1
MOVING FORWARD WITH REVERSE MORTGAGES
Module 1
Learning Objectives
The mortgage industry has seen massive shifts in direction and legislation in recent years as a result of the unprecedented collapse of the housing and economic markets. While clear-cut reasons for the mortgage market collapse continue to be debated, one thing has become certain: the scrutiny of the industry’s products and programs has never been tighter, and expanding legislation promises to continue that trend. One mortgage product that has experienced a surge in popularity in recent years has been the reverse mortgage.
In Module 1, participants will:
Discuss what a reverse mortgage is
Determine what oversight and regulatory provisions and authority apply to certain products
Define terms often used in the reverse mortgage industry Learn who is eligible to obtain a reverse mortgage
Learn what general provisions cover most reverse mortgage products
Gain a general understanding of the several varieties and uses of the reverse mortgage Explore reasons why the reverse mortgage has gained a broader popularity
Introduction
As more of the population of the United States shifts into the later stages of life, the “Baby Boomer” generation is, in many cases, looking for additional options to meet the financial demands of its golden years.
The number of American citizens aged 65 years or older is quickly becoming the fastest-growing segment of the nation’s population, expected to double over the next 25 years. This, coupled with the fact that Americans now have longer life expectancies than ever before, means that seniors also need their retirement assets to last much longer. The collapse of the financial markets in 2008 has put even greater pressure on seniors, some of whom have been forced to go back into the employment pool to supplement retirement income that has come to be insufficient. As a result, fewer seniors preparing for retirement are able to turn to pension plans from
employers to help provide for a signification portion of financial needs in their retirement years, as many have in the past. This means that, now more than ever before, seniors must take
2
Currently, the CFPB does not have rules specific to senior consumers. However, originators have the same responsibility to all of their clients, including seniors. In carrying out those responsibilities, especially with respect to the current size of the senior population and their financial needs, age, life stage (for example, pre- or completely retired) and level of wealth or income can be very important factors when making recommendations. When working with senior investors, originators of reverse mortgage loans should cast a particularly careful eye to suitability, ensuring that all recommendations they make are appropriate for their customers. While the FHA created an insurance program for the reverse mortgage 25 years ago through the Housing and Community Development Act of 1987, the many products available in the market to allow elderly homeowners to access the equity in their homes have never been in greater use than today. Consequently, there has never been more debate over the effectiveness and risk of these products.
In this course, we will take a look at the history of the reverse mortgage, basic concepts and misconceptions, common product types, and provisions of the products meant to protect elderly homeowners.
Please note, there may be state-specific restrictions on making reverse mortgages. Course participants should check with their state’s law regarding the rules and regulations surrounding reverse mortgages.
What is a Reverse Mortgage?
A reverse mortgage is a loan against a home which the homeowner does not have to pay back for as long as he/she lives there. With a reverse mortgage, the value of the home may be turned into cash without having to move or to repay a loan each month. Unlike a traditional “forward” mortgage, the reverse product allows equity to be “cashed-out” for purposes such as helping the homeowner supplement the cost of living or pay for home repairs.
The cash received from a reverse mortgage can be paid to the homeowner in several different ways:
Single lump sum of cash
Regular monthly cash advance, known as a tenure payment or term payment
Credit line that allows the homeowner to decide when and how much of the available cash is paid out
Combination of any of these methods
Regardless of how this loan is paid out, the homeowner typically does not have to pay anything back until he/she dies, sells the home, or permanently moves out of the home. There are certain provisions in place which establish the rules on repayment and default on a reverse mortgage, all of which will be covered in greater detail in a later section of this course.
3
Some of the general benefits possible through the use of a reverse mortgage include:
There are no monthly payments, as the loan is repaid by the sale or refinancing of the home.
The money received from a reverse mortgage can be spent in any way the homeowner chooses.
Eligibility is based on the borrower’s age, current interest rates, and the value of the home, not the homeowner’s credit or employment status.
Fees may be financed as part of the mortgage, so the borrower incurs little out-of-pocket expenses to obtain the reverse mortgage.
There is no maturity date. A reverse mortgage becomes due when the borrower sells or permanently moves out of the home, or if the borrower does not maintain the property taxes, homeowners’ insurance or reasonable maintenance of the property.
There is no prepayment penalty for FHA-insured Home Equity Conversion Mortgage (HECM) loans. These loans can be partially or fully paid off at any time with no additional fees or costs.
There is asset protection. At the end of the reverse mortgage, the amount that must be paid is the sum of the actual funds received or advanced for fees, plus accrued interest. The repayment amount will never exceed the value of the home, as long as the property is sold to pay back the reverse mortgage.
Common Misconceptions of the Reverse Mortgage
Many believe the reverse mortgage to be a dangerous product based on the misconception that by allowing a lender to extend a loan on the home, the homeowner is actually turning over the deed to the property. In reality, what happens is that the homeowner allows for a lien to be placed on the property in the amount of the loan, and ultimately, the loan must be paid to satisfy the debt.
The misconception of having to hand over the deed comes mainly from the perception driven by the common solution to paying the debt: sale of the home after the passing of the homeowner. Because this is the most common method of satisfying the debt, many believe the family may have been “forced” to hand over the home.
Typically, much of the confusion and misunderstanding comes as a result of heirs to the elder’s property having concerns for their parents’ future, and, perhaps, their own. It is often heirs, in fear of an inheritance being lost in what may be perceived as a risky, sophisticated financial scheme, who prevent parents from going beyond the initial stages of inquiry.
The argument over whether the reverse mortgage is a good product or not rages on, but it is certainly important that before entering into the loan (or even before entering into the argument), more knowledge of the product is gained. Counseling sessions required by the Department of Housing and Urban Development (HUD) for the HECM product are especially helpful in dispelling these misconceptions. Many professionals in the industry recommend that
4
homeowners interested in the possibility of a reverse mortgage bring their heirs with them to counseling sessions.
Guidance for Managing Compliance and Reputation Risks
The Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA) have all adopted a guidance addressing the growth and popularity of the reverse mortgage. The Guidance is called Reverse Mortgage Products: Guidance for Managing
Compliance and Reputation Risks.
The Guidance provides the following concerns of the federal lending regulatory authorities regarding the protection of both HECM and proprietary reverse mortgage consumers:1
Consumers may enter into reverse mortgage loans without fully understanding the consequences of these products, including the costs, terms, and risks, or they may be misled by marketing and advertisements promoting reverse mortgage products Counseling may not be provided to borrowers or may not adequately clear up any
misconceptions
Steps may not be taken to ensure that consumers will be able to pay required taxes and insurance
Potential conflicts of interest and abusive practices may arise in connection with reverse mortgage transactions, including using the proceeds of the loan for the sale of ancillary investment and insurance products
Laws and Regulations Applicable to Reverse Mortgages
The Guidance cites the following important laws and regulations for creditors, mortgage lenders, mortgage brokers, and mortgage loan originators involved in the solicitation, negotiation, and issuance of reverse mortgages.
Section 5 of the FTC Act
Unfair or deceptive acts or practices are prohibited in Section 5 of the Federal Trade
Commission Act (FTC Act).2 This Act is enforced by the OCC, the FRB, the FDIC, and the NCUA.
A practice is generally considered “deceptive” under this Act if:
There is a representation, omission, act or practice that is likely to mislead the consumer The act or practice would be deceptive from the perspective of a reasonable consumer,
and
1 Federal Register. “Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks.”
December 16, 2009. https://www.federalregister.gov/articles/2009/12/16/E9-29882/reverse-mortgage-products-guidance-for-managing-compliance-and-reputation-risks#p-142
5
The representation, omission, act or practice is material A practice is generally considered “unfair” under the FTC Act if:
The practice causes or is likely to cause substantial consumer injury
The injury is not outweighed by benefit to the consumer or to competition, and The injury caused by the practice is one that consumers could not reasonably have
avoided
TILA and Regulation Z
The Truth-in-Lending Act (TILA) disclosure requirements and those in its implementing regulation, Regulation Z, apply to reverse mortgage transactions, including those which are applicable to disclosure:
In mortgage loan advertisements
With a loan application before loan consummation, and When interest rates change
Disclosures for open-end, closed-end and variable-rate mortgages must be provided as applicable to reverse mortgage applicants.
In addition to those disclosures required for regular mortgage loan transactions, TILA also requires that a loan cost disclosure form be provided to reverse mortgage borrowers. This form provides the total annual loan cost, including:
Upfront costs, for example, the origination fee, the third-party closing fee, and any upfront mortgage insurance premium
Interest
Ongoing charges, for example, the monthly service fee and any annual mortgage insurance premiums
RESPA and Regulation X
Pursuant to the Real Estate Settlement Procedures Act (RESPA) and its implementing regulation, Regulation X, institutions may not pay or accept any fee or other thing of value in exchange for the referral of business related to reverse mortgage transactions.
Other Applicable Laws
Parties that offer reverse mortgage products must ensure that they also comply with the Equal Credit Opportunity Act (ECOA), the Fair Housing Act, and the National Flood Insurance Act. State legislation regarding unfair and deceptive acts or practices also applies to reverse mortgage transactions. State financial institution regulators have the authority to supervise the mortgage-related activities of entities offering reverse mortgages.
6
Abusive Practices and Conflicts of Interest in Offering Reverse Mortgages
Lenders and institutions are also told in the Guidance that they should take steps to manage the compliance and reputation risks presented by third-party relationships. For example, if a lender makes, purchases or services reverse mortgages through a mortgage broker or loan servicer, the lender should:
Practice due diligence and establish criteria for maintaining relationships with third parties
Establish criteria relating to third-party compensation that are designed to avoid providing incentives for originations inconsistent with the lender’s policies and procedures
Set requirements for agreements with third parties
Establish internal procedures and systems to monitor ongoing compliance
Implement appropriate corrective actions in the event that the third party fails to comply with agreements, policies, or laws and regulations
Review promotional materials used by third parties to ensure compliance with TILA, the FTC Act and other applicable laws
Structure the relationship so that it does not violate RESPA’s prohibition against paying or receiving any fee or other thing of value in exchange for the referral of business related to a reverse mortgage transaction
Deceptive Product Communications and Marketing
The Guidance states that agency regulators are concerned about adequate and deceptive communication of reverse mortgage products, through advertising, sales presentations, and marketing materials. For example:
Some reverse mortgage marketing material features prominent, false statements that the consumer is not incurring a mortgage, and then states otherwise in the fine print
Advertising materials declare that reverse mortgage borrowers have no risk of losing their homes or are guaranteed to retain ownership of their homes for life, and do not clearly indicate the circumstances under which the reverse mortgage becomes immediately due and payable, or in which borrowers may lose their homes
Advertisements misrepresent that reverse mortgages constitute “government benefits” or a “government program,” with no explanation that the products are loans made by private entities and that the only government program for reverse mortgages is the federally-insured HECM program
Supervisory Responsibility of Marketing and Promotional Materials
Persons within the mortgage lender or brokerage firm responsible for reverse mortgage
advertising and marketing materials should review them to ensure they comply with applicable state and federal disclosure requirements. Lenders and brokers are responsible for ensuring that marketing materials do not provide misleading information about product features, loan terms, or
7
product risks, or about the borrower’s obligations with respect to taxes, insurance, and home maintenance. When examining lending institutions, federal regulators will evaluate potentially misleading or deceptive marketing materials and take appropriate action if violations of the FTC Act or other applicable laws are discovered.
All communications and promotional materials regarding reverse mortgages must comply with the FTC Act, RESPA, TILA, and other applicable laws. The Guidance recommends that clear and balanced product descriptions be developed and made available at branch locations to
consumers shopping for a mortgage, and when branch personnel supply loan brochures or similar promotional material to consumers. The Guidance states that information is “balanced” when it fairly presents the risks and costs as well as the potential benefits of the product.
Promotional materials should include information about the costs, terms, features, and risks of reverse mortgage products. This information should include:
Borrower and property eligibility
When marketing proprietary products, the fact that these reverse mortgages are not government-insured and the resulting risk to consumers
Determination of maximum loan limits based on home value, borrower age, expected interest rates, and program limitations
Lump sum and other disbursement options and possible implications for the borrower’s ability to obtain public benefits
The circumstances under which the loan must be repaid
The actions the borrower must take to prevent the loan from entering default and therefore becoming due and payable, including the need to continue to pay taxes and insurance on the property and to maintain the property as required
Fees and charges associated with reverse mortgages
The requirement to make direct payments for real estate taxes and insurance if there is no provision for a set-aside from the mortgage payouts to pay these obligations
Alternatives to reverse mortgage products that are offered by the institution which may address the homeowner’s needs
The importance of reverse mortgage counseling
Information about how to find a qualified independent counselor
For additional assistance in creating reverse mortgage advertising and promotional materials that are compliant with federal lending laws, mortgage professionals may consult the National
Reverse Mortgage Lenders Association’s Code of Ethics and Advisory Opinions.3
The Guidance regulations concerning required counseling for reverse mortgage products will be discussed in detail in Module 2.
3
National Reverse Mortgage Lenders Association. “NRMLA Code of Ethics & Professional Responsibility.” http://www.nrmlaonline.org/nrmla/ethics/conduct.aspx
8
Suitability
Suitability is essential to fair dealing, meant to ensure and promote ethical sales practices and high standards for professional conduct. Concerning suitability in relation to reverse mortgages, FINRA Regulatory Notice 11-02 states the following:
“An originator must have a reasonable basis to believe that a recommended transaction, product or strategy is suitable for the customer, based on the information obtained through the reasonable diligence of the originator to ascertain the customer's financial information.”4
Implicit in all loan origination activities with customers and others is the fundamental responsibility for fair dealing. Sales efforts must be undertaken only on a basis that can be judged as being within a specific set of ethical standards with particular emphasis on the requirement to deal fairly with the public.
A customer's financial information may include: The customer's age
Financial circumstances – current state and needs Investments
Projected timeline and needs
Any other information the customer may disclose to the originator in connection with such recommendation.
FINRA Notice 07-43 recommends important questions to ask at the start of the process in order to learn more information about the customer’s financial situation. These questions include:
What is the customer’s current employment status? If employed, how much longer does he or she plan to continue working?
What are the customer's living expenses?
o Look to FHA/VA guidance on residual income to make suitable recommendations What other sources of income does the customer have? Does the customer live on a fixed
income or anticipate doing so in the future?
How much income is needed for the customer to support fixed or anticipated expenses? o What health care insurance does the customer have? Will the customer be relying
on the funds from a reverse mortgage or other assets for anticipated and unanticipated health costs?
How much has the customer saved for retirement?
4
FINRA Regulatory Notice 11-02.
9
How important is the liquidity of income-generating assets to the customer?
What are the customer's other financial goals? For example, how important is passing on the home as an asset to heirs?
o It can be difficult for some customers to fully appreciate the risks of reverse mortgages (e.g., compounding interest eating up home equity), particularly if they are concerned about running out of money5
Acting in the Best Interests of the Customer
Looking again to the broader financial services industry for guidance in interpreting suitability, numerous cases explicitly state that an originator’s “recommendations must be consistent with
his customers’ best interests.” The suitability requirement that an originator make only those
recommendations that are consistent with the customer's best interests prohibits an originator from placing his or her interests ahead of those of the customer.
Below are several examples in which a broker has violated the suitability rule by acting in its own interests instead of those of the customer:
A broker that recommends one product over another to a customer in order to receive a larger commission
A broker “designs” its recommendations so that it may garner higher commissions, rather than establishing a plan that is suitable for the needs of the customer
In order to keep its job, a broker recommends new products being promoted by its firm, rather than products that fit the specific needs of the customer
A firm pressures a broker into recommending products that pay higher commissions6
A critical part of an assessment of suitability is the customer’s financial profile; other factors can include cost, specific characteristics of a product or strategy, and more. For this reason, it is essential that the broker’s recommendation is always consistent solely with the best interests of the customer seeking assistance. However, brokers should keep in mind that, while their recommendations should be based only on what will work best for the customer, this does not necessarily create an obligation that the broker only recommend the least expensive option. Other recommendations may be made, so long as they are suitable for the customer’s
circumstances and do not put the best interests of the broker before those of the customer.
Reasonable Diligence in Obtaining Customer Information
The unique circumstances of each customer’s situation will impact the “reasonableness” of any efforts made in obtaining customer-specific information; however, in most cases, the individual will voluntarily provide all necessary information. Typically, and with the exception of any “red 5 FINRA Notice 07-43. http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p036816.pdf 6 FINRA Notice 12-25. http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p126431.pdf
10
flags” clearly signifying inaccurate or unclear information, obtaining specific details directly from the customer can ensure accuracy. However, there will be instances in which an originator may not have the ability to rely solely on what is provided by the customer. For example, if the customer clearly demonstrates signs of diminished capacity (discussed below) or other “red flags” indicating possible inaccuracy, or if the originator has posed a confusing or misleading question.7
Diminished Capacity and Suspected Financial Abuse
As the number of seniors in the United States continues to grow at a steady pace, it is likely that two common issues among older citizens will become more prevalent in the financial process: diminished capacity and financial abuse. According to a recent study by the National Institute on Aging, impaired cognition impacts approximately 20% of people aged 85 and older. Companies in the mortgage industry may experience cases in which they work with seniors who show clear signs of diminished mental capacity. This can seriously impact the lending process, and it is important for mortgage professionals to be properly informed of and educated on how to best serve members of the aging population.
In addition, some senior customers may bring with them the issue of suspected financial abuse by their caregivers or members of their family. Because it is difficult to define financial abuse, it may also be difficult for a broker to detect or recognize. Financial abuse is generally considered to be “…the misuse of an older adult’s money or belongings by a relative or a person in a
position of trust.”8 Signs, or “red flags,” of financial abuse may include an inability to contact
the senior customer, isolation of the individual from his/her family and friends, sudden, unusual, or unexplained withdrawals from the senior’s bank accounts, or clear signs of the senior
customer’s reluctance to discuss his/her finances in the presence of a certain family member or caregiver.
A firm may choose to take steps to address and prevent financial abuse. While not required, companies may elect to incorporate financial abuse policies as a matter of ethical concern or professional conduct. These efforts may include:
Choosing one specific individual within the company to be the designated point of contact for questions and concerns regarding senior financial issues and resources Providing relevant employees with written guidance on issues related to senior finances,
including how cases of financial abuse may be identified and addressed, as well as information about diminished capacity and its impact on financial matters9
Some companies providing reverse mortgages have detailed procedures in place for such issues, requiring employees to immediately notify their branch manager, supervisor or designated firm employee if they suspect abuse, who then may decide to report the suspected abuse to the
7 Ibid.
8 FINRA Notice 7-43.
http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p037148.pdf
11
appropriate state agency. Other companies ascertain, as a matter of course during the origination process, whether abuse may be occurring. Methods for doing so may include:
Asking whether the customer has executed a durable power of attorney
Asking the customer to designate a secondary or emergency contact for his/her account. This person would provide a point of contact should the lender find itself unable to speak directly with the customer, or have concerns about the location or health of the customer. Providing training to relevant employees (loan originators, processors, underwriters, etc.)
to better equip them to meet the needs of older customers. These needs may concern assets, liquidity, longevity, or future changes.
Some companies choose to invite representatives from advocacy groups in the senior
community, including the Alzheimer’s Association and others. State and local agencies that focus on serving the older population may also have useful information to share with employees. According to FINRA Notice 07-43, other organizations that can help firms get in touch with experts in their area include:
The National Association of State Units on Aging (www.nasua.org) The National Association of Area Agencies on Aging (www.n4a.org) AARP (www.aarp.org)
The National Council on Aging (www.ncoa.org)10 Professional Designations and Credentials
Recently, concern has risen about the abundance of financial professionals carrying titles such as “certified senior advisor,” “senior specialist,” or “retirement specialist;” these titles suggest a certain level of experience or expertise in the area of financial services or retirement planning for seniors. However, the criteria for these designations can vary widely; some require certification via a curriculum of financial education and one or more exams. Other titles have much less complex processes. Some designations simply require professionals to pay an annual fee or membership dues. Regardless of the requirements to obtain a professional designation, these titles may lead seniors to feel that a given individual is especially qualified to help older
borrowers, and place a greater level of trust in his/her opinion, whether or not he/she has engaged in any sort of specialized education. These designations may be violations of state law, and firms should be aware of antifraud and designation regulations in the state or states where they conduct business.11
The Truth-in-Lending Act (TILA)
The Truth-in-Lending Act (TILA) was initially enacted by Congress in 1968 as part of a larger legislation known as the Consumer Credit Protection Act (CCPA). The CCPA was intended to aid in consumer protection by allowing for the informed use of credit. TILA was the first law in
10 FINRA Notice 07-43.
http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p037148.pdf
12
which the federal government adopted disclosure requirements as a means of protecting consumers from unfair treatment by creditors. As previously mentioned, the regulations
associated with TILA are known as Regulation Z. A primary tenet of that regulation is to ensure that advertising for credit is truthful and not misleading.
In 2008, revisions to Regulation Z included a list of seven prohibited practices when advertising closed-end mortgage loans. Amongst those are the following:
Misleading claims of debt elimination: this includes claiming debt elimination when one debt merely replaces another debt. Paying off a consumer’s debt(s) with the proceeds from a reverse mortgage does not ‘eliminate’ his/her debt. Given the nature of the compounding of interest in a reverse mortgage, such a strategy may actually prove more expensive to the consumer than other alternatives from which they may be able to benefit.
Misleading use of the term “counselor”: an advertisement cannot refer to a for-profit lender, mortgage broker, or its employees as a “counselor.” Other designations, as discussed above, may also fall into the category of “misleading and deceptive” practices. In October 2009, a reformed set of rules increased the scrutiny of credit advertisements, and specific definitions were created for prohibited practices dealing with common mortgage industry advertising initiatives which lawmakers felt increased the likelihood of misled and/or misinformed consumers.
Further, as recently as August of 2011, the Federal Reserve updated and strengthened the focus on consumer protection in advertising by expanding coverage of the rules. The agency added language to the statutes in an attempt to clarify the requirements and avoid confusion caused by differences in interpretation. Ultimately, the Federal Reserve’s attempts to strengthen and clarify advertising rules pertaining to the mortgage industry are intended to make it possible for
consumers to gain a clear picture of products and features without misleading or incomplete terms making it difficult to decipher.
The Mortgage Acts and Practices (MAP) Rule
The Mortgage Acts and Practices – Advertising Final Rule (MAP Rule) was published by the Federal Trade Commission and became effective on August 19, 2011. The Rule was published
“relating to unfair or deceptive acts and practices that may occur with regard to mortgage advertising.” (76 FR 43826)
The Mortgage Acts and Practices - Advertising Rule amends Title 16 CFR by the addition of Part 321. The MAP Rule applies to entities which fall under the FTC’s jurisdiction – including mortgage brokers, servicers, lenders, and others who may engage in mortgage advertising; for example, advertising agencies or real estate agents. Entities which do not fall under the jurisdiction of the FTC, such as federal credit unions, banks, and savings and loan institutions, are not affected by the Rule.
13
The MAP Rule prohibits “any material misrepresentation, expressly or by implication, in any
commercial communication, regarding any term of any mortgage credit product....” (12 CFR
§1014.3) A list of prohibited misrepresentations is included in Section 1014.3 of the law. Specific references to reverse mortgages include:
Potential for default (12 CFR §1014.3(l)): this section states that misrepresentations regarding the potential for default are prohibited. Customers must be made aware that the potential for default exists not only in cases of mortgage nonpayment, but also in instances of “…nonpayment of taxes, insurance, or maintenance, or for failure to meet
other obligations.”
Right to reside in the home (12 CFR §1014.3(p)): this section prohibits
misrepresentations about the right of the customer to maintain residence in the property subject to the mortgage credit product. This includes “…misrepresentations concerning
how long or under what conditions a consumer with a reverse mortgage can stay in the dwelling.”
Effectiveness of the product (12 CFR §1014.3(m)): this section prohibits any
misrepresentation about the effectiveness of a certain mortgage product for resolving a customer’s debts. This includes claims that the product “…can reduce, eliminate, or
restructure debt or result in a waiver or forgiveness, in whole or in part, of the consumer’s existing obligation with any person.”
Existence of counseling services (12 CFR §1014.3(s)): this section prohibits
misrepresentations of the “…availability, nature, or substance of counseling services or
any other expert advice” on mortgage products for consumers. This includes
misrepresentations regarding the qualifications of those individuals offering such
services; the section applies to counselors, counseling agencies, lenders, and originators. This prohibition includes referencing nonexistent or self-conferred degrees or designations or referencing legitimate degrees or designations in a misleading manner. To help seniors and originators understand professional designations, FINRA maintains a database of those designations and the qualifications, if any, that are needed to obtain them at:
http://apps.finra.org/DataDirectory/1/prodesignations.aspx. High-Pressure Sales Seminars Aimed at Seniors
Regulators recently acted in response to increasing concern over one particularly aggressive form of mortgage product marketing. “Free lunch” seminars, frequently targeted at senior consumers, create situations in which a certain product is promoted to a large group of customers, even though that product is likely not suitable for the needs of all of the seniors present. These seminars create a high level of pressure and could lure seniors into making major financial decisions as the result of a false sense of urgency – perpetuated by statements such as “limited time offer” or an obligation to sign up that day. As a result of these concerns, FINRA
14
Throughout these investigations, it was discovered that these seminars often used false or misleading materials in the promotion and sales of mortgage products. FINRA Notice 07-43 noted:
Among the most common practices were inaccurate or exaggerated claims regarding the safety, liquidity or expected returns of the investment or strategy being touted; scare tactics; misrepresentations or material omissions about the product or strategy; conflicts of interest; or misleading credentials used by persons sponsoring or participating in the seminar. The examinations also detected instances in which advertisements failed to include the firm’s name, or made improper use of testimonials, in violation of NASD Rule 2210(d).12
It is certain that the CFPB and other regulators will issue rulings and bring disciplinary actions where warranted.
Definition of Terms Common for Reverse Mortgages
While the reverse mortgage side of the business does use similar terminology and language as the “forward” mortgage business, there are terms specific to, or used to describe features of, the reverse mortgage. The following is a list of some of the more pertinent terms used in relation to reverse mortgages:
Acceleration Clause: Terms in the mortgage describing when a loan may be declared due and payable
Adjustable Rate: A mortgage rate that may change one or more times over the term of the loan
Appreciation: An increase in home values
Constant Maturity Treasury Rate (CMT): Used most commonly as the index for the most widely-used reverse mortgage, the HECM
Condemnation: A court decision that determines a property is unable to be occupied; this is common in the conversion of private property to public use under eminent domain Deferred Payment Loan (DPL): A lump sum reverse mortgage used for home repair,
which is generally offered through a state or local government agency Depreciation: A decrease in home value
Eminent Domain: The government’s right to convert private property for use in public works or projects
Expected Interest Rate: The determining rate used to calculate a borrower’s advances for a HECM
Federal Housing Administration (FHA): Federal agency within the Department of Housing and Urban Development (HUD) charged with insuring HECM loans
12
FINRA Notice 07-43.
15
Federally-Insured Reverse Mortgage: The Home Equity Conversion Mortgage (HECM)
Home Equity: An amount calculated by subtracting the total debt against the value of a home from that same value
Home Equity Conversion: Converting the available equity in a property into cash without giving up ownership and without a required payment
Home Equity Conversion Mortgage (HECM): The only federally-insured reverse mortgage product, by the FHA
Home Value Limit: In the HECM program, the largest home value that can be used to determine a borrower’s loan advance amounts
Initial Interest Rate: The interest rate that is first charged on a loan, beginning at closing Leftover Equity: The net proceeds from selling a home, minus the total amount of debt
owed against it
London Interbank Offered Rate (LIBOR): Used as an interest rate index in the HECM program
Loan Advances: Payments made to a borrower, or to another party on behalf of a borrower
Loan Balance: The amount owed, including principal and interest Lump Sum: A single loan advance at closing
Margin: The amount a lender adds to the index on an ARM to establish the adjusted interest rate
Maturity: When a loan becomes due and payable
Mortgage: A legal document making a home available to a lender to satisfy a debt Non-Recourse Mortgage: A home loan in which a lender may look only to the value of
the home for repayment; the borrower has no personal liability for any repayment Origination: The overall administrative process of setting up a mortgage, including the
preparation of documents
Property Tax Deferral (PTD): A reverse mortgage providing annual loan advances for paying property taxes, usually offered by state or local governments
Proprietary Reverse Mortgage: A reverse mortgage product designed by a private company
Reverse Mortgage: A non-recourse loan against home equity, providing cash advances to a borrower and requiring no repayment until a future event
Right of Rescission: A borrower’s right to cancel a home loan within three business days of closing, as provided by the Truth-In-Lending Act
16
Reverse Mortgage Eligibility
In order to be eligible for most reverse mortgages, an individual must own his/her home and be at least 62 years of age. To qualify for most other home loans, the lender will check a loan applicant’s income to see how much he/she can afford to pay back each month; with a reverse mortgage, an individual does not have to make monthly repayments. Consequently, an individual does not need a minimum amount of income to qualify for a reverse mortgage, nor is there a requirement for a minimum credit score. An individual could have no income and still be able to obtain a reverse mortgage.
With most home loans, if a borrower fails to make monthly repayments, he/she could lose the home. However, with a reverse mortgage, there are no monthly repayments to make, so an individual cannot lose the home by failing to make them. Reverse mortgages typically require no repayment for as long as the homeowner or any co-owner(s) lives in the home. As a result, they differ from other home loans in these important ways:
There is no income needed to qualify
There are NO monthly payments required, as long as the homeowner continues to live in the home as a primary residence
Deciding Whether a Reverse Mortgage is the Right Path for a Homeowner
Whether eligible for a reverse mortgage or not, there is more to deciding whether cashing out equity is appropriate for a homeowner than qualification alone. There are some very important questions to ask, all of which a housing counselor can help an elderly borrower to consider. The first question asked should be, “Have alternative options been considered?” A reverse mortgage can be a very expensive option and can quickly erode the equity in a property, which may actually harm a homeowner’s retirement plan if not carefully considered.
Reverse mortgage counseling will be discussed in greater detail in a later section of this course, but some other simpler or less expensive options may include:
Selling and Moving: Many homeowners become interested in reverse mortgages as a way to remain living in their present homes. Selling the home and moving elsewhere is generally not very appealing to most reverse mortgage shoppers. But for some, this may actually be the least expensive and most feasible option.
Supplemental Income: While the cash disbursements from a reverse mortgage are most often used to supplement the income of an elderly homeowner, there are other public programs available that may achieve similar results much less expensively. For example, a substantial portion of all Americans aged 65 and over who are eligible for monthly cash benefits from Supplemental Security Income (SSI) are not getting them.
Property Tax Relief: Most states have one or more property tax relief programs, which allow an elderly homeowner discounted rates or deferred payments. Some allow for less expensive reverse mortgage products to be used solely for the purpose of paying property taxes or even health care costs.
17
Postpone or Combine: Public benefits can make it possible for a homeowner to
postpone getting a reverse mortgage until a future time. In many cases, this may allow a homeowner to obtain larger future loan advances because he/she will be older, have a shorter life expectancy, and the home’s value is likely to be greater at that time. The longer a homeowner waits, the less the equity will be consumed by interest charges. On the other hand, a homeowner can sign up for public benefits and take out a reverse mortgage. The need for loan advances will be less than if he/she was not receiving public benefits. By taking smaller loan advances, a homeowner will have smaller interest charges and preserve more equity for future use.
In many cases, after some research, other, less expensive alternatives may be best for a
homeowner who simply needs a little assistance, especially if he/she is only in need of temporary help.
Homeowners who are considering pulling equity from their homes using one of the available reverse mortgage options should consider several alternatives before ultimately making a final determination as to the appropriate path. An article from AARP outlines five questions that homeowners should ask themselves before taking the plunge and obtaining a reverse mortgage:
13
Do you really need a reverse mortgage?
Why are you interested in these loans? What would you do with the money you would get from one? Are the needs you intend to meet really worth the high cost of these loans? If you want to take that dream vacation, a reverse mortgage is a very expensive way to pay for it. Investing the money from these loans is an especially bad idea, because the loan is highly likely to cost more than could be safely earned. If anyone is trying to sell you something and recommending you use a reverse mortgage to pay for it, that is generally a good sign that you do not need it and should not be buying it. Be especially wary if you do not fully understand what the person is selling or if you are not certain that you need it.
Can you afford a reverse mortgage?
These loans are very expensive, and the amount you owe grows larger every month. The younger you are when you take out a reverse mortgage, the longer compound interest will grow, and the more you will owe. On the other hand, due to high upfront costs, reverse mortgages can be especially costly if you sell and move just a few years after taking one out.
Can you afford to start using up your home equity now?
The more home equity you use now, the less you will have later when you may need it more; for example, to pay for future emergencies, healthcare needs, or everyday living expenses—especially if your current needs grow or your income does not keep pace with inflation. You may also need your equity to pay for future home repairs or a move to assisted living. If you are not facing a financial emergency now, consider postponing a
13AARP. “5 Questions to Ask Before Considering a Reverse Mortgage.” September 2010.
18
reverse mortgage. Homeowners who decide to wait have “a reasonable expectation of
securing a better product at a lower cost in the not-too-distant future,” according to a
report by the Fidelity Research Institute. Do you have less costly options?
Do you have other financial resources that you could use instead of taking out a loan? If you do not, and if you could easily make the monthly repayments on a home equity loan or home equity line of credit, these alternatives are much less costly than a reverse mortgage. Many state and local governments offer very low-cost loans for paying your property taxes or making home repairs.
Do you fully understand how these loans work?
Reverse mortgages are quite different from any other loan, and the risks to borrowers are unique. Before considering one, you need to do your homework carefully and thoroughly. A reverse mortgage is a major financial decision, and you cannot afford to find out too late that you misunderstood or were not aware of any important facts about these loans.
Common Features
Although there are many different types of reverse mortgages, most carry similar features. Some of the more common features are discussed next.
Homeownership
With a reverse mortgage, an individual remains the owner of the home, just as when he/she had a forward mortgage. The homeowner is still responsible for paying property taxes and
homeowner’s insurance and for making property repairs. When the loan is over, the homeowner or his/her heirs must repay all of the cash advances plus interest. Reputable lenders do not want the house; they want repayment.
Financing Charges
A homeowner may use the money received from a reverse mortgage to pay the various fees that are charged on the loan. This is called “financing” the loan costs. The costs are added to the loan balance, and the homeowner pays them back plus interest when the loan is over.
Loan Amounts
The amount of money a homeowner may receive depends most on the specific reverse mortgage plan or program selected. It also depends on the kind of cash advances chosen. Some reverse mortgages cost a lot more than others, and this reduces the amount of cash a homeowner may obtain from them.
Within each loan program, the cash amounts a homeowner may obtain generally depend on the age of the individual and the home’s value:
19
The more the home is worth, the more cash he/she may obtain
The specific dollar amount available to an individual may also depend on interest rates and closing costs on home loans in the area.
Debt Payoff
Reverse mortgages generally must be “first” mortgages; that is, they must be the primary debt against the home. If an individual owes any money on the property, the individual generally must do one of two things:
Pay off the old debt before obtaining a reverse mortgage
Pay off the old debt with the money received from a reverse mortgage
Most reverse mortgage borrowers pay off any prior debt with an initial lump sum advance from their reverse mortgage. In some cases, an individual may not have to pay off other debt against the home. This can occur if the prior lender agrees to be repaid after the reverse mortgage is repaid. Generally, the only lenders willing to consider “subordinating” their loans in this way are state or local government agencies.
Debt Limit
The debt owed on a reverse mortgage equals all the loan advances received, including any used to finance loan costs or to pay off prior debt, plus all the interest that is added to the loan balance. If that amount is less than the home is sold for when the individual pays back the loan, then the individual (or the estate) keeps whatever amount is left over. However, if the rising loan balance ever grows to equal the value of the home, then the total debt is generally limited by the net sales proceeds from selling the home. This overall cap on the loan balance is called a “non-recourse” limit. It means that the lender, when seeking repayment of the loan, generally does not have legal recourse to anything of the borrowers’ other than the home’s value and cannot seek repayment from the individual’s heirs, provided the heirs do not wish to retain the property. If they do, and do not sell the home to use the proceeds to retire the debt, they will have to repay the debt, even if the balance exceeds the net sales proceeds which might be generated from the sale of the home.
Repayment
All reverse mortgages become due and payable when the last surviving borrower dies, sells the home, or permanently moves out of the home (typically, a “permanent move” means that neither the individual nor any other co-borrower has lived in the home for one continuous year.)
Reverse mortgage lenders can also require repayment at any time if an individual fails to: Pay property taxes or special assessments
Maintain and repair the home, or keep the home insured
20
however, lenders generally have the option to pay for these expenses by reducing loan advances and using the difference to pay these obligations. This is only an option, however, if an
individual has not already used all of the available loan funds. Other default conditions could include:
Declaration of bankruptcy Abandonment of the home
Perpetration of fraud or misrepresentation
Eminent domain or condemnation proceedings involving the home
A reverse mortgage may also include “default” clauses that make it due and payable. Generally, these relate to changes that could affect the security of the loan for the lender. For example:
Renting out part or all of the home Adding a new owner to the home’s title Changing the home’s zoning classification Taking out new debt against the home
Loan documents should be read carefully to ensure an understanding of all the conditions that can cause the loan to become due and payable.
Rescinding the Deal
After closing a reverse mortgage, an individual has three extra days to reconsider the decision. If for any reason an individual decides he/she does not want the loan, he/she can cancel it. An individual must do this within three business days after closing. In accordance with the Truth-In-Lending Act’s provisions regarding rescission, the term “business day” includes Saturdays, but not Sundays or legal public holidays. If a homeowner decides to use this “right of rescission,” he/she must do so in writing, using the form provided by the lender at closing, or by letter, fax, or telegram. The notice must be hand-delivered, mailed, faxed, or filed with a telegraph company before midnight of the third business day. An individual cannot rescind orally by telephone or in person. The notice must be in writing.
Various Reverse Mortgage Products
As mentioned in the previous section, a homeowner has several considerations in determining if a reverse mortgage is an appropriate tool for their specific circumstances. After careful thought to determine whether a reverse mortgage is a possibility, another consideration is which type of product to choose. There are several options which share many similarities, as previously mentioned. Following is a listing of the more widely-used and well-known products in the market.
21
Single Purpose Reverse Mortgage
These are low-cost loans offered to low-income borrowers by state and local agencies or non-profit organizations. Borrowers can only use them for the purpose specified by the lender, such as payment for home improvements or payment of property taxes.
Sometimes referred to as Deferred Payment Loans (DPLs), this type of public sector reverse mortgage provides a one-time, lump sum advance. No repayment is required for as long as the borrower lives in the home. Eligibility criteria vary from program to program. Most are limited to homeowners with low or moderate incomes. Many place a limit on a home’s value or lend only in defined areas. Some have a minimum borrower age or a disability requirement. DPLs can be used only for the specific types of repairs or improvements that each program allows. This may limit a homeowner to projects that replace or repair basic items, such as the roof, wiring, heating, plumbing, floors, stairs, or porches. Many programs will cover
improvements in accessibility or energy efficiency. Such modifications may include the installation of ramps, rails, grab bars, storm windows, insulation, or weather stripping.
Some state and local government agencies offer “property tax deferral” (PTD) loans. This type of public sector reverse mortgage generally provides annual loan advances that can be used only to pay property taxes. No repayment is required for as long as the borrower lives in the home. In some states, PTD is available on a uniform, statewide basis. In many others, it is not available in all areas, or is not the same in all the areas where it is available. Eligibility criteria vary
considerably. Depending on the state, and details of the program, some can carry a minimum age slightly higher than the standard age of 62 required for most typical reverse mortgage programs, and are usually limited to homeowners with low or moderate incomes.
The amount of the annual PTD loan advance is generally limited by the amount of the property tax bill for that year. Some programs limit the annual advance to some part of the tax bill, or to a specific amount.
Home Equity Conversion Mortgage (HECM)
HECM loans generally provide the largest loan advances of any reverse mortgage. HECMs also provide the most choices in how the loan is paid, and the borrower can use the money for any purpose. Although they can be costly, HECM loans are generally less expensive than privately insured reverse mortgages. These other reverse mortgages may have smaller fees, but they generally have higher interest rates. On the whole, HECMs are likely to cost less in most cases. The HECM is the only product insured by the Federal Housing Administration, and requires counseling to be completed with a HUD-certified HECM counselor before the loan can be finalized. The HECM has several options to better address the specific circumstances of each borrower. These loans will be addressed more specifically in a separate section later in the course.
22
Proprietary Mortgage
Proprietary mortgages are private loans. They are more expensive, but often allow homeowners to borrow more than they can borrow with a HECM. Homeowners with expensive homes who want to borrow more than they can borrow with a HECM may consider this type of reverse mortgage. Private companies develop and back these loans, and they decide which lenders may offer them. By contrast, HECMs are backed by the U.S. Government and may be offered by any lender approved by the Federal Housing Administration.
Compared with HECMs, proprietary reverse mortgages typically offer lower upfront and monthly fees but charge much greater interest rates—as much as three percentage points (3%) greater. In other words, the lower fees on a proprietary plan can be offset by its much higher interest rate, resulting in greater total costs for the proprietary plan.
These types of proprietary reverse mortgages (those that are not FHA-insured HECM loans) nearly vanished from the marketplace during the recession. At this time, only a few products are available, mostly for very high-value homes.
The Growing Popularity of the Reverse Mortgage
Without a doubt, the reverse mortgage, and more particularly the HECM loan, has become a much more popular and commonly discussed product in today’s mortgage industry. The overall number of “Baby Boomers,” those reaching the proverbial retirement age, has risen dramatically; combined with the economic struggles many are experiencing with retirement accounts, and possibly unemployment, reverse mortgages can be useful tools.
The debate often revolves around whether a senior should choose to access the equity in his/her home, or look for other opportunities or methods to supplement income. Unfortunately, as a result of the economic downturn in 2008, many seniors are discovering diminishing returns from their retirement accounts and have been left with limited resources. In some cases, whatever home equity remains in their residences may be the only assets they have. The popularity of the product in these cases is often a result of necessity.
With greater restrictions on costs, and more publicity of the product, elderly homeowners are becoming more comfortable with the idea of reverse mortgages as they become more educated about the product, and it becomes less expensive.
Discussion Scenario: A Family’s Decision in Obtaining a Reverse
Mortgage
Paul and Mary Stevens have both been retired for five years and have struggled through their retirement. Shortly after leaving their teaching jobs after 40 plus years, the couple’s retirement accounts were hammered by the economic downturn as the financial markets collapsed. Paul and Mary have been discussing ways to lighten their financial load in recent months and have
23
begun looking at the possibility of taking a reverse mortgage on their home, which they have owned, free and clear, for many years.
Mary is concerned, however, because she and Paul have long planned to leave their family home to their eldest son when they are no longer around. She tells Paul regularly during their
conversations about ways to cut expenses because she cannot bear to think of not having her grandchildren grow up in the family home.
During their talks, Paul reminds Mary about the fact that a reverse mortgage does not eliminate that possibility in the future, and perhaps may lower the likelihood of being forced to have their son’s family move in with them in order to help pay bills.
Paul Jr. has just recently learned of his parents’ consideration of the reverse mortgage as an alternative to supplement his parent’s income. His initial concern, similar to his mother’s, was that the long-held plan of his young family inheriting the home upon his parents’ passing would be jeopardized as a result. Paul Jr. has half-heartedly suggested he find some part-time work for his Dad at his company if he needs extra income.
Paul Sr. and Mary are feeling pressure that they may be running out of time to make a decision to alleviate their current financial woes.
Discussion Questions
What are some options that Paul and Mary might consider, other than the reverse
mortgage?
Where might the family seek additional information about options for their home,
including information about reverse mortgages?
What options might Paul Jr. have in moving into the family home, even in the event that
his parents take a reverse mortgage?
Discussion Feedback
Paul and Mary are in a similar position to many other aging homeowners. Given the state of their retirement benefits and savings, they are struggling to make ends meet. Rather than be a burden on his son and his young family, Paul Sr. is inclined to tap into the equity he and his wife have created over many years in their home. However, his wife and son are hesitant to sign on the plan. Paul Sr. might be wise to suggest that the entire family seek some counseling from a HUD-approved HECM counselor, and make sure everyone who may be affected by the decision is fully informed.
After counseling, Paul and Mary might consider other options, such as seeking a reduced or deferred property tax payment. They may even consider moving forward in having Paul Jr. and his family move into the home with them to help with the bills. In the worst case scenario, and certainly not what they would prefer, they could sell the home altogether and seek to move into a less expensive house. This, of course, would mean their plan to pass the home along to their son would be lost.
24
If Paul Jr.’s parents do take a reverse mortgage, this does not eliminate the possibility of Paul Jr.’s family taking ownership of the home later on down the road. In the wake of his parent’s passing, Paul could facilitate the move by using a new mortgage to pay off the lien created by his parents through the use of the HECM. Depending on the will, and the state’s requirements in probate, it could even be a simple process to conduct. If the family does wish to retain the property, and they do not sell the home to use the proceeds to retire the debt, they will have to repay the debt, even if the balance exceeds the net sales proceeds which might be generated from the sale of the home.
Module 2
Learning Objectives
As addressed earlier in the course, the Home Equity Conversion Mortgage (HECM) is the only reverse mortgage product that carries the backing of the federal government, through the Department of Housing and Urban Development (HUD). In this module, we will take a closer look at the details of the HECM, its features, and unique benefits for the elderly borrower. In Module 2, participants will:
Gain a more detailed understanding of the HECM
Learn what the benefits of the HECM are for both the lender and borrower Learn how loan amounts are determined
Look at both the upfront and long term costs of the HECM Gain a general understanding of the several types of HECM loans Examine the steps in the reverse mortgage process
Take a more detailed look into the counseling requirements
Examine the future of the market for reverse mortgages and discuss the lenders entering (and leaving) the market
Overview of the Home Equity Conversion Mortgage
The HECM is the only reverse mortgage product insured by the federal government. HECM loans are insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). The FHA tells HECM lenders how much they can lend, based on age and home value. The HECM program limits loan costs, and the FHA guarantees that lenders will meet their obligations.
FHA’s HECM is a loan secured by a first mortgage on the property, and enables a homeowner aged 62 or older to convert some of the equity in his or her home to cash to pay living expenses. The borrower may take the loan funds in monthly advances for a fixed period or until he/she no
25
longer qualifies and/or through a line of credit. Each month’s interest is added to the principal loan balance, causing the interest to be compounded.
Common characteristics of the HECM mortgage include:14
Loan proceeds are paid out according to a payment plan selected by the borrower
Unlike a traditional "forward" mortgage, which is repaid in periodic payments, a reverse mortgage is repaid in one payment
The HECM is a "non-recourse" loan. This means that the borrower (or his/her estate) will never owe more than the loan balance or the value of the property (whichever is less), and no assets other than the home must be used to repay the debt.
The HECM has neither a fixed maturity date nor a fixed mortgage amount
If the lender cannot make payments to the borrower, HUD will assume responsibility for making payments until the lender is able to do so. If the lender will not be able to make future payments, HUD will take over payments for the remainder of the term.
The mortgage proceeds paid by the lender and/or HUD will be secured by first and second mortgages on the property. These liens allow the lender and HUD to recover any losses up to the value of the property when the borrower dies or no longer maintains the property as a principal residence.
An HECM loan insures lenders against loss on those reverse mortgages that convert equity into cash disbursements. HECM loans are available in all 50 states, the District of Columbia, and Puerto Rico.
HECM Eligibility
There are several eligibility requirements for a borrower looking to obtain an HECM. To be eligible for an HECM loan, the borrower must:
Be the owner of the home Be aged 62 or over
Live in the home as a principal residence Not be delinquent on any federal debt
The home must be a single-family residence or a one- to four-unit dwelling, or part of a planned unit development (PUD) or a HUD-approved condominium. Some manufactured homes are eligible, but most mobile homes are not. Recent changes to HECM guidelines addressing cooperatives have been passed legislatively; however, they have yet to be finalized. As a result, cooperatives are not eligible for the HECM loan at this time. The home must also meet HUD’s minimum property standards, but a borrower can use the HECM to pay for repairs that may be required.
14 National Reverse Mortgage Lenders Association. “Home Equity Conversion Mortgages.”
http://www.nrmlaonline.org/App_Assets/public/31c16af6-2843-4056-8f41-73bdabc7ece7/4235.1%20HECM%20Handbook.pdf
26
The borrower must also receive counseling from a HUD-approved housing counseling agency relating to:
Alternatives to HECMs
The financial implications, including tax implications, of entering into an HECM The effect on eligibility for assistance under federal and state programs
The impact on the estate and heirs of the homeowner The Benefits of the HECM
The HECM program provides the most extensive selection of cash advance options. A borrower can select from any one, or a combination, of the following:15
Tenure (life), under which the lender makes equal monthly payments to the borrower for as long as he/she lives and continues to occupy the property as a principal residence Term, under which the lender makes equal monthly payments to the borrower for a fixed
period of months selected by the borrower
Line of Credit, under which the lender pays proceeds to the borrower in unscheduled payments or in installments, at times and in amounts chosen by the borrower, until the line of credit is exhausted. This line of credit may be taken as a lump sum when issued. Modified Tenure, under which a line of credit is combined with monthly payments for
life or for as long as the borrower continues to live in the home as a principal residence. In exchange for reduced monthly payments, the borrower sets aside a specified amount of money for a line of credit on which he/she can draw until the line of credit is exhausted. Modified Term, under which the borrower combines a line of credit with monthly
payments for a selected fixed period of months. As with the Modified Tenure plan, in exchange for reduced monthly payments, the borrower sets aside a specified amount of money for a line of credit on which he/she can draw until the line of credit is exhausted. Another important consideration is that the borrower may change his or her payment plan
throughout the life of the loan, and he/she may receive a cash advance in an amount, when added to the outstanding balance, that does not exceed the principal limit. If the new outstanding balance does not equal the principal limit, such an unscheduled payment would likely result in a new payment plan with a new reduced monthly payment or line of credit. A draw under an existing line of credit does not result in a new payment plan.16
15 Department of Housing and Urban Development. “Home Equity Conversion Mortgages.” Chapter 1-5.
http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh/4235.1
16
Department of Housing and Urban Development. “Home Equity Conversion Mortgages.” Chapter 5-4. http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh/4235.1
