Evaluating the HECM product

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Evaluating the HECM product

March 26, 2015

Presented by Garrett M. Kolb

[email protected] Senior Managing Director Reverse Mortgage Solutions, Inc.

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3/26/2015

These materials are designed to provide the reader with a general overview and understanding of the topic(s) presented and are not intended as a substitute for consultation with qualified legal counsel regarding the manner in which the laws, regulations, and guidelines covered may apply to a particular fact pattern or business model. No part of this presentation may be reproduced, forwarded, copied, or redistributed in any form or by any means without the prior written consent of Reverse Mortgage Solutions, Inc. (“RMS”). This

presentation could include technical inaccuracies or typographical errors. RMS does not guarantee the accuracy of the information provided and disclaims any and all express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. This presentation should not be construed as legal advice or relied on as a sole resource for any part of the Home Equity Conversion Mortgage program.

Unauthorized reproduction, forwarding, distribution or display of this copyrighted work is subject to criminal and civil penalties under federal law.

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Agenda

 Reverse Mortgage History

 Reverse Mortgage Product Overview

 Comparisons of Forward vs. Reverse

 Marketplace Perceptions

 Technical Considerations - Integration

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Industry Evolution

• Original reverse mortgage product dates back to 1989.

• Received a boost from HUD in 1999 when it increased the origination fee from 1 to 2%, and from Fannie Mae when it started paying a premium in 2001.

• By mid-2010, margins and profitability became robust as reverse mortgages gain wider acceptance and the

secondary market vastly expanded.

• GNMA becomes the primary

secondary market for HECM loans, increasing margins and investor base.

• Low interest rates and high investor demand increase margins

significantly.

• HUD reduces principal limit, but also lowers floor rate, allowing for higher Loan to Value.

• Competitive landscape has eased, as major commercial banks focus on their “core” business lines.

• Non-borrowing spouse protections put in place by HUD.

• Reverse mortgages continue to gain acceptance which, combined with the ever-growing senior

demographic, makes for an attractive market.

• Return of proprietary and jumbo product development by industry players.

• Stabilization of home process and reemergence of non-government securitization will open door for new proprietary products.

• Margins may improve as secondary market acceptance of the reverse mortgage product increases.

Past

_Presen

_t

Future

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How a Reverse Mortgage Works

Borrower pledges home equity to guarantee loan repayment. Based on age, interest rate, and home value the maximum principal amount is established Borrower receives regular or periodic payments from lender Borrower occupies home until death or default, even if all principal has been paid out

At death of last borrower property is sold by estate to pay off loan or the property is acquired and sold to investor If proceeds from sale are less than debt, lender files a claim with FHA

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Product Overview

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Forward vs. Reverse

Forward Mortgage

• Purpose of loan is to purchase property or refinance.

• Prior to closing, borrower has limited-to-no equity.

• Must have sufficient income-to-debt ratio to qualify for the loan.

• During life of the loan: Pay monthly installments, loan balance decreases, and equity increases.

• Falling debt, rising equity.

• Amount borrowed is determined by

requirements for income, credit worthiness and appraised value of homes.

• Counseling is not required.

Reverse Mortgage

• Purpose of loan is to generate cash or purchase property.

• Prior to closing, borrower has significant level of equity in property.

• Financial assessment of income and

creditworthiness to support ability to maintain mandatory housing and living expenses. • During life of the loan: Receive monthly

payments, loan balance increases, and equity gets reduced.

• Rising debt, falling equity.

• Amount borrowed is determined by

considering age, current interest rate, and appraised value of home.

• Requires HUD Approved Counseling.

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Product Specifications

• HUD Product-National lending limit: $625,500

(MCA)

• Loan amount is determined by the HUD (PLF)

factor

• Single family primary residence 2-4 unit

properties, approved condo and manufactured

• Refinance and Purchase

• Minimum age 62

• Protection for eligible non-borrowing spouses

• No monthly mortgage payments

• Taxes, insurance and other property charges

must be kept current and property maintained

• No prepayment penalty

• Non-recourse

• Mortgage Insurance required (MIP)

• HUD-mandated counseling

• FRM - Single Disbursement

• ARM - Multiple Disbursement options

• Tenure payment-lifetime payments

• Term payments-fixed payout term

• Line of Credit:

— Credit limit grows annually

• Rather than credit- and income-based

underwriting used in traditional mortgages, a borrower’s age and the amount of equity in the home are the primary factors used to qualify for a HECM.

• Financial assessment of income and credit

history to support ability to maintain mandatory housing and living expenses.

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Reverse Mortgage Benefits

 Pay off an existing mortgage and get cash for any

reason.

 Access remaining equity through lifetime payments,

term payment and/or line of credit.

 No monthly mortgage payments for as long as you live

in the home and continue to meet the property obligations.

 Minimal out-of-pocket closing costs; e.g., counseling and

appraisal fee. Other closing costs are usually financed.

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Reverse Mortgage Benefits

 Loan proceeds are not taxable.

 Social Security and Medicare benefits are not affected.

 You will never owe more than what your home is

worth—even if your home decreases in value when it comes time to repay your loan (non-recourse).

 You or your heirs may have an option to cash out any

equity remaining after the loan is paid off.

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Perceptions

 The loan balance increases over time as interest on

the loan and fees accumulates. As home equity is

used, fewer assets are available to leave to your heirs.

 Access to additional available funds may be limited

during the first year.

 Mortgage insurance cost may be substantially higher

in low-equity scenarios.

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Perceptions

 Eligibility for needs-based government programs, such

as Medicaid, may be affected.

 The loan becomes due when the last borrower or

eligible non-borrowing spouse no longer resides in the home; the home is no longer the borrower’s principal residence; or the borrower vacates the property for more than 12 months.

 Loan defaults when property obligations are not paid or

the property is not maintained per the terms of the loan agreement.

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Statistics

Source: Reverse Marketing Insight Industry Trends; www.rminsight.net

• The reverse mortgage market is about 1% the size of the traditional mortgage market.

• The number of reverse mortgage originations is likely to increase in upcoming years as the Baby Boom generation – those born from 1946 to 1964 – retire.

• 41% of Americans aged 55 to 64 have no retirement savings

account.

• The homeownership rate for those aged 55 to 64 is 74%.

• Homeowners aged 62 and older hold a combined $3.84 trillion in equity in their homes.

• 10,000 people turn age 62 daily. • 23 million households

• 6% relocate

• 20% use mortgage financing • 276,000 purchase

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Tactical & Technical

• Recruiting tool

• Historically profitable

• Versatile product

• Purchase Market & Realtor

• Financial Planners

• More senior lending options

• Expand customer base

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Integration

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Conclusions & Questions

 The HECM may not be right for every borrower.

 The HECM may not be right for every lender.

 The HECM is unique; there is no other product like it.

 The HECM is unique and requires a specialized process.

 When the need exists within the organization, the HECM

expands opportunity.

 Cost of implementation may outweigh the benefits.

 The cost of not offering the HECM may be immeasurable.