HECM loans executed on or after May 1, 1997. The new definition provides that, after the first month, "the principal limit increases each month thereafter at a rate equal to one-twelfth of the mortgage interest rate in effect at that time, plus one-twelfth of one-half percent per annum . . ." For HECM loans executed prior to May 1, 1997, the principal limit definition remains as stated in the original loan documents. Specifically, the principal limit on loans executed prior to May 1, 1997 will continue to increase each month at a rate equal to one-twelfth of the expected average mortgage interest rate, plus one-twelfth of one-half percent per annum. This new definition is found in Attachment 3, the Federal Register publication from March 19, 1997, which corrected the revised definition in previous publications. 2. MONTHLY PAYMENT CALCULATIONS The new definition of principal limit does not change the way that monthly payment calculations are made. The instructions in Chapter 5 of HUD Handbook 4235.1 REV-1 regarding calculation of monthly payment amounts are unchanged by the implementation of this final rule. Furthermore, the monthly payment formula shown in Appendix 22 of HUD Handbook 4235.1 REV-1 is also unchanged by this final rule. For monthly payment calculations (as well as servicing fee set-aside calculations) the expected average mortgage rate is still to be used in the formulas as the interest rate projection into the future. Although the monthly payment and set-aside formulas remain unchanged, the rule does affect the inputs required in the HECMOD calculation software (see below).
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3. HECM CALCULATION SOFTWARE (Version 6.3) The new HUD HECM worksheet software used to calculate the loan payments to the borrower is Version 6.3. This software will be used for mortgages executed on or after May 1, 1997. The major change between Version 6.3 and the previous edition is that the HECMOD module which is used to modify an existing payment plan now reflects the new definition of principal limit. The new version of HECMOD can be used edition is that the HEC-MOD module which is used to modify an existing payment plan now to modify the payment plans of all HECM loans, regardless of the date of execution. The user of HECMOD 6.3 is now required to enter the principal limit as of the effective date of the payment plan modification using the definition of principal limit that applies to that loan. For example, if the borrower were seeking a modification effective on May 31, 1997 the servicer of the loan would enter the principal limit as of May 31, 1997. Regardless of which regime governs the growth, the loan servicer enters the current principal limit figure manually into the HECMOD input screen. Program participants can obtain a copy of the HECM worksheet diskette at a cost of $5.00 per copy by contacting HUD User (800) 245-2691 or (301) 251-5154. Local HUD offices may also copy the software and distribute it to the HECM mortgagees in their area, if resources are available. 4. FEE FOR CHANGE IN PAYMENT OPTION The fee for a change in payment option is presently $20.00. Although the Final Rule revised the payment provisions in 24 CFR 206.26, the Secretary has not authorized a change to the $20.00 fee. 5. CHANGES TO LEGAL DOCUMENTS Changes have been made to the following legal documents: Model Mortgage form Fixed Rate Note Adjustable Rate Note Second Mortgage Fixed Rate Second Note Adjustable Rate Second Note Home Equity Conversion Loan Agreement Notice to Borrower Attachment 4 lists the changes in detail and includes some miscellaneous changes, as well as those resulting from the recent Final Rule. 6. LIFE ESTATE PROVISIONS Regulatory changes permit mortgages to be insured and remain in force even if no eligible mortgagor has any interest in the property greater than a life estate. If an eligible mortgagor holds only a life estate when the mortgage is executed, all holders of any future interest in the property (remainder or reversion) will also be required to execute the mortgage to ensure that the mortgage is secured by a fee simple interest. A holder of a future interest does not execute the note or loan agreement and does not have the rights to loan proceeds of other mortgagors. The regulatory changes also permit a mortgagor who held a fee simple title when the mortgage was executed to subsequently convey his or her interest in the property, as long as a life estate is retained. These changes to 24 CFR 206.27(c) and 206.35 were published in the Final Rule in Attachment 1. 7. PREPAYMENT (24 CFR 206.209) The prepayment section of the regulations was revised to eliminate the former requirements that a borrower prepay only on the first of the month (if a monthly payment mortgage) or with two weeks notice to the lender (if a pure line of credit), with the lender otherwise being able to collect extra interest to cover the remainder of the month after the prepayment date, or for two extra weeks. The revised section now permits the borrower to prepay "at any time, regardless of any limitations stated in the mortgage." Revised language for legal documents is in Attachment 4.
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8. TRUSTEE IN SECOND DEED OF TRUST Where allowed by state law and acceptable to the HUD official responsible for single family programs in the appropriate HUD Field Office, a generic description of a trustee under a second deed of trust may be used, rather than naming a specific HUD individual. The following generic description of a trustee in a second deed of trust is acceptable: Senior Official with responsibility for Single Family Mortgage Insurance Programs in the Department of Housing and Urban Development Field Office with jurisdiction over the Property described below, or a designee of that Official. This language refines provisions previously provided in Mortgagee Letter 95-54 . 9. TITLE INSURANCE POLICY This letter clarifies that the intent of the title insurance language in paragraph 6-11(I)(2) in Handbook 4235.1 was to advise that HUD did not require title insurance coverage of 150 percent of the maximum claim amount (MCA) but, in fact, required a minimum of 100 percent of the MCA. The sentence, therefore, would state that "Notwithstanding this larger amount for the purpose of recordation, HUD only requires that the title insurance policy obtained be at least equal to the maximum claim amount, NOT 150 percent of that amount." 10. DOCUMENTATION REQUIRED TO BE SUBMITTED BY DIRECT ENDORSEMENT LENDERS FOR ENDORSEMENT Attachment 5 lists documents that must be submitted by DE lenders to receive insurance endorsement for HECMs. Note that this is the same list as attached to a Mortgagee Letter recently issued or soon to be issued on "Single Family Loan Production Credit Policy Issues." Originals of the second note and recorded second mortgage should be sent to and retained by the appropriate HUD Field Office, Asset Management Branch Please note that Appendices 3A and 4A, the Underwriter's and Mortgagee's certifications attached to Mortgagee Letter 95-54 , are not required to be submitted to HUD in DE cases. 11. CORRECTION TO REGULATION CITATION IN FINAL RULE Two references in Item 14 of the Final Rule from September 17, 1996 (Attachment 1, p. 49033) about the addition of a new paragraph (e), should correctly refer to Sec. 206.45, rather than 206.47. 12. FUTURE MORTGAGEE LETTER Additional guidance related to HECM loans is planned for a subsequent mortgagee letter. January 7, 1998 MORTGAGEE LETTER 98-3 SUBJECT: Home Equity Conversion Mortgage (HECM) Insurance Program - Servicing Fee Cap Monthly Adjustable Loans The purpose of this Mortgagee Letter is to establish a servicing fee cap for monthly adjustable HECM loans. HUD Handbook 4235.1 REV-1, paragraph 1-12, established a monthly servicing fee cap of $30.00 for fixed rate or annually adjustable HECM loans. There was no limit set on the servicing fees that lenders could charge for monthly adjustable loans. In response to concerns raised about problems with excessive servicing fees being charged on monthly adjustable HECMS, the Department has decided to establish a maximum amount that lenders can charge for these fees. Therefore, effective 30 days from the date of this Mortgagee Letter, the maximum servicing fee that may be charged for monthly
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adjustable HECM loans is $35.00. This servicing cap applies only to loans closed on or after the effective date of this Mortgagee Letter. Lenders are permitted to charge this fee if the cost has not already been included in the borrower's mortgage interest rate. Questions regarding this matter should be directed to Ted Green, Single Family Servicing Division, on 202-708-1672 or, Internet address Theodore_A._Green@hud.gov. February 18,1999 MORTGAGEE LETTER 99-2 SUBJECT: Implementation of the Final Rule - HECM Consumer Protection Measures On October 21, 1998, the President signed legislation that amended Section 225(d) of the National Housing Act (12 U.S.C 1715z -20(d)). This amendment mandated certain disclosure requirements and prohibited unnecessary funding or excessive costs associated with obtaining a Home Equity Conversion Mortgage (HECM). The legislation required that, within 90 days of the enactment date of the law, HUD publish a final rule requiring that the senior homeowner receive a full disclosure of all costs, including estate planning, financial advice and other services that are related to the mortgage, but are not required to obtain a HECM loan. Senior homeowners must be informed that if the information provided by these services can be obtained for minimal or no charge, then the costs cannot be financed with HECM proceeds. The final rule is designed to protect senior homeowners in the HECM program from becoming liable for payment of excessive fees for third party services that may have little or no value and are not necessary. The final rule governing Home Equity Conversion Mortgages, Consumer Protection Measures Against Fees, was published on January 19, 1999, in the Federal Register and is effective on February 18, 1999. A copy of this rule is attached to this Letter and also can be viewed on the Internet at: http://www.access.gpo.gov/su_docs/aces/aces140.html Requirements for HECM Counselors Effective February 18, 1999, a HECM program counselor must discuss with the senior homeowner whether they have signed a contract or an agreement with an estate planning service firm that requires a senior homeowner to pay a fee on or after closing. Counselors must inform the senior homeowner that these services are unnecessary to obtain a HECM loan and are ineligible for payment from HECM proceeds. The counselor must annotate this information on the Counselor's Certificate. Requirements for HECM Mortgagees For HECM applications signed on or after February 18, 1999, the mortgagee must provide the borrower with a Good Faith Estimate and inquire whether the loan proceeds will be used to pay any cost associated with estate planners as outlined in the rule and provide any explanation or clarification for the use of the HECM proceeds. The mortgagee must inform the borrower that these services are unnecessary to obtain a HECM loan and are ineligible for payment from HECM proceeds. Although the borrower has received a Good Faith Estimate, the mortgagee must clearly state to the borrower which charges are required to obtain the mortgage and which are not. If the senior homeowner requests up-front funds of 25% or more of the principal limit, the mortgagee must make sufficient inquiry at closing to confirm that the HECM proceeds will not be used for payments to or on behalf of
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an estate planning service firm. The HECM application must be annotated to document that the mortgagee has made inquiry. [Federal Register: January 19, 1999 (Volume 64, Number 11)] [Rules and Regulations] [Page 2983-2988] _____________________________________________________________________Part IV Department of Housing and Urban Development 24 CFR Part 206 Home Equity Conversion Mortgages; Consumer Protection Measures Against Excessive Fees; Final Rule [[Page 2984]] DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 24 CFR Part 206 [Docket No. FR-4306-F-02] RIN 2502-AH10 Home Equity Conversion Mortgages; Consumer Protection Measures Against Excessive Fees AGENCY: Office of the Assistant Secretary for Housing-Federal Housing Commissioner, HUD. ACTION: Final rule. ----------------------------------------------------------------------SUMMARY: This final rule implements several measures designed to provide protection to elderly homeowners in connection with HUD's Home Equity Conversion Mortgage (HECM) insurance program. The HECM program offers FHA-insured first mortgages providing payments to elderly homeowners based on the accumulated equity in their homes. These FHA- insured HECMs are commonly referred to as ``reverse mortgages.'' The rule is designed to protect homeowners in the HECM program from becoming liable for payment of excessive fees for third-party provided services of little or no value. This rule takes into consideration the comments received on a March 16, 1998 proposed rule. EFFECTIVE DATE: February 18, 1999. FOR FURTHER INFORMATION CONTACT: Vance Morris, Director, Home Mortgage Insurance Division, Room 9266, Department of Housing and Urban Development, 451 Seventh Street, SW, Washington, DC 20410. Telephone: (202) 708-2700. (This is not a toll-free number.) For hearing- and speech-impaired persons, this number may be accessed via TTY by calling the Federal Information Relay Service at 1-800-877-8339. SUPPLEMENTARY INFORMATION: Background On March 17, 1997, HUD issued Mortgagee Letter 97-07, which prohibited FHAapproved lenders from being involved in transactions for HECMs referred by estate planning entities charging what HUD deemed to be exorbitant fees. Two estate planners engaged in the business of making referrals for reverse mortgages sued, seeking a temporary restraining order (TRO) and preliminary injunction to require HUD to withdraw the Mortgagee Letter on the ground that notice and comment rulemaking procedures should have been followed. A TRO was issued on March 26, 1997, and a preliminary injunction followed on April 11, 1997. Mortgagee Letter 97-07 was then withdrawn. Due to the Secretary's concern about the need to protect senior citizens from practices that may subvert the HECM process, the Secretary decided that HUD should issue a proposed rule based on the consumer protection authority contained in section 255 of the National Housing Act as it then existed
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(see proposed rule published on March 16, 1998, 63 FR 12930). With respect to the FHA insurance program for HECMs, current FHA requirements strictly limit the fees that a mortgagee can collect. The FHA regulations currently do not have any express provisions that protect mortgagors from fees collected by third parties. The proposed rule was intended to fill that gap. The public comment period ended on May 15, 1998, and HUD has taken these comments into account in the preparation of this final rule. Congress has now enacted legislation to specifically address the problem to which the proposed rule was directed, and this action makes it unnecessary for HUD to rely solely on the previously-existing authority under the National Housing Act. Section 593(e) of the Departments of Veterans Affairs and Housing and Urban Development, and Independent Agencies Appropriations Act, 1999 (P.L. 105-276 approved October 21, 1998) amended section 255 of the National Housing Act to require that: (1) a HECM shall have been executed by a mortgagor who has received full disclosure, as prescribed by the HUD Secretary, of all costs charged to the mortgagor, which disclosure shall clearly state which charges are required to obtain the HECM and which are not, and (2) a HECM shall have been made with such restrictions as the HUD Secretary determines to be appropriate to ensure that the mortgagor does not fund any unnecessary or excessive costs for obtaining the HECM. Section 593(e)(2) directs HUD to issue a final rule no later than 90 days after section 593(e) takes effect (i.e., by January 19, 1999), after notice and opportunity for public comment. Section 593 does not require that the notice and public comment procedure occur after, rather than before, enactment of section 593. HUD has concluded that the previously published proposed rule is fully consistent with the requirements of section 593, with one exception, and that all interested persons have been provided with an adequate opportunity for public comment, consistent with the desires of the Congress and the demands of HUD's ``rule on rules'' in 24 CFR part 10. In order to address the one exception, HUD is adding an express requirement (based on statutory language) for a statement to the mortgagor of which charges are required and which are not. Therefore, HUD is proceeding with this final rule after considering the public comment previously submitted. Section 593(e) also provides for immediate implementation of section 593, even in advance of consideration of public comments, through an interim notice procedure, if necessary. HUD already had received and reviewed public comments on the proposed rule by the time section 593 took effect and has taken those comments into account in this final rule. Therefore, HUD believes the procedure that it has followed, which accorded the public an opportunity to comment on a proposed rule that addressed the subjects of section 593(e), more than satisfies the intent of section 593. This rule amends an existing regulation by increasing the information available to mortgagors and by limiting the manner in which funds are disbursed. The Catalog of Federal Domestic Number for the HECM program is 14.183. List of Subjects in 24 CFR Part 206 Aged, Condominiums, Loan programs--housing and community development, Mortgage insurance, Reporting and recordkeeping requirements. Accordingly, part 206 of the Code of Federal Regulations is amended as follows:
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PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE 1. The authority citation for part 206 continues to read as follows: Authority: 12 U.S.C. 1715b, 1715z-20; 42 U.S.C. 3535(d). 2. Section 206.3 is amended by adding a new definition of ``estate planning service firm'' to read as follows: Sec. 206.3 Definitions. * * * * * Estate planning service firm means an individual or entity that is not a mortgagee approved under part 202 of this chapter or a housing counseling agency approved under Sec. 206.41 and that charges a fee that is: (1) Contingent on the homeowner obtaining a mortgage loan under this part, except the origination fee authorized by Sec. 206.31 or a fee specifically authorized by the Secretary; or (2) For information that homeowners must receive under Sec. 206.41, except a fee by: (i) A housing counseling agency approved under Sec. 206.41; or (ii) An individual or company, such as an attorney or accountant, in the bona fide business of generally providing tax or other legal or financial advice; or (3) For other services that the provider of the services represents are, in whole or in part, for the purpose of improving an elderly homeowner's access to mortgages covered by this part, except where the fee is for services specifically authorized by the Secretary. * * * * * 3. A new Sec. 206.29 is added to read as follows: Sec. 206.29 Initial disbursement of mortgage proceeds. Mortgage proceeds may not be disbursed at the initial disbursement or after closing (upon expiration of the 3-day rescission period under 12 CFR part 226, if applicable) except: (a) Disbursements to the mortgagor, a relative or legal representative of the mortgagor, or a trustee for benefit of the mortgagor; (b) Disbursements for the initial MIP under Sec. 206.105(a); (c) Fees that the mortgagee is authorized to collect under Sec. 206.31; (d) Amounts required to discharge any existing liens on the property; (e) An annuity premium, if the premium was disclosed as part of the total cost of the mortgage under the disclosures required by 12 CFR part 226; and (f) Funds required to pay contractors who performed repairs as a condition of closing, in accordance with standard FHA requirements for repairs required by appraisers. 4. A new Sec. 206.32 is added as follows: [[Page 2988]] Sec. 206.32 No outstanding unpaid obligations. In order for a mortgage to be eligible under this part, a mortgagor must establish to the satisfaction of the mortgagee that: (a) After the initial payment of loan proceeds under Sec. 206.25(a), there will be no outstanding or unpaid obligations incurred by the mortgagor in connection with the mortgage transaction, except for repairs to the property required under Sec. 206.47 and mortgage servicing charges permitted under Sec. 206.207(b); and (b) The initial payment will not be used for any payment to or on behalf of an estate planning service firm. 5. Section 206.41 is amended by revising paragraph (b) to read as follows: Sec. 206.41 Counseling. * * * * * (b) Information to be provided. A counselor must discuss with the mortgagor: (1) The
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information required by section 255(f) of the National Housing Act; (2) Whether the mortgagor has signed a contract or agreement with an estate planning service firm that requires, or purports to require, the mortgagor to pay a fee on or after closing that may exceed amounts permitted by the Secretary or this part; and (3) If such a contract has been signed under Sec. 206.41(b)(2), the extent to which services under the contract may not be needed or may be available at nominal or no cost from other sources, including the mortgagee. * * * * * 6. A new Sec. 206.43 is added to read as follows: Sec. 206.43 Information to mortgagor. (a) Disclosure of costs of obtaining mortgage. The mortgagee must ensure that the mortgagor has received full disclosure of all costs of obtaining the mortgage. The mortgagee must ask the mortgagor about any costs or other obligations that the mortgagor has incurred to obtain the mortgage, as defined by the Secretary, in addition to providing the Good Faith Estimate required by Sec. 3500.7 of this title. The mortgagee must clearly state to the mortgagor which charges are required to obtain the mortgage and which are not required to obtain the mortgage. (b) Lump sum disbursement. (1) If the mortgagor requests that at least 25% of the principal limit amount (after deducting amounts excluded in the following sentence) be disbursed at closing to the mortgagor (or as otherwise permitted by Sec. 206.29), the mortgagee must make sufficient inquiry at closing to confirm that the mortgagor will not use any part of the amount disbursed for payments to or on behalf of an estate planning service firm, with an explanation of Sec. 206.32 as necessary or appropriate. (2) This paragraph does not apply to any part of the principal limit used for the following: (i) Initial MIP under Sec. 206.105(a) or fees and charges allowed under Sec. 206.31(a) paid by the mortgagee from mortgage proceeds instead of by the mortgagor in cash; and (ii) Amounts set aside under Sec. 206.47 for repairs, under Sec. 206.205(f) for property charges, or Sec. 206.207(b). Dated: January 12, 1999. William C. Apgar, Assistant Secretary for Housing-Federal Housing Commissioner. [FR Doc. 99-1084 Filed 1-15-99; 8:45 am] March 8, 2000 MORTGAGEE LETTER 00-10 SUBJECT: Revisions to the Home Equity Conversion Mortgages (HECMs) Program The Department is continuing its efforts to both promote the HECM program and deliver this valuable product more efficiently to seniors. Recently, Congress converted the HECM program from a temporary program to a permanent one and also increased the number of HECM loans that FHA can insure to 150,000. Congress also increased the maximum mortgage amounts available under this program. This Mortgagee Letter implements a number of changes to the HECM program to increase its availability and further streamline the process for mortgage lenders. These changes are effective immediately.
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Increase in Loan Origination Fee --Must Cover Mortgage Broker or Loan Correspondent Fee FHA permits a lender to charge a loan origination fee agreed upon by the borrower and lender. However, we are now capping the amount of the origination fee that can be charged the borrower and also permitting the borrower to finance the entire amount of the fee. The origination fee amount will now be limited to the greater of $2000 or 2 percent of the maximum claim amount on the reverse mortgage. The financed origination fee is now the full amount that the borrower can pay for the origination and underwriting of the mortgage and must also include the full amount of any mortgage broker fee or loan correspondent fee. The borrower is not permitted to pay any additional origination fees of any kind to a mortgage broker or loan correspondent. Lenders are reminded that a mortgage broker fee can be included as part of the origination fee only if the mortgage broker is engaged independently by the homeowner and that a mortgage broker's fee is prohibited if there is any financial interest between the mortgage broker and lender. A copy of the agreement between the borrower and the mortgage broker to pay the broker fee must be submitted along with the loan application and other documents in the binder submitted to FHA. Consequently, the Home Equity Conversion Mortgage Loan Agreement section 2.2.1 is amended to: 2 2.2.1. Loan Advances shall be used by Lender to pay, or reimburse Borrower for, closing costs listed in the Schedule of Closing Costs (Exhibit 2) attached to and made a part of this Loan Agreement, provided that Loan Advances will only be used to pay origination fees in an amount not exceeding the greater of $2,000 or 2 percent of the maximum claim amount, nor shall the Lender charge the Borrower an origination fee in excess of this amount. Counseling Certificates In all circumstances the borrower must receive reverse mortgage counseling. The Certificate of HECM Counseling includes a 180-day expiration period. Provided the homeowner applies for a HECM within 180 days of signing the certificate, there is no need to obtain an updated certificate. Further, when the loan is being applied for by more than one homeowner, as long as at least one homeowner's signature on the certificate is within the 180-day expiration period, the lender may consider the counseling certificate as being valid for all borrowers on the loan. In addition, those borrowers that received the counseling more than 180 days previously but do not believe that a second session would be useful may also waive the expiration date in writing. HECM Counseling Provided by Fannie Mae On October 15, 1999, Fannie Mae began providing telephone counseling for homeowners contemplating using FHA's HECM loans. This service will be offered under a one-year pilot. Fannie Mae will provide counseling under any of the following circumstances: a) HUD-approved counseling is not available within 50 miles of the homeowner's residence, or b) The HUD-approved counseling agency has a waiting period of three weeks or more before it can see the homeowner, or c) The local agencies do not provide reverse counseling in the homeowner's native language, or d) The homeowner is unable to travel and the local agencies do not make home visits, or e) The local agency charges a fee for reverse mortgage counseling.
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Face-to-Face Interview Requirement In Mortgagee Letter 98-15 (March 16, 1998), FHA eliminated the face-to-face interview requirement. Those rules, which affected forward mortgages insured by FHA, now also apply to reverse mortgages under the HECM program provided that the homeowner has at least had a face-to-face interview with a HUD-approved reverse mortgage counseling agency. In other words, a face-to-face interview with an acceptable counseling agency may substitute for a face-to-face interview with the mortgage lender. However, please note that the above telephone counseling provided by Fannie Mae cannot also substitute for the lender's face-to-face interview. With or without a face-to-face interview, the lender remains completely accountable for positively identifying the applicant and assuring that the homeowner is eligible based on his or her age for the HECM loan. Revised Appraisal Disclosure Requirements Mortgagee Letter 99-18 announced numerous changes to FHA's appraisal requirements. Please note, however, that the "Importance of Home Inspections" form is not required to be provided on HECM loans.
MORTGAGEE LETTER 2004-25 Subject: . SUBJECT: Home Equity Conversion Mortgage (HECM) Program -- Clarification of
HECM Counseling Requirements The purpose of this Mortgagee Letter is to clarify the housing counseling requirements of the HECM program. Specifically, this Mortgagee Letter addresses: a) When a potential mortgagor must be referred for counseling; b) The acceptable listing of entities eligible to provide HECM counseling to which a client must be referred; c) The topics that must be covered in a counseling session; d) The types of counseling that are permissible; e) Acceptable means of documenting that a potential HECM borrower has received counseling; f) The counselor’s responsibility for referring potential mortgagors to Federal Housing Administration (FHA)-approved HECM lenders; and g) How to notify the Department of Housing and Urban Development of concerns regarding the services of a HECM lender or HECM counselor. All of the policies covered by this Mortgagee Letter are included in various policy documents, including Section 255 of the National Housing Act, 24 CFR 206.41, Mortgagee Letters 00-10 and 0039, and Handbook 4235.1, REV 1. This Mortgagee Letter clarifies and consolidates the FHA’s requirements. Given that some mortgagees and counseling agencies were confused about FHA’s requirements and were not complying with the policies stated in this Mortgagee Letter, FHA will provide mortgagees and counseling agencies time to bring their operations into compliance. Therefore, all of the policies stated in this Mortgagee Letter take effect 30 days after the publication date.
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Initial Contact between Mortgagor and Mortgagee When a potential HECM mortgagor first contacts or communicates with an FHA-approved mortgagee, the mortgagee must explain that the HECM program requires counseling and refer the client to a list of entities eligible to provide HECM counseling. To satisfy this requirement, the lender must provide the potential HECM borrower with information on the American Association of Retired Persons (AARP) Foundation HECM Counseling network and a list of all HUD-approved housing counseling agencies that offer HECM counseling within the state in which the potential borrower lives. The mortgagee may also provide the client the phone number for Fannie Mae’s telephone counseling service. See below for more details on these eligible counseling entities. The lender may not steer, direct, recommend, or otherwise encourage a client to seek the services of any one particular counseling agency, but must provide the entire listing of agencies located within the state in which the borrower resides, as described above. Further, before, during, or after the counseling session is completed, the lender may not contact a counselor or counseling agency to refer a client; discuss a client’s personal information, including the timing or scheduling of the counseling; or request information regarding the topics covered in a counseling session. Mortgagee Activities Allowed Prior to Counseling HUD recommends and urges mortgagees to refer clients to counseling prior to taking initial application. However, if a mortgagee decides to discuss the program with a potential mortgagor and/or take initial application prior to counseling, the mortgagee may only undertake the following permissible activities: a) explain the HECM program to the potential client; b) discuss whether the potential borrower is eligible; c) provide information regarding the fees and charges associated with the HECM product; d) describe the potential financial implications of a HECM loan for the client; and e) provide the borrower with copies of the mortgage, note, and Loan Agreement. The potential HECM borrower is not obligated to pursue a HECM loan from a lender who takes initial application or discusses the HECM program with the potential mortgagor before the potential mortgagor completes the counseling. Mortgagee Activities Prohibited Prior to Counseling The mortgagee may not order an appraisal, title search, or an FHA case number or in any other way begin the process of originating a HECM loan before the potential mortgagor completes the required counseling. The mortgagee may only proceed to process the initial HECM loan application once the counseling is complete, as evidenced by the signed and dated counseling certificate (described below). Fees and Charges Until the mortgagee receives the required HECM counseling certificate indicating the counseling has been completed, the mortgagee may not charge the borrower an application fee, an appraisal fee, or charge for any other HECM-related services.
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Entities Eligible to Provide HECM Counseling Entities providing HECM counseling must be separate from HECM lending institutions. The only entities eligible to provide HECM counseling are: the AARP Foundation Network HECM Counselors; housing counseling agencies that are approved by HUD, including affiliates of HUDapproved national and regional housing counseling intermediaries; state Housing Finance Agencies that receive grant funding from HUD to offer HECM counseling services; and the Fannie Mae Telephone HECM Counseling Service. AARP Foundation Network Counselors – In response to a 1999 Congressional mandate, HUD worked with the AARP Foundation to develop a national network of expert HECM counselors. Counselors providing services through the AARP Foundation network must pass a rigorous exam and receive continuing education on the HECM program. The AARP Foundation counselors work at HUD-approved housing counseling agencies and provide both face-to-face counseling and telephone counseling services. HUD has established no conditions or requirements that limit the number or type of clients that may receive HECM counseling through the AARP Foundation network. HUD encourages lenders to inform all potential HECM borrowers that any client seeking HECM counseling may receive counseling services from an AARP Foundation counselor. The phone number for the AARP Foundation counseling service is 202-434-6082 (not a toll free number). Consumers can also obtain a listing of reverse mortgage counselors in the AARP Foundation network on the web at: http://www.hecmresources.org/network.cfm HUD-Approved Housing Counseling Agencies – The list of HUD-approved housing counseling agencies (including affiliates of HUD-approved national and regional intermediaries) and state housing finance agencies that provide HECM counseling services is available on HUD’s website. This listing arrays agencies in alphabetical order by state, then by city. Lenders, as well as the general public, may obtain a copy of the most recent listing of the HECM housing counseling agency directory at: http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm Fannie Mae Telephone HECM Counseling – Fannie Mae has an agreement with HUD to provide telephone counseling services to potential HECM borrowers under a very limited set of circumstances. See the Telephone Counseling section of this mortgagee letter for the criteria that must be met for a client to receive telephone counseling from Fannie Mae. Topics to be Covered Financial Implications of and Alternatives to a HECM In accordance with the HECM statute and regulations, the following information must be provided to the potential HECM borrower: a) options, other than a HECM, that are available to the homeowners, including other housing, social service, health, and financial options; b) other home equity conversion options that are or may become available to the homeowner, such as other reverse mortgage products, sale-leaseback financing, deferred payment loans, and property tax deferral; c) the financial implications of entering into a HECM; d) a disclosure that a home equity conversion mortgage may have tax consequences, affect eligibility for assistance under federal and state programs, and have an impact on the estate and heirs of
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the homeowners; and whether the potential HECM mortgagor has signed a contract or agreement with an estate planning firm that requires, or purports to require, the mortgagor to pay a fee on or after closing that may exceed amounts permitted by the Secretary under 24 CFR part 206 and the extent to which these services may not be needed or may be available at nominal or no cost from other sources, including the mortgagee (24 CFR 206.41(b)). In providing information on the financial implications of entering into a HECM, a counselor must cover, at a minimum: a) the advantages and disadvantages of each payment plan; b) the steps followed in determining the borrower’s principal limit, including all loan costs and set-asides; c) the increase in the loan balance and likely decrease in the borrower’s equity over time; d) the growth of the HECM line of credit; and e) the borrower’s ongoing responsibility to pay property taxes, ground rents, and insurance either directly or indirectly by electing to require the mortgagee to withhold funds from monthly payments or to charge such funds to a line of credit. HECM Calculation Software In providing this information, a counselor should use computer printouts generated by HUD’s software, or similar software generating the same information, for calculating the maximum funds available to HECM borrower(s) and payment plan options. The HUD HECM software was recently updated and the most recent version must be used. For agencies that have never installed the HECM software, it can be downloaded from: http://www.hud.gov/offices/hsg/sfh/hecm/hecminst.cfm. For agencies already using the software, the upgrade can be downloaded from: http://www.hud.gov/pub/chums/hecm_upgrade.html. Costs to Obtain a HECM Finally, counselors must explain for all HECM clients: what costs are required to obtain a HECM loan; the maximum amount HUD permits a mortgagee to charge for specific loan costs; which loan costs are the same for every lender and which costs may vary from lender to lender. Prohibition on Dissemination of Specific Loan Product Information A counselor must never provide information on the specific prices charged by any individual lender, because prices are subject to market fluctuations and may depend on variables that are not constant from client to client. The counselor should tell the client that information on prices must come from a loan officer. If a client presents a counselor with detailed information on a variety of loans offered by multiple lenders, the counselor may help the client compare the costs by pointing out the features described above (i.e., what costs are required, what HUD permits, what costs may vary and which may not). Counseling Certificate All parties shown on the property deed must receive counseling in order to obtain a HECM loan. For borrowers lacking legal competency, the counseling session may be conducted with a person holding a durable power of attorney, or with a court-appointed conservator or guardian (as specified in
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Handbook 4235.1, REV-1, paragraph 4-6). When the counseling session is successfully completed, the counseling agency will issue a certificate stating that counseling was provided. All owners shown on the property deed are eligible mortgagors and each of them (or legal representative, as described above) must sign the counseling certificate. In the event that multiple parties shown on the deed are not located in the same place, counseling may be provided to these parties by one counseling agency via teleconference call or the individuals may receive counseling separately from distinct counseling agencies. So long as one party participating in the counseling resides in the state where the counseling agency conducting the telephone counseling is located, the counseling agency may offer this service across state boundaries. If the potential HECM mortgagors choose to receive counseling from separate counseling agencies, each of the parties would sign a separate HECM counseling certificate. The certificate must contain the name of the counselor, the name of the counseling agency, and the Employer Identification Number (EIN) of the counseling agency. In addition, the certificate must be signed and dated by both the counselor and all potential mortgagors, indicating the counseling has been completed. The counselor must also provide the actual expiration date for the certificate. The certificate will expire 180 calendar days from the date the counseling was completed. A sample certificate is attached for your convenience. This sample certificate replaces the sample previously provided by FHA in Handbook 4235.1, REV-1, Appendix 16. Consistent with the other provisions of this mortgagee letter, the new certificate must be used for all prospective HECM mortgagors referred for counseling 30 days after the mortgagee letter is published. Mortgagee Responsibilities Regarding Counseling Certificate The mortgagee must take initial application from a prospective mortgagor before the counseling certificate expires, but it is not necessary for a loan to close before the certificate expires. FHA prohibits the mortgagee and/or the potential mortgagor from waiving the certificate expiration date. The mortgagee must verify that the housing counseling entity listed on the certificate is an entity that HUD has deemed eligible to provide HECM counseling. To do so, the mortgagee may check the name of the counseling agency identified on the certificate against the HUD’s listing of eligible HECM counseling entities, provided on HUD’s website. As mentioned above, a mortgagee may not order an appraisal or request an FHA case number until the potential borrower completes the required counseling and presents the lender with the counseling certificate. Permissible Types of Counseling Face-to-Face Counseling HUD expects potential HECM borrowers to meet face-to-face with a counselor to discuss their unique financial circumstances and decide what housing options are best for them. Face-to-face counseling
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enables the counselor to assess whether the homeowner understands the features of the HECM program and the financial implications of a HECM on his/her household. Telephone Counseling Should telephone counseling be necessary, the AARP Foundation Network of HECM counselors is the only entity permitted by HUD to provide telephone counseling with no special conditions or limitations. As mentioned above, AARP Foundation counselors work at HUD-approved housing counseling agencies and provide both face-to-face counseling and telephone counseling services. HUD has established no conditions or requirements that limit the circumstances under which a client may receive HECM counseling through the AARP Foundation network. In other words, any client, located anywhere in the country and under any circumstances, may receive telephone counseling from an AARP Foundation counselor. Local housing counseling agencies (including affiliates of national and regional intermediaries) may provide telephone counseling only under a limited set of circumstances and only to clients residing in the state where the agency is approved to operate. Only under the following circumstances may a local housing counseling agency whose counselors are not part of the AARP Foundation network offer telephone counseling: the potential borrower has a mobility problem or medical condition that will affect his or her ability to travel to the local counseling agency or no counseling agency is located within 50 miles of the borrower’s home. HUD encourages local agencies to refer clients in need of telephone counseling to the AARP Foundation Network of expert HECM counselors. If a local agency receives a telephone inquiry from a caller who resides in a state that is different from that where the agency is located, the agency must refer that caller to the AARP Foundation counselors or to an agency in the caller’s state, which can be obtained by looking at the listing of agencies on HUD’s web site.
Fannie Mae has an agreement with HUD to provide telephone counseling services to potential HECM borrowers, if any one of the following circumstances apply: a) There is no HUD-approved counseling agency within 50 miles of the potential HECM borrower’s home; b) The local counseling agencies do not provide reverse mortgage counseling in the potential mortgagor’s language; c) There is a waiting period of three or more weeks for a reverse mortgage counseling appointment; d) The potential HECM mortgagor is unable or unwilling to travel and the local agency does not make home visits; or e) The potential HECM mortgagor is experiencing an emergency such as foreclosure of his/her present home and no counseling is immediately available in the local area. Fannie Mae’s toll-free counseling service can be reached at 800-732-6643, weekdays, from 9:00 am to 5:00 pm, Eastern Standard Time.
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Exceptions to HECM Counseling Requirement In accordance with the provisions of 24 CFR Part 206.53, HUD may waive the HECM counseling requirement for HECM mortgagors who are refinancing into a new HECM mortgage and choose not to receive counseling, only if the following conditions are met: a) the HECM mortgagor received the anti-churning disclosure form required by law; b) the increase in the mortgagor’s principal limit exceeds the total cost of the refinancing by 5 times; and c) the timing between the closing on the original HECM loan and the date of the application for refinancing does not exceed five years. See Mortgagee Letter 04-18 for more details on this subject. Lender Steering Housing counseling agencies are not permitted to promote, represent, recommend, or speak for any specific lender. Potential borrowers seeking assistance in locating a lender may be referred to HUD’s listing of approved HECM lenders located at: http://www.hud.gov/ll/code/llplcrit.html. Concerns or Complaints Regarding a HECM Lender or HECM Counselor If a consumer, lender, counselor, or representative from the housing industry has a concern or complaint about the services provided by a particular HECM lender or HECM counselor, they should immediately contact the homeownership center in their jurisdiction. Toll-free contact numbers for the Homeownership Centers are: Philadelphia (800) 440-8647; Atlanta (888) 696-4687; Denver (800) 543-9378; and Santa Ana (888) 827-5605. Information Collection Requirements The information collection requirements referred to in this Mortgagee Letter have been approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). The OMB number issued for this requirement is OMB 2502- 0546 If you have questions regarding this Mortgagee Letter, please contact your local Homeownership Center (HOC). The toll-free numbers for the four HOCs are listed above
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December 30, 2004 MORTGAGEE LETTER 2004 - 48 SUBJECT: Home Equity Conversion Mortgage (HECM) Counseling Requirements Simplified The purpose of this Mortgagee Letter is to provide additional guidance to the Federal Housing Administration (FHA) approved mortgagees and the Department of Housing and Urban Development’s approved housing counseling agencies serving prospective HECM borrowers. Mortgagee Letter 04-25, “Clarification of HECM Counseling Requirements,” elicited questions and comments from lenders and counselors. To ensure that all seniors pursuing HECM loans are able to obtain high-quality HECM counseling in a timely manner, this FHA Mortgagee Letter: a) provides guidance on face-to-face interview requirements for HECM borrowers; b) provides additional guidance regarding when telephone counseling is permissible and what entities may provide telephone counseling; c) simplifies the identification of eligible HECM counseling agencies; and d) describes HUD’s creation of and ongoing support for the American Association of Retired Persons (AARP) Foundation Network of expert HECM counselors. Face-to-Face Requirements for HECM Loans Mortgagee Letter 00-10 clarifies FHA’s requirement (stated in Handbook 4000.2, REV-2, Chapter 3) that senior citizens applying for HECMs receive a face-to-face interview with either the Mortgagee or the HUD-approved housing counseling agency. The Mortgagee may elect to routinely conduct the face-to-face interview with the borrower and have the borrower counseled by a HUD-approved housing counseling agency by telephone. However, any prospective borrower who requests face-toface meetings with both the lender and the counselor must be accommodated. Telephone Counseling Requirements for HECM Loans As stated in Mortgagee Letter 04-25, FHA prefers face-to-face counseling for HECM borrowers. However, FHA recognizes that many seniors prefer telephone counseling to face-to-face counseling for a variety of reasons, including limited mobility and health conditions. For seniors who cannot or who choose not to travel to a housing counseling agency and who cannot be visited by a counselor in their home, FHA permits telephone counseling. Telephone counseling may be provided by agencies approved by HUD to offer HECM counseling, including: a) local HUD-approved housing counseling agencies; b) affiliates or branches of HUDapproved national and regional counseling organizations located in the area where the prospective HECM borrower resides; c) State Housing Finance Agencies (HFAs) funded by HUD to provide HECM counseling (and their affiliates, if applicable); d) the AARP Foundation Network of expert HECM counselors; and e) the Fannie Mae HECM Counseling hotline, under a limited set of circumstances, which are described in Mortgagee Letter 04-25.
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Local agencies and local affiliates of national, regional, or state organizations may provide telephone counseling within the state where the agency is located or within a contiguous state only under the following circumstances: a) HUD has approved the agency to operate in a defined service area that covers more than one state and b) the agency’s out-of-state service area is clearly defined in its housing counseling plan and the agency has the capacity to serve the extended service area. HUD approval for an out-of-state service area is based on an assessment of the agency’s administrative and financial capacity to serve a broader geographic area. This clarification of the appropriate jurisdiction of a local housing counseling agency or affiliate recognizes that many agencies are serving metropolitan areas that cross state lines or are serving rural areas where few agencies are located and one agency covers a portion of two states. In accordance with Handbook 7610.1, REV-4 and HUD Form 9900 Application for HUD Approval as a Housing Counseling Agency, HUD expects that local counseling agencies and local affiliates serve residents within their state or general geographic area. For HECM counseling, this policy helps to ensure that counselors fulfill the statutory requirement that prospective borrowers receive information on alternatives to a HECM. State and local agencies familiar with state and local programs are well qualified to assist seniors in meeting their financial needs. As stated in Mortgagee Letter 04-25, HECM counselors with the AARP Foundation Network may provide counseling services by telephone to anyone in the country. The AARP Foundation HECM counselors are specialized to cover particular states and are trained to know about a wide variety of state and local programs available to seniors in those particular states. Availability of HUD-Approved Agencies offering HECM Counseling HUD has approved approximately 800 housing counseling agencies to provide HECM counseling. There are agencies located in 49 states. HUD continues to add new agencies to the list. Lender’s List of HUD-Approved Housing Counseling Agencies FHA has required that lenders provide prospective HECM borrowers with a list of all HECM counseling agencies serving the state in which the prospective borrower resides. The standard state listing was intended to ensure that lenders were not steering seniors to any particular agency. It has come to HUD’s attention that many seniors find the listing of all HECM counseling agencies to be excessively long and confusing. Therefore, FHA will now permit lenders to provide prospective HECM borrowers with a list of no fewer than five HUD-approved agencies in the local area and/or state that can provide HECM counseling (except in cases where fewer than five agencies are serving a particular state). The lender must include at least one agency located within a reasonable driving distance from the prospective borrower, so that the prospective borrower is able to receive face-toface counseling if he/she chooses. In addition to the five local agencies, the list must include the AARP Foundation Network of HECM Counselors toll-free number: 800-209-8085. Should a prospective borrower request the list of all agencies serving the state, the lender must provide this listing rather than the abbreviated list.
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AARP Foundation’s HECM Counseling Network Established and Supported with HUD Funding Congress established a special set-aside of funding for HECM Counseling in HUD’s FY1999 Appropriations Act. Given the complexity of the HECM program and the importance of providing seniors with comprehensive and accurate information, HUD determined that the best use of the funds was to build the capacity of HECM counselors. The initial set-aside of funding was awarded in FY2000 to AARP Foundation, who proposed to partner with HUD, Fannie Mae, the National Reverse Mortgage Lenders Association (NRMLA), the Mortgage Bankers Association of America (MBAA), and experienced reverse mortgage counselors to improve the quality and availability of reverse mortgage counseling nationwide. Since FY2000, more than $3 million in HUD counseling grant funds have been dedicated to the creation and maintenance of a national network of expert HECM counselors. The industry has adopted the term “AARP counselor” to refer to the expert counselors who are selected to participate in the AARP Foundation’s HECM Counseling Network. However, it should be noted that these counselors work for HUD-approved agencies and receive HUD funding to provide HECM Counseling. These counselors are not employees of AARP. The AARP Foundation provides oversight and guidance for the Network on HUD’s behalf. Currently, the Network has 91 counselors working for 58 HUD-approved local agencies in 34 states. FHA commends the AARP Foundation and its partners for creating a HECM Counseling system that is effective and efficient. Each year, the Network meets the counseling needs of thousands of seniors. Seniors who receive services from counselors in this Network consistently praise the quality of the counseling and professionalism of these counselors. Quality Standards and Uniform Protocols To be eligible to join the AARP Foundation’s HECM Counseling Network, a counselor must: a) work for a HUD-approved housing counseling agency; b) achieve a qualifying score on a national HECM exam; c) follow uniform counseling protocols, which stipulate appropriate procedures for servicing clients and the topics that must be covered; d) track all HECM clients using specialized HECM Counseling software; and e) participate in ongoing education and training. Successful Model The AARP Foundation HECM Counseling Network model has proven to be a success. The Network enables HUD to financially support housing counselors who have the knowledge and skills necessary to provide HECM counseling and to ensure that these counselors continue to be experts in the field.
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HUD plans to continue to expand the Network. The AARP Foundation is working with HUD to offer the HECM counselor qualifying exam on a regular basis, to permit more experienced HECM counselors to join this unique, highly-qualified team of experts. Any HECM lenders or counselors with questions about this Mortgagee Letter or seeking additional information about the HECM Counseling Network should contact the Homeownership Center in its jurisdiction: Atlanta (888-696-4687), Denver (800-543-9378), Philadelphia (800-440-8647), or Santa Ana (888-827-5605). November 1, 2005 MORTGAGEE LETTER 2005-44 SUBJECT: Home Equity Conversion Mortgage (HECM) Program – Expanded National HECM Counseling Network The purpose of this Mortgagee Letter is to announce an expanded network of HECM counselors approved by the Department of Housing and Urban Development (HUD) to provide faceto-face and telephone HECM counseling nationally. Increasing demand for HUD’s HECM product by senior citizens, the fastest growing segment of the population, has put pressure on the counseling industry to meet the demand for the required counseling. Specifically, this Mortgagee Letter expands the network of counselors permitted to provide face-to-face and telephone HECM counseling nationally in order to meet the growing demand for this specialized counseling. National HECM Counseling Network To make sufficient quality HECM counseling available, HECM counselors from the National Foundation for Credit Counseling (NFCC) and Money Management International (MMI) are now permitted to provide face-to-face and telephone counseling nationally. NFCC and MMI are high performing HUD-approved national housing counseling intermediaries that administer HUD housing counseling funds and significant leveraged resources through affiliates and branches with strong experience in providing quality HECM counseling. Previously, Mortgagee Letter 2004-25 authorized specific organizations and organization types to provide telephone HECM counseling, and outlined the specific conditions applicable to each organization. Fannie Mae, for example, can provide telephone counseling services to potential HECM borrowers in situations where there are no HUDapproved counseling agencies within 50 miles of the potential borrower’s home, and a handful of other circumstances. By contrast, Mortgagee Letter 2004-25 made clear that the AARP Foundation Network of HECM counselors was the only entity permitted by HUD to provide telephone counseling with no special conditions or limitations. This Mortgagee Letter extends that status to NFCC and MMI. Now, any potential HECM borrower, located anywhere in the country and under any circumstances, may receive telephone counseling from a HECM counselor from NFCC, MMI or the AARP Foundation.
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Toll-Free Telephone Numbers Consumers can access these three entities through the following toll-free numbers, which will also be listed on HUD’s website: National Foundation for Credit Counseling (NFCC) – 1-866-698-6322 Money Management International (MMI) – 1-877-908-2227 AARP - 1-800-209-8085 Continued Expansion of the Network To ensure the long-term availability and accessibility of high quality HECM counseling, both face-to-face and via telephone, HUD intends to continue to expand this new network of HECM counselors approved by HUD to provide face-to-face and telephone HECM counseling nationally. HUD plans to establish an FHA Roster of National HECM Counselors consisting of counselors from HUD-approved housing counseling agencies, sub-grantees and branches of HUD-approved housing counseling intermediaries, and sub-grantees of State Housing Finance Agencies (SHFAs) that successfully pass a HECM counseling exam administered by HUD. All trained and tested HECM counselors will be eligible to provide HECM counseling nationwide face-to-face or by telephone. It is HUD’s intention to offer the exam on a continuous basis, beginning in early 2006, through testing centers across the country. HECM Lender Activities Allowed Prior to Counseling Because there is currently not enough accessible HECM counseling to meet the growing demand, a growing number of potential HECM borrowers are unable to receive HECM counseling in a timely manner. The expanded National Network of HECM Counselors described in the Mortgagee Letter is designed to make quality HECM counseling more available in order to not delay the process unnecessarily. To further ensure that HECM loans can be closed in a timely manner, this Mortgagee Letter also imposes a moratorium on the provisions in Mortgagee Letter 2004-25 prohibiting mortgagee activities prior to counseling. As of the publication date of this Mortgagee Letter, through December 31, 2005, HECM lenders may begin the process of originating a HECM loan, including ordering an appraisal, title search, or an FHA case number, before the potential mortgagor completes the required counseling and the HECM lender is in receipt of a signed and dated counseling certificate. Beginning January 1, 2006 the temporary moratorium expires and the provisions in Mortgagee Letter 2004-25 related to mortgagee activities prohibited prior to counseling go back into effect. The moratorium does not apply to related fees. Although the HECM lender may process the application, appraisal fees, and fees for any other HECM-related services may not be charged to the prospective HECM borrower until the counseling is completed.. The procedures stated in this Mortgagee Letter take effect immediately. All other HUD HECM counseling guidelines and provisions not superceded by this Mortgagee Letter, including those
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regarding what must be covered in a HECM counseling session, and others contained in Mortgagee Letters 2004-25 and 2004-48, remain in effect. If you have any questions regarding this Mortgagee Letter, please contact your local Homeownership Center (HOC) in Atlanta (888-696-4687), Denver (800-543-9378), Philadelphia (800-440-8647), or Santa Ana (888-827-5605). 17 March 2006 MORTGAGEE LETTER 2006-06 SUBJECT: Home Equity Conversion Mortgage Program – Line of Credit Payment Option for Texas- Single Family Effective for all Home Equity Conversion Mortgages (HECM) closed on or after March 1, 2006, the Federal Housing Administration (FHA) will permit borrowers in Texas to choose a line of credit payment option. The provisions contained in this Mortgagee Letter will replace previously issued guidance found in Mortgagee Letter 00-09, ML 00-34, and ML 00-39 on the same topics. Background On March 8, 2000, in ML 00-09, FHA announced that only certain payment options were available for HECM loans originated in the State of Texas. At that time, the Texas Constitution: 1) restricted the line of credit payment option, thereby limiting homeowners to 3 payment plan options (lump sum at closing, term and tenure) and 2) placed special restrictions on mortgage acceleration due to non-occupancy and homeowner’s refusal to allow the lender to inspect the property. On November 8, 2005, voters in Texas ratified an amendment to the Constitution to authorize line of credit advances under home equity reverse mortgages. With the amendment being ratified on November 23, 2005, elderly homeowners now have the flexibility to select from five (5) HECM payment options, which are currently available to all HECM borrowers. The five HECM payment options are: Tenure (regular monthly payments so long as HECM borrower occupies the property) Term (regular monthly payments for a specific period of time selected by HECM borrower) Line of Credit (unscheduled advances at the HECM borrower’s request) Modified Tenure (combination of tenure and line of credit payment options) Modified Term (combination of term and line of credit payment options) The Constitutional amendment prohibits certain practices in extending lines of credit in reverse mortgage lending1) borrowers are prohibited from using a credit card, debit card, preprinted solicitation checks or similar devices to obtain an advance; 2) after the extension of credit is established, lenders cannot charge or collect a transaction fee solely in connection with any debit or loan advance; and 3) lenders cannot unilaterally amend the terms of the document administering the extension of credit.
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Forms Lenders must adapt all forms to ensure compliance with existing FHA requirements, and Texas Constitution and statutes. Lenders should: • • • • Insert line of credit language that was deleted in 2000; Insert the prohibition on HECM borrowers using a credit card, debit card, preprinted solicitation checks, or similar devises to obtain an advance; Insert the prohibition against lenders charging or collecting a transaction fee solely in connection with any debit or loan advance; and Insert the prohibition against lenders unilaterally amending the terms of the document administering the extension of credit.
The validity and enforceability of the mortgage and note will depend on compliance with state law and therefore HUD emphasizes the need for a lender to adapt the mortgage and note, accordingly. FHA strongly encourages lenders to seek counsel’s advice that State law has been considered and that any necessary changes to the instruments have been made. Loan Agreement – Repair Rider Lenders are no longer required to escrow amounts for repairs completed after closing. Instead, lenders must establish a repair set aside that is at a minimum equal to 150 percent of the cost of repairs, plus the repair administration fee, and consistent with existing HECM policy. The repair administrative fee cannot exceed the greater of one and one-half percent of the funds used for repairs or fifty dollars. Loan Closing Upon the expiration of the three day right of rescission, initial disbursements from the principal limit can be made. After closing, net principal limit disbursements for term and tenure should be disbursed on the first business day of each month. Lenders are required to disburse line of credit payments within five business days of receiving a written request for payment from the HECM borrower. Lenders are subject to late charges from their own funds if they are unable to mail or electronically transfer a scheduled monthly payment on the first business day of the month or make a line of credit payment within five business days after receiving a written request from a HECM borrower for payment. Disbursements by Lender Lenders can disburse payments at any time on behalf of the borrower when the borrower elects to require the lender to use loan advances for payment of property charges consisting of taxes, hazard insurance premiums, ground rents, and special assessments or when repairs are completed after closing
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and the property has been inspected by a HUD-approved inspector. In addition, lenders can disburse payments for the protection of their interest at any time. Events that trigger the disbursement of payments in order to protect the HECM lender’s interest include, but are not limited to: the HECM borrower’s failure to pay property taxes, the HECM borrower’s failure to pay ground rents, the HECM borrower’s failure to pay flood insurance, and the HECM borrower’s failure to pay hazard insurance premiums. Refinancing an Existing HECM Loan HECM borrowers must refinance their existing FHA insured HECM loan to take advantage of the line of credit payment option. The lender should also inform HECM borrowers about reasonable and customary charges that are acceptable to FHA, thereby providing a safeguard against equity stripping, which FHA strictly prohibits. Application of Funds Received by Lender Any funds received by the lender for the benefit of the HECM borrower, such as a condemnation award, may only be credited to the borrower’s account in accordance with the applicable law. Prepayments, however, made by the HECM borrower must be credited to the borrower’s account on the date received by the lender. Acceleration of the Mortgage Although the constitutional amendment now permits the line of credit payment option, special restrictions on mortgage acceleration due to non-occupancy and borrower’s refusal to allow the lender to inspect the property are still in effect. The reasons for accelerating the debt have not changed, however, we are providing the exact language of the Texas Constitution (Article XVI, Section 50 (k)(6)(C)) for your convenience. Mortgage Acceleration, Occupancy --- Article XVI, Section 50(k)(6)(C) of the Texas Constitution provides that a payment of principal or interest is due (i.e., acceleration) when all borrowers cease occupying the homestead property for a period of longer than 12 consecutive months without prior written approval from the lender. Mortgage Acceleration. Property Inspections --- Under 24 CFR 206.27(c )(2)(iii), the mortgagee can accelerate the loan if an obligation of the borrower under the security instrument is not performed. However, the provisions of the Texas State Constitution preclude acceleration for -the homeowner’s refusal to allow the lender to inspect the property. Therefore, for Texas HECMs only, lenders may not accelerate the mortgage due to the homeowner's refusal to allow the lender to inspect the property.
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Foreclosures Lenders are reminded that there are specific foreclosure procedures for HECMs within the State of Texas; therefore, lenders should follow the requirements and instructions outlined in the Texas Constitution (Article XVI, sections 50 (a)(6) and (7)). Foreclosure procedures should be placed under the non-uniform covenants of the Deed of Trust forms. The form should use the foreclosure procedures paragraph of the current approved Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) form (including language regarding payment of costs such as attorney’s fees) as a guide with any necessary adaptation to conform to FHA instructions and applicable law. Any special language or notices required by applicable law should appear following the non-uniform covenants using the Fannie Mae and Freddie Mac form as a guide. If you have any questions regarding this Mortgagee Letter, please contact the Department of Housing and Urban Development’s Denver Homeownership Center at (800) 543-9378.
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Appendix B HECM Calculations
(from Tab 6)
Examples A Maximum Line of Credit (LOC) (also known as Net Principal Limit) Monthly Payment/Tenure Monthly Payment/Term 10 years 15 years Monthly Payment/Tenure with: $ 10,000 LOC $ 30,000 LOC Monthly Payment/10 year Term with: $ 10,000 LOC $ 30,000 LOC 559.83 323.90 588.15 347.10 1,281.87 1,035.64 329.77 190.80 374.14 220.80 1,018.10 822.54 677.80 529.33 708.67 558.19 1,404.98 1,115.89 $57,457.66 B $58,799.01 C $114,120.58
$ 399.26
$ 450.81
$ 1,115.89
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Appendix C The Reverse Mortgage Machine
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Appendix D Total Annual Loan Cost (TALC) Tutorial* Table 1: Which Loan Costs the Least?
LOAN Fees Origination = 2% MIP = 2% + 0.5% on loan balance Servicing = $35/mo Origination = 2% Servicing $30/mo Origination = 2% Servicing = $30/mo No origination fee Servicing = $30/mo No origination fee Servicing = $30/mo Interest 1-yr Treasury + 1.5% adjusted monthly Lifetime cap = 1-yr Treasury + 11.5% 1-mo CD + 3.4% 6-mo LIBOR + 5% lifetime cap = 6-mo LIBOR + 11% 6-mo LIBOR + 5% Lifetime cap = 6-mo LIBOR + 11% 6-mo LIBOR + 5% Lifetime cap = 6-mo LIBOR + 11% Other Usual and customary 3rd-party closing costs
#1
#2 #3
Usual and customary 3rd-party closing costs Usual and customary 3rd-party closing costs 3rd-party closing costs capped at $3,500; must take 75% initial advance No 3rd-party closing costs; must take 100% initial advance
#4
#5
Each of the five reverse mortgage loans described in Table 1 has been offered in the United States. But even though this table tells you all about the costs of these loans, you cannot tell which one costs the least. The categories of cost are different from one loan to another, which makes them almost impossible to compare. Moreover, you don't know how much money a borrower could get from one loan versus another. In "forward" mortgages, the dollar amount of major cost items is directly related to the amount of the proceeds a borrower gets from the loan. In a reverse mortgage this is not always true. *Copyright NCHEC, 1996 Reprinted with permission.
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So now let's simplify the matter by comparing one HECM loan to another. That way the cost categories would be the same, and that should make the loans much easier to compare.
Table 2: Which HECM Costs Less?
LOAN A Age Status Home Value 203-b Limit Interest MIP Closing Servicing 75 single $150K $150K 8% $3,000 $3,500 $30 LOAN B 75 single $150K $150K 8% $3,000 $3,500 $30
So which costs less: the Loan A or Loan B? The categories of cost are the same, and both loans are HECMs. In fact, all of the itemized costs are exactly the same. But there is virtually no likelihood that these two loans will cost the same. In the left hand column you can see that three boxes are blank. This means that three cost factors are missing. Can you guess what they are? Let's take a closer look at these "identical" loans.
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Table 3: Two HECMs at Closing
Loan A Payment Plan LUMP SUM $70,298
Loan B MONTHLY TENURE $562
Net Cash to Borrower Total Financed Costs Loan Balance
$6,500
$6,500
$76,798
$7,062
Here we are outside the bank when Borrower A and Borrower B emerge from their HECM closings with their "identical" loans. The first thing we learn is that Borrower A took the entire loan as an immediate lump sum of cash at closing, and Borrower B took it as a monthly advance only. Borrower A has come away from the deal with $70,298, and when we ask how much it cost her to get it, she tells us $6500, which is the total of all the upfront costs back on Table 2. Now we ask Borrower B how much she paid for her loan, and she tells us the same thing: $6500. But when we ask how much money she got out of the deal, she tells us $562 - so far. So who would you say has gotten the better deal - so far? Both have paid $6500 for the loan, but A now has $70,298 and B has $562. So far, you would have to say that Borrower A has gotten more for the same amount of money - a lot more. But let's not jump to conclusions. Let's wait a while, and see how things develop. What will these "identical" loans look like two years later?
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Table 4: Two HECMs After Two Years
Loan A Payment Plan Net Cash to Borrower Total Costs Balance LUMPSUM $70,298 $21,464 $91,762 Loan B MONTHLY TENURE $562/mo. ($13,488) $9,751 $23,239
Two years later, Borrower A still has gotten only the lump sum she started out with. But now her loans costs total $21,464 - this includes the upfront costs, the monthly servicing fees, and the interest that has been charged on her large lump sum and on her other costs and fees. But the total amount of cash she has gotten is still more than three times greater than her total loan costs. By contrast, Borrower B has now gotten $13,488 ($562 per month for 24 months). But that isn't even anywhere close to two times as much as her total loan costs. So Borrower A has still gotten more bang for her buck. For every dollar in costs she has gotten $3.28 in benefits, while for every dollar in costs Borrower B has gotten only $1.38 in benefits. Borrower B may be starting the long process of catching up to the deal that Borrower A got, but she has a long way to go. Borrower A - so far - has still gotten more for her money. But how would you express that numerically? Take a look at the next table.
Table 5: TALC after Two Years
Loan A Payment Plan Net Cash to Borrower Balance (FV) TALC Rate LUMP SUM $70,298 (PV) $91,762 13.4% Loan B MONTHLY TENURE $562/mo (PMT) $23,239 49.5%
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Do you have a simple financial calculator? If you do, you can try this at home. For Borrower A, punch in $70,298 as the "present value" (how much she got at closing). Then punch in $91,762 as the "future value" (how much she owes after two years). Then punch in 24 months (two years). Now punch the "interest" button to find out what single rate of interest it would take to make $70,298 grow to become $91,762 after two years. The answer (after you've multiplied by 12 to change the monthly rate to an annual one) is 13.4% per year. In other words, if the lender could not charge loan costs in different ways (interest, origination, insurance, closing costs, servicing fees, etc.) but had to roll all of the costs into the interest rate, what would that rate have to be to generate the same future amount owed as you would get by charging the separate costs? That's the Total Annual Loan Cost (TALC) rate. Put another way, if you were charged 13.4% interest on $70,298 for two years, you would owe $91,762. Now let's try it for Borrower B to find out how much more her loan advances have cost her - so far. Punch in $562 as the "payment," $23,239 as the "future value," 24 months (making sure to set the calculator for "beginning of the month" which is when the loan advances are made), and then the interest button. Now multiply by 12. The TALC rate in this case is a whopping 49.5% - confirming our suspicion that Borrower B has paid a lot more for what she's gotten - so far. Why is Borrower B's rate so high? Because her total costs so far ($9,751) are still a very large part of what she owes ($23,239). In fact, these costs are over 40% of her total debt. By contrast, Borrower A's total costs are less than 25% of what she owes and she had all of her money since the very first day of the loan. it’s taken Borrower B two full years to get her money. So far, we have seen that the real cost of these loans depends on the type of loan advances you select, that is, how much money you get, and when you get it. Now let's take a look at another factor you are probably starting see: time.
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Table 6: TALC Rates Over Time
Loan A Payment Plan LUMP SUM Loan B MONTHLY TENURE
TALC Rate after 2 years 12 years 17 years 22 years 13.4% 10.0% 8.3% 7.3% 49.5% 10.8% 9.0% 6.5%
The TALC rate comes down over time for two reasons. First, as the upfront loan costs get spread out over more and more years, they become a smaller part of the total amount owed. Second, as the loan balance rises over time, the likelihood increases that it will catch up to - and then be limited by - the home's value. Remember, reverse mortgages are nonrecourse loans - so you can never owe more than the future value of the home. When a rising loan balance catches up to that value, the borrower cannot owe more than that value. For example, Borrower B has taken monthly advances for as long as she lives in her home ("tenure" advances). Assume that her home value never increases after closing. When her rising loan balance catches up to that non-rising home value, her debt is then capped by the home's value. If that value remains fixed, she will continue getting monthly advances every month, but her loan balance will not increase. And that will drive the TALC rate down at a faster rate. The nonrecourse limit accelerates the decrease in the TALC rate. Even when a home's value grows, the loan balance may still catch up to it and -when it does - be limited by its future value, which will most likely grow at a slower rate than the loan balance otherwise would have (without the nonrecourse limit). If a home's value decreases, on the other hand, a borrower could have a declining debt despite continuing to receive loan advances every month.
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So changes in a home's value are a key factor in determining the loan's total annual average cost. Table 7 shows the effect of home appreciation on the TALC rate. The smaller the appreciation rate, the lower the rate will tend to be over time - because the rising loan balance will catch up to - and then be limited by - the home's value sooner. The larger the appreciation rate, the greater the TALC rate will tend to be over time - because the rising loan balance will not catch up to the home's value as soon - if ever. And if it does, a higher appreciation rate will place less of a cap on the growing loan balance than a smaller rate would. Table 7: TALCs on 3 HECMs Home Appreciate Rate = LUMP SUM @ 2 years @ 12 years @ 17 years CREDITLINE (50% at closing) @ 2 years @ 12 years @ 17 years TENURE (monthly) @ 2 years @ 12 years @ 17 years 49.5 8.4 2.2 49.5 10.8 9.0 49.5 10.8 9.8 19.4 11.0 8.5 19.4 11.0 10.4 19.4 11.0 10.4 13.4 5.9 4.1 13.4 10.0 8.3 13.4 10.0 9.7
0%
4%
8%
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Table 7 also shows the impact of loan advances on the TALC rate. TALC rates on lump sum loans don't vary as much as they do on monthly advance loans. Creditline loans generally fall somewhere in between, depending on how the borrower uses the creditline. If it's used more like a lump sum, the actual TALC rates will be more like lump sum TALCs. If it's used more like a monthly advance, the actual TALCs will be more like monthly advance TALCs. In the official TALC disclosure,, however, lenders are instructed to assume that the borrower will withdraw 50% of the available creditline at closing, and none thereafter. This is the assumption used to project the TALC rates in Table 7. So now we return to our original question. Can you name the three non-cost factors that affect the total annual average cost of a reverse mortgage? As we've seen, they are • • • the pattern of loan advances ("Payments"), how long the borrower lives in the home ("Term"), and what happens to the home's value during that time ("Appreciation").
Curiously, these key cost factors are not controlled by the lender. To the extent that anyone can know at closing how these factors will play out over time, the borrower may have a better sense of each than the lender. But then, the lender who originates the loan generally is not affected financially by its total annual average annual cost rate. The lender's earnings on the loan typically equal the origination fee and some portion of the servicing fee. So lenders generally get paid the same no matter what the loan ends up costing the borrower.
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Revised HECM Counseling Protocol Reverse Mortgage Education Project AARP Foundation - September, 2005
Background The protocol sets forth the policies and procedures that govern the counseling services provided by members of the AARP Foundation’s HECM counseling network. It began as a one-page outline, but has grown larger in response to the many HECMspecific issues that arise when this type of counseling is actively managed. As each issue has arisen, the Foundation’s Reverse Mortgage Education Project has developed procedures or crafted policies to standardize and direct the delivery of HECM counseling services. HUD and industry representatives on the Project’s Advisory Committee have provided significant input into the document, and much of it reflects negotiated outcomes on contentious matters. The protocol provides the detailed guidance that counselors need to deal with the variety of unique situations and circumstances that characterize the HECM market. It plays a central role in generating the high quality ratings given by clients to AARP network counselors. These counselors must achieve the qualifying score on the HECM Counselor Exam and follow this protocol when providing HECM counseling. Revised Version The revised version (September, 2005) incorporates and integrates past additions on faxing HECM certificates to lenders, counseling non-owner and under-age spouses, and a staff commentary on lender steering issues. It also deletes the following procedural requirements: • • • • • provision of generic consumer guide scripted screening of potential clients use of the Project’s online client management system use of the Project’s “overflow” client transfer system required data submissions and follow-up
The Project estimates that these procedural deletions will substantially reduce the amount of time needed to provide HECM counseling that meets the protocol’s requirements. The revised version also deletes a section on ongoing protocol development because it has never been used. Persons concerned about protocol provisions or implementtation have preferred to raise these matters informally. Finally, the revised version includes a change required by HUD that gives each telephone counseling client the option to be counseled before or after receiving the information packet described in section II of Part 1.
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HECM Counseling Protocol Reverse Mortgage Education Project AARP Foundation Revised - September, 2005
Contents Part 1: HECM Counseling Procedures Part 2: HECM Counseling Policies Client Privacy • Elder Abuse • Lender Steering • Product Comparisons • Counseling Spouses
•
3 6 7 8 9 12 13 15 16 17 18 21
Appendixes
• •
Sample Appointment Confirmation Letter Disclosure on HECM Counselors, Lenders, and Loan Costs Handout on Reverse Mortgage Lending Process Handout on Annuities Sample Closeout Letter
•
• •
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HECM Counseling Protocol Reverse Mortgage Education Project AARP Foundation - September, 2005
This document sets forth the policies and procedures that govern Home Equity Conversion Mortgage (HECM) counseling services provided by members of the AARP Foundation’s HECM counseling network. In addition to following this protocol in the provision of HECM counseling services, network counselors must achieve a qualifying score on a uniform national HECM counselor exam developed by the AARP Foundation’s Reverse Mortgage Education Project. The Project, which also provides support services to the HECM counseling network, is funded by the U. S. Department of Housing and Urban Development (HUD) and the AARP Foundation. Part 1 outlines the Project’s HECM counseling procedures. Part 2 presents the Project’s policies on client privacy, elder abuse, lender steering, product comparisons, and counseling non-owner and under-age spouses. The Appendixes contain items referenced in Part 1, including a sample appointment confirmation letter, a disclosure on HECM counselors, lenders, and loan costs, a handout on the lending process, a proprietary loan disclosure, a handout on annuities, and a sample closeout letter.
Part 1 – HECM Counseling Procedures
To achieve greater counseling efficiency, the Project encourages its subgrantee national intermediaries and local agencies to refer first-time callers to generic resources such as the Project’s free consumer guide (“Home Made Money”) and websites at www.aarp.org/revmort and www. hecmresources.org. These resources answer many consumer questions without requiring counseling, thereby reducing the number of counseling requests. They also help clients know what to ask and get more out of the counseling process. Their use by consumers prior to counseling means that counselors can focus more on individual issues. The Project also encourages its subgrantee intermediaries and local agencies to screen persons requesting counseling for HECM eligibility, estimated loan amounts, and basic consumer questions. These efforts can significantly increase the efficiency of a HECM counseling program because they screen out many callers who do not require counseling. As a result, more of the time of HECM counselors is devoted to the clients who most need their HECM counseling expertise. The following outline contains a variety of information items. But it does not prescribe a specific order in which these matters must be discussed with clients. Each client's needs, situation, and capacities are different. So counselors must exercise discretion and judgment in tailoring the counseling content and format to each client. In particular, knowledgeable counselors may conclude that certain items should be given greater time and emphasis while other items should be treated briefly or eliminated based on a client's specific needs, situation, and capacities.
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I – Initial Client Assessment (may be completed immediately after screening or intake, or during first scheduled appointment; may be completed by trained assistants)) A) Counselor identifies self and agency B) Explains counselor role 1) independent information and education only 2) covering all available options including public benefits 3) no advice re: client's decisions; client is responsible for own decisions 4) client confidentiality will be respected C) Checks to see if client has reviewed (or wants) consumer guide D) Outlines counseling process (establishes professional rapport) E) Intakes or confirms client data 1) name(s), address, date(s) of birth 2) home value, location, type 3) existing debt on home 4) unpaid Federal debt F) Assesses client comprehension: hearing or language problems? legal capacity concerns? power of attorney issues? If necessary, makes referrals to local agencies G) Identifies client needs & goals: 1) main reason(s) for investigating reverse mortgages; personal & financial goals 2) financial situation: income, assets, liabilities/debt, and, if appropriate, expenditures/budget and any concerns about preserving assets 3) length of time person(s) plans to remain in home 4) needed repairs 5) scheduling preference H) Describes individualized info packet (see II) and Counseling Session (see III) I) Encourages participation by family & professional advisors (if telecounseling, confirms number of phones in home needed for other participants) J) Explains procedural options (sending info packet in II before versus after counseling) and notes client choice in client record; if sending packet after counseling, proceeds to III and incorporates info packet items from II in counseling (if client has internet access, counselor may share printouts and other documents live during the counseling session via, for example, Windows’ NetMeeting feature, or similar software) K) Schedules next appointment (if applicable) L) Offers to send or provides info on ordering “Home Made Money” (via 800-209-8085 or www.aarp.org/revmort) II – Counselor develops and sends individualized information packet (via priority mail, fax, or email, if the appointment is within 14 days), which should include: A) Appointment confirmation letter is optional; a sample is included (see p. 15) B) “Important Information about HECM Counselors, Lenders, and Loan Costs” (see p.16) C) “Steps in the Reverse Mortgage Lending Process” (see p. 17) D) If client is considering an annuity: “Using a HECM To Buy an Annuity” (pp. 18-20) E) Client-specific loan printouts (using initial and expected interest rates) 1) cash advances and itemized costs 2) individual loan amortization schedule(s)
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3) future projections (including proprietary loan comparisons as appropriate) F) Other client options as available & appropriate (see “Alternatives” database at www.hecmresources.org and www.BenefitsCheckUp.org) These may include: 1) selling & moving 2) deferred payment & other home repair loans 3) property tax deferral & relief 4) SSI & Medicaid 5) QMB/SLMB 6) other housing options (shared, congregate, assisted, etc.) 7) area agency on aging 8) other programs and options as appropriate III – Counseling Session(s) A) If client requested packet before counseling, counselor confirms client receipt and review of individualized info packet B) Counselor reviews information on client's other options as available & appropriate C) Reviews basic info on reverse mortgages in general (or, presents this information within the context of the HECM program, i.e., III-D below) 1) rising debt/falling equity 2) repayment requirement 3) non-recourse limit 4) leftover equity (implications for borrower & heirs) 5) factors that determine loan amounts 6) borrower obligations - especially taxes & insurance 7) fee financing 8) retention of title 9) impact on public benefits D) Discusses key HECM program features 1) eligibility, including any special problems relating to deed or property 2) principal limit versus home value (including 203-b limit if applicable) 3) payment plan options and changes 4) credit line growth 5) required repairs 6) loan costs, including “Important Information about HECM Counselors, Lenders, and Loan Costs” a ) application fee, appraisal fee, credit report b) closing costs c) origination fee d) servicing fee e) mortgage insurance premium f) monthly versus annually adjustable interest 7) repayment requirements 8) borrower obligations 9) statement on tax implications 10) inquiry re estate planning services E) Reviews financial implications via printouts, using initial and expected interest rates (if client gets more cash from a proprietary plan, include printouts for HECM versus proprietary plan[s]; see Product Comparison policy in Part 2)
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1) cash advances and itemized costs 2) individual loan amortization schedule(s) 3) future projections/comparisons a) total cash advances b) total dollar costs c) leftover equity d) total annual average rates 4) loan/annuity combinations (only if client is considering an annuity; see Product Comparison policy and “Using a HECM To Buy an Annuity”): benefits, costs, choices, impact on public benefits G) Answers client questions & discusses options H) Encourages client to review consumer guide including Part 3 (“Other Choices”) I ) Explains follow-up packet and next steps 1) explains contents of follow-up packet (see IV below) 2) loan processing & expected timelines 3) ongoing access to counselor 4) follow-up survey IV – Project counselor sends follow-up packet (including items from II if client chose to be counseled before receiving section II info packet) A) Closeout letter (see sample on p. 21) B) As needed: revised printouts, additional information on alternatives and action plan C) HECM (and/or Home Keeper) certificate, including a duplicate copy for the client’s files D) Other materials as appropriate
Part 2 - HECM Counseling Policies
All HECM counseling must conform to the requirements of the Home Equity Conversion Mortgage (HECM) program as set forth in the HECM statute, regulations, program handbook (4235.1), and relevant HUD mortgagee letters (MLs), with particular emphasis on MLs 2004-25 and 2004-48. In addition, AARP Foundation network sub-grantee intermediaries and local agencies must maintain their HUD-approved status, which obligates them to follow HUD counseling requirements as specified in HUD Handbook 7610.1. The Project particularly encourages local agencies and counselors to be thoroughly familiar with their federal statutory obligation to provide full disclosure of all the required costs of HECM loans, discuss options other than a HECM, and the financial implications of obtaining a HECM loan. The policies in this protocol cover the following: A) B) C) D) E) Client Privacy Elder Abuse Lender Steering Product Comparisons Counseling Spouses
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A) Client Privacy HUD’s basic requirement on the confidentiality of client information is set forth in Part 4-8 of HUD Handbook 7610.1: The counseling agency must hold in strict confidence all client information regardless of the source or sources from which it is received. To further safeguard the privacy of counseling clients, the Project has adopted a policy of • not accepting counseling requests by anyone “on behalf of” consumers, except for persons who are legally empowered to represent such consumers; and • not providing information on the scheduling, progress, or outcome of any counseling case to anyone without the client’s express prior permission as documented by the counselor in the client’s record. Persons who are legally authorized to represent consumers may be court-appointed guardians or conservators. They may also be persons holding a durable power of attorney as required in Part 4-6 of HUD Handbook 4235.1 who have been authorized to exercise this authority with respect to HECM counseling. When a valid power of attorney is being counseled instead of a homeowner, HUD does not require that the homeowner must also be counseled. The Project is particularly concerned about subgrantee intermediaries or local agencies accepting counseling requests directly from lenders “on behalf of” consumers, or providing information to lenders about the scheduling, progress, or outcome of any counseling sessions. These practices undermine the independence of the counselor’s role, disrespect consumer autonomy, and violate the confidentiality of the counseling process. By contrast, the Project’s policy makes it clear from the start that the intermediaries and agencies have a confidential relationship with the consumer that is independent of the lender. This message clarifies that
• •
the role of the counselor is separate from that of the lender; and the counselor’s job is to represent the best interests of the consumer.
This policy requires that consumers must request counseling on their own volition and at their own initiative. This helps ensure that it is the consumer who wants the counseling rather than a lender or someone else who wants the consumer to be counseled. It establishes from the beginning that the counselors will take their lead from the client (or the client’s legal representative), and will not act upon someone else’s view of what the client should or wants to do.
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Faxing HECM Certificates to Lenders - Some lenders have asked counselors to fax them the counseling certificate when the counseling has been completed. In support of this request, they have asked consumers to sign a statement before the counseling has begun that requests the counselor to fax the certificate when the counseling is over. The Project does not object to faxing certificates as long as doing so reflects the client’s wishes as expressed by the client to the counselor at a time when the counseling has been completed. Any other approach would prejudge the outcome of the counseling or substitute a lender’s wishes for those of the client. According, the Project has adopted the following policy: 1) If, when counseling has been completed, a client requests a counselor to fax a certificate to a lender, a counselor should comply with a client's request. The request must come directly from the client, and it must be made at a time when the counseling has been completed. In other words, the request must represent the client’s wishes at a time when the client has completed counseling. 2) Such a request does not have to be in writing. If the client makes a verbal request, the counselor should note this fact in the client’s record. In any case, the counselor should note the date of faxing and the number to which it was faxed in the client’s record. 3) If a client makes such a request before counseling has been completed, a counselor should respond that he or she will be happy to comply if that is what the client still wants the counselor to do when the counseling has been completed. In these cases, the counselor should acknowledge the request, and then - when the counseling has been completed - ask the client if the client still wants the counselor to fax the certificate to a lender. 4) If a counselor receives a request to fax a certificate to a lender from anyone other than the client, a counselor should respond that he or she can only comply with a client’s request to fax a certificate, and only if the request is made directly by the client at a time when the counseling has been completed. B) Elder Abuse Elder abuse means “any knowing, intentional, or negligent act by a caregiver or any other person that causes harm or a serious risk of harm to a vulnerable adult.” Legal definitions vary from state to state, but may include abuse that is physical, emotional, sexual, or financially exploitative. They may also cover situations involving neglect or abandonment. Financial exploitation is the illegal or improper use of a person’s funds, property, or assets. It includes the illegal or improper use of conservatorship, guardianship, or power of attorney. It can also involve cashing a person’s checks without authorization or permission; forging a person’s signature; misusing or stealing a person’s money or possessions; or coercing or deceiving a person into signing any document, for example, a counseling certificate, a loan application, or mortgage documents. Source: National Center on Elder Abuse (see “FAQs” and “The Basics” at www.elderabusecenter.org )
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“Sixteen states require anyone to report, and most other states require ‘human services professionals’ to report suspected elder abuse – including financial exploitation – of older persons. Reports can be made anonymously; conversely, most states' laws or policies require that there is no duty to report back to the person who lodges the complaint as their investigations and any actions or outcomes are confidential. All states provide statutory immunity, i.e. if someone reports about a problem in good faith, they can not be sued.” Source: American Bar Assn. (at www.abanet.org/media/factbooks/eldt1.html) If a HECM counselor suspects elder abuse of any kind, the counselor should immediately report the case to the agency listed in the Project’s website as the “Elder Abuse” resource for the state in which the homeowner lives. The counselor should send a copy of the report to the HUD Home Ownership Center (HOC) HECM Point of Contact (POC) and to the Project. If a counselor suspects that a conservatorship, guardianship, or power of attorney may be invalid, the counselor should immediately refer the case to the HUD HOC POC and the Project. C) Lender Steering “Lender steering” means inducing a client to contact, select, or avoid a specific lender or lenders. Lender steering can eliminate or sharply reduce client choice in the selection of a lender by substituting the steering party’s judgment for the consumer’s. It can also constitute a real or apparent conflict of interest on the part of a counseling agency or counselor. Such conflicts can undermine the independence of the counselor’s role in fact or in the perception of their clients. The clearest way to avoid steering is by not ever presuming that a client wants to contact a lender unless the client specifically asks for help in finding a lender. By being purely responsive rather than anticipatory or leading in this regard, counselors can avoid steering and the appearance of steering. But if a client does initiate a request for help in finding a lender, then – in response to an autonomously and explicitly expressed need – counselors should tell them about HUD’s most up-to-date list (at http://www.hud.gov/ll/code/llplcrit.html) or give them a copy of it. The Project requires this specific approach because it ensures that only clients who expressly request help in finding a lender will be given information about contacting lenders, and that the information they receive will be a list provided by HUD rather than by a counselor or agency. Counselors should also be careful not to promote, represent, recommend, or speak for any specific lender or lenders. In particular, they should not let their past experience with a given lender – be it positive or negative – lead them inadvertently to steer their clients toward or away from any specific lender. Problems with lenders should be reported to HUD. It is the responsibility of HUD to regulate lender behavior. Counselors should not attempt to do so by steering their clients toward or away from any specific lenders. The Project requires that counselors be especially careful to avoid actual, inadvertent, or the appearance of lender steering with respect to loan costs. Because it can easily become or be interpreted as promoting, representing, or recommending a particular lender or loan officer, counselors should not speak for any lender or loan officer about the specific prices they charge. Some loan fees may be negotiable between a lender or loan officer and a consumer, and the fees charged by a given lender or loan officer in one case or at one time may be different from the fees they charge in another case or at another time. Providing accurate, comprehensive, fairly presented, and up-to-date comparative pricing
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information on all lenders and loan officers is a virtually impossible goal to achieve. Therefore, counselors should not provide either comprehensive or partial lender-specific or loan officer-specific pricing information. On the other hand, counselors should not protect lenders against price competition. To the contrary, they should equip their clients to be informed consumers about allowable loan costs and allowable lender prices. They should carefully explain which loan costs are required in order to obtain a loan, and which are not. They should clearly identify the specific loan costs that may vary from lender to lender or be negotiable with a lender or loan officer. And they should also explain the maximum amount that HUD permits HECM lenders to charge for specific loan costs. To stress the importance of this information, the Project requires counselors to provide a disclosure (attached to this protocol) to their clients entitled “Important Information on HECM Counselors, Lenders, and Loan Costs”. Over the past five years, the Project has been developing and refining a lender steering policy that provides specific guidance to counselors on these issues. The current policy appears below: 1) HECM counselors should explain to their clients that a) at any given time, all HECM lenders in a given area are likely to charge the same interest rates, the same mortgage insurance premiums, and similar third-party closing costs. b) HECM origination and servicing fees and third-party closing costs can vary from lender to lender. c) origination and servicing fees are subject to specific maximum amounts established by HUD (and what the current maximums are). d) third-party closing costs are limited by HUD to what is “usual and customary” in any given area (and provide a current estimated total of all such costs, noting that the total actually charged by any given lender is likely to be “in the general vicinity of the estimate, but may be more or less than that amount”. e) HECM origination and servicing fees and third-party closing costs may be negotiable between a lender and a consumer. f) the origination and servicing fees and third-party closing costs a lender charges one borrower may be different from what they would charge a different borrower at another time. g) counselors do not promote, represent, or recommend any specific lender or lenders. h) counselors do not speak for any lender or lenders about what they charge clients for origination or servicing or third-party closing costs.
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i) counselors do not provide information on the specific origination or servicing fees or third-party closing costs being charged by specific lenders. j) lenders are the best source of information about the origination and servicing fees and third-party closing costs they charge. k) generic information on selecting a lender can be found in AARP’s booklet on “Home Made Money.” 2) HECM counselors should not a) promote, represent, or recommend any specific lender or lenders. b) speak for any lender or lenders about what they charge clients for origination or servicing fees or third-party closing costs, for example, by providing information on the specific origination or servicing fees being charged by any specific lender or lenders; or by suggesting that a client not agree to pay more than any specific amount (other than the maximums established by HUD) for origination or servicing fees or third-party closing costs; or by providing loan printouts based on the specific origination or servicing fees or third-party closing costs that a counselor identifies as being the amounts currently being charged by any specifically named lender or lenders, unless the client has independently obtained this information and requested its inclusion. c) presume that a client wants to contact a lender or lenders. d) induce a client to contact a specific lender or lenders, for example, by providing a lender name or list to a client who has not asked for help in finding a lender or lenders, or by discussing with clients any prior experience with a specific lender or lenders. 3) HECM counselors should provide a list of HECM lenders to a client only if a client initiates a request for help in finding a HECM lender or lenders. This list should be the one on HUD’s website at http://www.hud.gov/ll/code/llplcrit.html. HUD Mortgagee Letter (ML) 2004-25 provided specific direction on three topics addressed by this protocol’s Lender Steering Policy: Lender Steering, Costs to Obtain a HECM, and Prohibition on Dissemination of Specific Loan Product Information. Since the publication of ML 2004-25, questions have been raised about the implementation of these sections of the ML and the Protocol’s Lender Steering Policy. This section of the protocol responds to those questions.
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A comparative review of ML 2004-25 and the protocol does not uncover any incompatibilities between these documents with respect to lender steering. To the contrary, the relevant text of the ML is very similar to - and wholly consistent with – Part 2-C of the Protocol. The ML is less detailed than the Protocol in these areas, but the direction it provides is consistent with the Protocol’s provisions. The basic challenge for counselors is twofold: on the one hand, they must avoid price-based steering; but on the other hand, they must not insulate lenders from price competition. The goal of the Protocol is to provide specific guidance and direction to help counselors meet this two-part challenge. Two main issues have been raised about implementation of the ML and the Protocol’s Lender Steering Policy: price negotiability and “shopping around” for lower prices. The first issue is the language that counselors should use in discussing price negotiability. Both the ML and the Protocol prohibit the provision of specific prices purportedly being charged by any individual lender or loan officer. The Protocol also more specifically proscribes various implications, hints, or other indirect suggestions of specific prices. These more detailed prohibitions mean that counselors must be careful about indirectly or inadvertently suggesting the specific prices charged or the negotiability of prices charged - by a given lender or loan officer. Project counselors should therefore not state that the price being charged by a given lender or loan officer “is negotiable,” “should be negotiable,” “can be negotiated,” or “can be negotiated to [a specific dollar figure].” Instead, they should state that the price “may be negotiable,” which implies that it may or may not be negotiable, that counselors do not provide information on the prices charged by specific lenders, and that lenders are the best source of information about the prices they charge. The second issue concerns “shopping around” to obtain lower prices. In this area, counselors must be careful not to impose their values and preferences on their clients. Therefore, they should not direct or urge all of their clients to shop around for lower prices. But counselors must tell all clients 1) which HECM loan costs may vary from lender to lender, or may be negotiable with a lender, and 2) the maximum amount that HUD permits HECM lenders to charge for specific loan costs. If a client expresses concern about what he or she deems to be high prices or otherwise asks how lower prices might be obtained, a counselor should explain that counselors do not provide information on the prices charged by specific lenders, and that lenders are the best source of information about the prices they charge. In short, they should explain that consumers concerned about prices can obtain comparative pricing information by asking lenders about the prices they charge. D) Product Comparisons A small percent of HECM counseling clients consider a proprietary reverse mortgage such as Fannie Mae’s “Home Keeper” loan or Financial Freedom’s “Cash Account” loan. A small percent also consider converting a HECM into a “reverse annuity mortgage” by using HECM proceeds to purchase an annuity. To ensure that these clients have the independent information they need to assess these alternatives, and to document that this information has been provided, the Project requires that counselors take specific steps in each situation.
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1) Proprietary Products – For clients considering a proprietary reverse mortgage, counselors should prepare side-by-side comparisons of a HECM versus the proprietary plan or plans using loan comparison software specified by the Project that meets its Model Specifications for Comparing Reverse Mortgages. The printouts should include a) (if the client selects a creditline) future remaining creditline projections based on creditline draws specified by the client; b) a comparison of estimated loan details at closing; c) projected loan comparisons at various future times, including projected figures for total cash received, cash remaining, and total cost expressed in terms of total dollars and a total annual average rate; and d) amortization projections for each selected loan providing year-by-year details The counselor should send these comparisons to the client, explain them during the counseling session, and, if appropriate, send revised comparisons. The counselor should also explain the paragraph about proprietary reverse mortgage costs and benefits in "Important Information about HECM Counselors, Lenders, and Loan Costs” on page 16. 2) Annuities – The federal Truth-in-Lending Act (TILA) recognizes the unique difficulty of evaluating the total cost of a reverse mortgage that is used to purchase an annuity. The Project requires its counselors to supplement specialized TILA cost disclosures for these two-part transactions by giving to clients who are considering them the 3-page textual disclosure that begins on page 18 of this protocol. In addition, the Project also requires that counselors i. explain the disclosure to the client, and ii. annotate the HECM counseling certificate to indicate that the “client is considering purchasing an annuity with loan proceeds.” E) Counseling Non-Owner and Under-Age Spouse HUD requires that all owners must be counseled. But counselors need guidance in dealing with the following circumstances: 1) the owner’s spouse is not an owner; 2) the spouse is an owner at time of counseling but intends to quitclaim before closing; 3) the spouse is an owner and 61 years of age or younger at time of closing but will either a) turn 62 before closing, or b) will not be 62 at closing but intends to quitclaim before then.
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As a matter of policy, some lenders require non-owner or quit-claiming spouses to participate in the counseling and sign an acknowledgement that they are not entitled to benefits under the loan, and that the loan will become due and payable based upon specified events related to the owner. On the other hand, some loan officers and clients have asked counselors not to counsel such spouses, and some spouses have objected to being counseled. To decrease the likelihood that these spouses will be unpleasantly surprised to learn about the loan or its requirements at a later date, our Project has had an informal policy that requires the counseling of these spouses. When any owner or spouse has strongly objected to this policy, the Project has either declined to provide the counseling, or provided the counseling and annotated the certificate to reflect who was not counseled. The HECM statute clearly requires that borrowers must be counseled as an eligibility criterion. But it does not provide similar authorization to require the counseling of non-borrowers. The Project has made the following recommendations to HUD: • HUD should clarify its “all owners must be counseled” policy to make clear that all spouses of any age who are owners at the time of counseling must be counseled. • HUD should encourage the counseling of non-owner spouses of any age, and require them to sign a HUD-prescribed acknowledgement that they are not entitled to benefits under the loan, and that the loan will become due and payable based upon specified events related to the owner. Until a HUD policy is established in this area or unless directed by HUD to proceed otherwise, the Project will continue following the informal policy described above.
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SAMPLE Appointment Confirmation Letter on Agency Letterhead
Dear Homeowner, Thank you for requesting counseling through . This agency does not endorse or recommend any reverse mortgage loan or lender. Our role is to provide you with the independent information you need to make your own best decisions about these loans and other alternatives. The counseling explains the key features of reverse mortgages in general, and provides detailed information on specific loans available to you. It covers the costs, benefits, and financial implications of these loans. It also provides information on less costly alternatives to reverse mortgages. Your counseling session is scheduled for at I will call you for your counseling session at that time. To prepare for this counseling, please review the enclosed materials. They include “Important Information about HECM Counselors, Lenders, and Loan Costs,” loan comparisons, individual loan information, a sample of the HECM counseling certificate, “Steps in the Reverse Mortgage Lending Process,” and any other information that may be related to your situation. Please have these materials on hand for the counseling session. You will also want to have paper and pencils handy to take notes. The counseling session will last approximately one hour. When the counseling is complete, I will send you a “Certificate of HECM Counseling.” When you sign this certificate, you will be verifying that you have been counseled by me. You will need a signed copy if you decide to apply for a federally-insured HECM loan within the next six months, Sincerely, Housing Counselor Enclosures
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Important Information about HECM Counselors, Lenders, and Loan Costs
The role of counselors in the Home Equity Conversion Mortgage (HECM) program is to discuss information with you that will help you make your own decisions about these loans and other alternatives. HECM counselors do not promote, represent, or recommend for or against any specific lender. They do provide general information on factors you may want to consider in selecting a lender. If you ask, these counselors will give you a copy of the lender list posted by the U. S. Department of Housing and Urban Development (HUD) at www.hud.gov/ll/code/llplcrit.html. HECM counselors will tell you
• • • •
which costs are required in order to obtain a HECM loan, and which are not; which HECM loan costs do not vary from lender to lender; which HECM loan costs may vary from lender to lender, or may be negotiable with a lender; and the maximum amount that HUD permits HECM lenders to charge for specific loan costs.
But they do not provide any information on the prices charged by any individual lender or loan officer. The prices that a lender or loan officer charges one borrower at one time may be different from what they would charge another borrower or at another time. Lenders and loan officers are the best source of information about the prices they charge. HECM counselors do not endorse any reverse mortgage product or lender. But they want you to have the information you need to make an informed decision about these loans and other, less costly alternatives. The HECM program generally provides greater cash benefits and costs less than other private sector reverse mortgages. But for some consumers, a different private sector reverse mortgage may provide greater cash benefits, although it generally costs more. If you are considering a different private sector reverse mortgage, your counselor is required to give you detailed comparisons of the total costs and benefits of this loan versus a HECM. Your HECM counselor is required to discuss all of the information on this page with you. If you have any questions about this information, ask your HECM counselor.
This information was developed by the AARP Foundation’s Reverse Mortgage Education Project under a grant from the U. S. Department of Housing and Urban Development. Neither AARP nor the AARP Foundation endorses any specific reverse mortgage lender or product. Revised August 2005 - AARP Foundation - 601 E Street NW, Washington DC 20049
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Steps in the Reverse Mortgage Lending Process
A) APPLICATION
1) When you apply, you will be asked to select a payment plan: a creditline, monthly advances (term or tenure), or a combination of a creditline and monthly advances. You may also be asked to select a monthly or annually adjustable interest rate, and to decide if you want your property taxes and homeowner insurance paid directly by advances from your loan. (Many lenders do not ask you to make all of these decisions until later in the process.) 2) You will need to provide information required by the lender, including a photo ID, verification of your Social Security number, a copy of the deed to your home, information on any existing debt (liens) on your home, and your counseling certificate. You will also be asked to pay a loan application fee, which covers the cost of a home appraisal and a minimal credit check.
C) CLOSING
1) When your loan is approved by the underwriting department, a date for closing the loan is set, and the final loan documents are prepared. A closing is a meeting at which you sign all the loan documents. It is generally handled by the title company or the lender. Some states require you to retain an attorney to be present at closing. 2) After closing, you have 3 business days in which to cancel the loan. When this three-day “recission” period is over, loan funds can be paid to you, and can be used to pay off any existing debt on your home. A new lien is placed on your home to secure the reverse mortgage. Your loan is then sent to the “servicing” department, or to another company that specializes in servicing reverse mortgages.
D) AFTER CLOSING
1) Unless you have arranged to have your taxes and homeowner insurance paid directly from your loan proceeds, you are still responsible for making these payments. If you do not, the lender can use loan proceeds to make the payments or – if none remain – the lender can make the entire loan due and payable. 2) The loan “servicer” sends you your loan advances and periodic loan statements. No repayment is due until the death or permanent move from the home by the last living borrower, the sale of the home, or any thing else that results in the home no longer being the principal residence of at least one borrower. The repayment obligation cannot be greater than the home's value at the time the loan is repaid.
B) PROCESSING
1) Your lender orders an appraisal, title search and insurance, lien payoffs, and any other services needed to complete the loan. An appraiser comes to your home to assess its value and physical condition. If the appraiser finds structural defects that require repair, to be eligible for the loan, you must hire a contractor to make the repairs. 2) Your lender submits all required information to the lender’s underwriting department, which determines if everything needed to close the loan is correctly completed.
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Using a HECM To Buy an Annuity
Are you considering using a Home Equity Conversion Mortgage (HECM) to purchase an annuity? If you are, here are some facts you need to know about • • • • • your loan options, annuity benefits, annuity costs, public benefits, and annuity choices.
or volatile. Although they may provide a fixed monthly advance for a while, “variable” annuities can result in a smaller monthly advance after their guarantee periods end. Fixed monthly annuity advances that continue for life no matter where you live may be smaller than the fixed monthly loan advances you can get from a HECM for as long as you live in your home. A lender can show you how much you could get each month from a HECM. You can also get an estimate at www.rmaarp.com. You may want to compare this monthly loan advance to the annuity advance you could get. You may also want to consider that if you were to move into a nursing home and qualify for Medicaid, most of the annuity advances and proceeds from any sale of your home would be used to pay for nursing home costs. Another option would be to take monthly cash advances from a HECM creditline*. The calculators beginning at www.rmaarp.com** can estimate how long you could take a monthly creditline advance of any specific amount. You may also want to consider that you can change these loan advance amounts to meet your changing needs. You could even take all remaining funds if you choose. By contrast, annuities lock you into a fixed monthly advance for life.
*Creditline option not available in Texas. **When you reach the “Loan Calculator Estimates” page, scroll down to the “Creditline” button, and click on it.
your loan options
You can decide how to have a HECM loan paid to you. You can select
• •
an immediate cash advance; a creditline account that lets you take cash advances at times and in amounts that you select; a fixed monthly cash advance for a specific number of years, or for as long as you live in your home; or any combination of immediate cash, creditline, or monthly advance.
•
•
So you don’t have to buy an annuity in order to get monthly cash advances. You can get them directly from a HECM without buying an annuity.
annuity benefits
An annuity can give you monthly cash advances for life - no matter where you live. By contrast, monthly HECM advances can only last for as long as you live in your home. If you sell or move, you stop getting them. So in considering an annuity, you should think about how long you expect to remain in your home. If you want annuity advances that are the same amount every month, be sure to get a “fixed" annuity. Cash advances from a “variable” annuity may depend on the stock market or other investments that are more risky
annuity costs
Using a HECM to buy an annuity is generally more expensive than getting monthly HECM advances. If you buy an annuity with loan proceeds, you will have a larger immediate loan balance, and that means greater interest charges, especially in the early years of the loan. But if you live beyond your life expectancy, a HECM/annuity combination can become less costly than a HECM alone.
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How can you compare the cost? Software that meets AARP's model specifications for comparing reverse mortgages includes the cost and benefits of an annuity purchased with HECM loans. Printouts from this software show you the total amount you would owe, and the total rate you would pay with – versus without - an annuity throughout the loan. This detailed report makes it easy to compare your choices. To find out if the cost comparison you get from a lender or annuity company meets AARP’s model specifications, send it to rmcounsel@aarp.org (email), 202-434-6068 (fax), or to this mailing address: AARP Reverse Mortgage Education Project, Rm B4-435, 601 E St NW, Washington DC 20049. Include your name, address, and phone number. If lenders know you intend to buy an annuity with a HECM, they are required by federal Truth-in-Lending law (12 CFR 226.33) to give you a Total Annual Loan Cost (TALC) disclosure that includes the annuity. If you want to make certain that you get it, send your lender a letter requesting a TALC disclosure that includes the annuity. Generally, the least expensive HECM/ annuity plans work like this: You take a HECM in two parts: as a lump sum at closing, and as a "term" monthly advance for a specific number of years. You then use the lump sum to buy a "deferred" annuity that will begin sending you monthly annuity advances in the first month after the HECM loan advances end. A deferred annuity is less costly than an "immediate" annuity (which sends you monthly annuity advances immediately after the loan is closed). So long as you do not move before the annuity advances begin, a deferred annuity would give you continuing monthly advances for life. This approach is likely to cost less or provide greater monthly advances than you would get by purchasing an immediate annuity.
On the other hand, if you die before the advances from a deferred annuity begin, you and your heirs would get no cash benefits from a deferred annuity unless you select an optional “period certain” or “death benefit” (see annuity choices). (Note: A “deferred” annuity should not be confused with a “taxdeferred” annuity, which may or may not provide fixed monthly advances for life.) Anyone who sells you an annuity will be paid a sales commission from the money you use to buy the annuity. If you want to know how much they will be paid, ask them what their sales commission would be. Also ask if the annuity includes a “surrender” fee that you would have to pay if you decide later on to discontinue the annuity.
public benefits
Annuity income does not affect your Social Security or Medicare benefits under current law. But if you are eligible for Supplemental Security Income (SSI), you need to understand that annuity income will jeopardize your benefits from this and possibly other programs.
Annuity advances are counted as income by SSI. So they can reduce SSI benefits dollar-for-dollar, and might make you ineligible for other programs.
By contrast, loan advances generally are not counted as income by SSI, and are not counted as assets if you spend them within the calendar month you receive them. (Source: American Bar Association, Reverse Mortgages: A Lawyer’s Guide, 1997, p. 36) If you now receive - or expect to become eligible for – SSI or similar programs (for example, Medicaid), be sure you understand exactly how annuity income would affect your eligibility and benefits.
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annuity choices
An annuity is only as safe and sound as the company that provides it. So you may want to ask the annuity company for its ratings from the firms that provide them. For example, one recognized consumer finance specialist suggests that consumers should look for companies with at least three of these five ratings: A+ from A. M. Best, AA+ from Fitch, Aa3 from Moody’s, Aaq from Standard & Poor’s, B from Weiss. Many annuity plans offer an optional cash refund (or “death benefit”) to your heirs upon your death. This reduces the overall cost to your estate. But it also reduces the amount of your guaranteed monthly annuity advance. Be sure to consider these options carefully. Some annuities provide monthly advances for a fixed period of time. If you are considering this type of “period certain” annuity, you may want to com-pare it with the monthly loan advance you could get for the same amount of time from a HECM “term” plan. You may also want to compare how much you would end up owing in each case.
conclusion
Only you can decide what best fits your needs. But it makes sense to be careful when considering a major financial decision about choices that may be new to you. So take the time you need to
• • • •
learn what you need to know, get answers to your questions, compare your choices carefully, and discuss your choices with people you trust who have no financial interest in your decision.
This information was developed by the AARP Foundation’s Reverse Mortgage Education Project under a grant (HC 02-0000-011) from the U. S. Department of Housing and Urban Development. 11/03 Neither AARP nor the AARP Foundation endorses any specific reverse mortgage lender, product, or annuity. But they want you to have the information you need to make an informed decision about these options and other, less costly alternatives. AARP Foundation 601 E Street NW, Washington DC 2004
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SAMPLE Closeout Letter on Agency Letterhead Dear Homeowner, Thank you for participating in the reverse mortgage counseling session I recently conducted with you. Please take whatever time you need to thoroughly review the information that I have shared with you before making any decisions that will affect your financial future. If you need more information, or if you have more questions, please call me at any time. Enclosed are two copies of a “Certificate of HECM Counseling.” Keep one copy for your personal records. If you apply for a HECM loan within the next six months, sign and give the second copy to your HECM lender. The lender will need this signed copy to verify that you have been counseled within six months of loan application. Two months from now, I will be calling you to ask if you have any more questions or made any decisions about reverse mortgages or other alternatives. Also at about that time, the AARP Foundation’s Reverse Mortgage Education Project will send you a “Consumer Satisfaction Survey.” The purpose of this survey is to help the Project evaluate and improve HECM counseling services. You can help by filling out and returning the form. The Project promises to protect the confidentiality of your responses, and to use them for statistical purposes only. If you need any further assistance, please do not hesitate to call me at any time. Sincerely, Housing Counselor Enclosures
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