RESIDENTIAL RELOCATION:
Cafeteria Style
Reverse Mortgages
Mortgage Interest Differential Payments
Income Determination
Tuesday, June 25, 2013
11:00 AM - 12:30 PM
Reverse Mortgages in Relocation Assistance
Residential Relocation: Cafeteria Style
aka Home Equity Conversion Mortgages (HECMs).
Marshall Wainright
Realty Team Leader
FHWA Resource Center
HECM Program Eligibility Requirements
• Age: Borrower (or youngest borrower must be at least
62 years old.
• Ownership: The borrower must hold title to the
property.
• Principal residence: Borrower must occupy the
property as a principal residence
• Sole mortgage: Any existing mortgages must be paid off
at closing.
• Property standards: Property must meet minimum
housing quality standards as prescribed by FHA.
Repayment Triggers
• Death: Borrower (or last co-borrower) dies.
• Move-out: Borrower (or last co-borrower) moves out of
house permanently.
• Extended absence: Borrower (or last co-borrower) does
not physically reside in property for more than 12 months
due to illness or other reasons.
• Sale or gift of property: Borrower (or last co-borrower)
sells the property or otherwise transfers title to third
party.
• Failure to fulfill obligations: Borrowers fails to pay taxes,
insurance, or keep home in good repair.
Mortgage Amount Based On
• Age of youngest borrower
• Current interest rate
• Lesser of appraiser value or the HECM FHA mortgage
limit of $625,000 or sales price; and
• Initial mortgage premium (HECM Standard or HECM
Saver)
HECM Costs
• Mortgage insurance premium
• Third party charges (closing costs)
• Origination fee – depends on value of home
• Interest rate – adjustable or fixed
• Servicing fee – account statements, disbursing loan
proceeds, assuring loan requirements are met
Why Choose a Reverse Mortgage?
• Allows homeowners to draw down equity and
continue to reside in existing home for extended
period (age in place)
• This equity conversion helps meet expenses in
retirement
• Choose between income stream to assist with
everyday expenses, a line of credit for major
expenses, or combination
• No monthly payments to a lender ever required –
interest accrues over life of loan and debt is satisfied
when borrower dies or sells the home
Disbursement Options
• Tenure – equal monthly payments as long as borrower
lives and continues to occupy property
• Term – equal monthly payments for a fixed period of
months selected
• Line of credit – unscheduled payments or in installments,
at borrower’s choosing until LOC is exhausted
• Modified tenure – combination of LOC and tenure
payments
• Modified term – combination of LOC and term payments
• Lump Sum – all or most equity drawn up front (now
accounts for 70% of market)
Challenges for Displacing Agencies
• Agency obligations under the Uniform Act to displaced
homeowners with a reverse mortgage
• Consistent, equitable guidance for handling these
situations
• HECMs not similar to type of mortgage envisioned under
original increased interest provision of Uniform Act –
owner is obtaining either a revenue stream or a revenue
package by drawing down on the property’s equity
• Various disbursement options present different
challenges for solutions
Example
Existing HECM Tenure Payments
(accrues interest and mortgage insurance
monthly that apply to mortgage balance)
Balance of HECM at time of acquisition
$800/month
$64,200
FMV of subject property
$300,000
Equity in subject property
$235,800
Comparable replacement property
$320,000
Price differential payment
$20,000
The homeowner should have sufficient equity plus the price differential payment to obtain a
HECM for purchase for the comparable replacement dwelling that provides a similar
monthly tenure payment (based on new actuarial tables at current age).
Homeowner also eligible for fees & costs associated with new HECM and increased interest
rate, if any.
It Gets Complicated…
• The homeowner with the HECM has little or no equity
in the subject property at the time of
acquisition…now what??
• Does the Agency still have to offer comparable
replacement housing?
• What options are available ?
Example
Existing HECM Tenure Payments
(accrues interest and mortgage insurance monthly that
apply to mortgage balance)
$800/month
Balance of HECM at time of acquisition
$200,000
FMV of subject property
$200,000
Equity in subject property
Comparable replacement property
Price differential payment
0
$210,000
$10,000
This situation presents several challenges for the displacing Agency;
1. Is the monthly tenure payment an eligible portion of the MIDP or replacement housing
payment?
2. Since the owner only has the $10,000 price differential payment available to purchase a
replacement dwelling, how does the Agency get her into another house?
Solutions FHWA is considering (not finalized)
• Compute a rental assistance payment for the
displaced homeowner – convert owner to tenant
status
• Provide assistance under Housing of Last Resort
• Supplemental payment to enable the homeowner to
reestablish a replacement HECM for purchase – this
supplemental payment may include the amount needed to
reestablish a HECM that pays out the same monthly
revenue stream previously received
• Provide a direct loan to the homeowner with the same
terms as the original reverse mortgage – amount and
tenure payment calculated on current age of owner and
actuarial tables
Solutions FHWA is considering (not finalized)
- continued
• Provide assistance under Housing of Last Resort
• Create a life estate for the homeowner with the Agency as the
remainderman – homeowner responsible for taxes, insurance
and maintenance of property
• Purchase a replacement dwelling and rent/lease back to
homeowner for life – homeowner responsible for taxes and
insurance. Maintenance may be Agency responsibility since it
is the owner.
• Provide a lump-sum payment based on the monthly tenure
payment for the actuarial remainder of the homeowner’s life,
discounted at the historical passbook savings rate.
Solutions FHWA is considering (not
finalized)continued
Make a payment under 49 CFR 24.106 Expenses incidental to
transfer of title to the Agency
(a) The owner of the real property shall be reimbursed for all reasonable expenses the
owner necessarily incurred for:
(1) Recording fees, transfer taxes, documentary stamps, evidence of title, boundary surveys,
legal descriptions of the real property, and similar expenses incidental to conveying the real
property to the Agency. However, the Agency is not required to pay costs solely required to
perfect the owner's title to the real property;
(2) Penalty costs and other charges for prepayment of any preexisting recorded mortgage
entered into in good faith encumbering the real property; and [emphasis added]
(3) The pro rata portion of any prepaid real property taxes which are allocable to the period
after the Agency obtains title to the property or effective possession of it, whichever is
earlier.
(b) Whenever feasible, the Agency shall pay these costs directly to the billing agent so that
the owner will not have to pay such costs and then seek reimbursement from the Agency.
Solutions FHWA is considering (not finalized)
- continued
• When homeowners do not have sufficient equity to
reestablish a reverse mortgage with similar monthly
revenue stream, the prepayment provisions of
§24.106 may apply
• Payoff of the reverse mortgage terminates the loan
contract- the owner will no longer receive the
periodic payments of equity guaranteed under the
terms of the mortgage
• This is a prepayment penalty created by early
termination of the loan caused by Agency’s
acquisition
Solutions FHWA is considering (not
finalized)- continued
Calculation of Prepayment Penalty
Amount of penalty determined as the present value of future
payments to owner based on actuarial equivalent of owner’s
remaining life, discounted at average passbook savings rate.
Owner’s current age
86
Current monthly revenue
$700
Average passbook rate over historical period
3.5%
Likely remaining life based on actuarial tables
6.31 years
75 monthly
periods
Prepayment penalty due for early termination
$47,093
Questions?
Marshall Wainright
Realty Team Leader
FHWA Resource Center
(404) 562-3692
Marshall.Wainright@dot.gov
The Progression of
Mortgage Interest
Differential Payments
Lisa Barnes
SR/WA, R/W-RAC
Why was the mortgage interest
differential payment included in the
Uniform Act?
Legislative History
Senate Committee on Government Operations –
February 26, 1969
Colloquy between Senators Moss and Muskie
Senator Moss. As to the difference between the interest rate
on the mortgage, that is perhaps harder to calculate but I
think, nevertheless, some computation should be made to
compensate a landowner for that, . . .
But it is astonishing, the difference in the interest rate, now
and the rate of just 5 years ago, and certainly 10 years ago, for
money that was borrowed on real estate, on property.
Senator Muskie. Yes; we know here in this area.
Legislative History (cont.)
Senator Moss. To be shopping in the housing market
soon establishes that in one’s mind.
Senator Muskie. And 2 percent difference is not a
rarity at all.
Senator Moss. No; and that projected out for a 25year payment on a piece of property that has
considerable value make a lot of dollars.
Senator Muskie. Two percent of $10,000 would be
what? $200. It is a lot of money.
Senator Moss. Yes, it is.
Legislative History (cont.)
House Committee on Public Works
House Report No. 91-1656 - December 7, 1970
“Replacement housing satisfying these requirements
must be available to the homeowner before
displacement, at terms he can reasonably afford and
that do not worsen his economic condition. In other
words, the displaced person should not have to spend
more for monthly payments of principal and interest
on a mortgage for the comparable replacement
dwelling.”
The 1970 Mortgage
• Fixed rate, amortizing mortgage
• Interest typically paid in arrears
• Monthly payments applied to interest for prior
month and then principal reduction
Amount Rate
Term
Payment
Interest
Principal
Balance
$20,000 8.5% 30 yrs
153.78
141.67
12.11 19,987.89
141.58
12.20 19,975.69
141.49
12.29 19,963.40
Original Calculation of Mortgage Interest
Differential Payments
• Based on the increased monthly interest amount
discounted to a present value
• Uniform Act prescribed this method of calculation
• When interest rates increased (as high as 18%) in
early 1980’s, interest differential payments were
BIG
• The calculation method was deleted from the URA
in 1987 amendments
Buydown Process
49 CFR 24.401(d)
• Payment amount must be amortized at the same
monthly payment for principal and interest over the
same time period as the remaining term of the old
mortgage
• Reduces displacee’s replacement mortgage through the
“buydown”
What You Need For Calculation
Existing Loan
 Remaining principal
balance
 Remaining term
New Mortgage
 Principal amount
 The term
 Interest rate
 Interest rate
(prevailing rate)
 Monthly principal &
interest payment
 Points & origination
fees
Let’s Look at Difference
Original Loan (July 1975)
Interest Rate
Monthly payments (p&i)
$31,725.00
9%
$255.27
Date of displacement
Principal balance
Remaining term
July 1984
$28,856.76
252 months
Prevailing interest rate
14.75%
MIDP Calculation
Difference Discounted to Present Value
Monthly payment on $28,856.76 for 252
months @ 14.75%
$371.81
Payments on current mortgage
$255.27
Difference
116.54
252 payments of $116.54 discounted to
PV @5% (passbook savings rate in
1984)
$18,601.61
Mortgage interest differential payment
$18,601.61
MIDP Calculation
Buydown Method
Remaining principal balance
$28,856.76
Remaining term
252 months
Monthly principal & interest payment
$255.27
Interest rate on replacement mortgage
14.75%
How much can displacee borrow at 14.75% for 252
months and have principal and interest payments
of $255.27?
Answer: $19,811.94
Existing principal balance
$28,856.76
Reduced principal balance
$19,811.94
Mortgage interest differential payment
$9,044.82
Adjustable Rate Mortgage
• Authorized by Congress in 1982
• Interest rate periodically adjusts based on an index
and specified margin
• Typically has a cap on the periodic rate adjustment
and total rate adjustment for life of loan
• Generally offer lower rates up front in exchange for
risk assumed by borrower
What You Need For Calculation
1. Terms of existing ARM:
• Current interest rate
• Index
• Cap rate (initial interest +lifetime cap)
• Remaining term of ARM
2. Current prevailing rate for fixed rate mortgage
MIDP Calculation for Adjustable Rate
Mortgage
• When ARM’s current rate is LESS than prevailing
rate for fixed rate mortgage Agency may consider
using a replacement ARM for the MIDP
determination.
• If an ARM is available with same index and
adjustment terms, Agency must determine
whether to use the ARM or a fixed rate loan for the
MIDP calculation.
MIDP Calculation for Adjustable Rate
Mortgage (cont.)
Determine LESSER of:
Example:
A. The difference between
the current ARM cap rate
and the available ARM cap
rate
Current ARM cap rate =
8%
Available ARM cap rate =
8.5%
Difference =
0.5%
B. The difference between
the current adjustable
interest rate and the
prevailing fixed interest
rate
Current adjustable rate =
4.0%
Prevailing fixed rate =
4.25%
Difference =
0.25%
Select LESSER of A or B
In example “B” is lesser
Use the current adjustable interest rate and prevailing fixed interest rate
as the “rate” components to compute the MIDP payment in manner
described in Appendix A, §24.401(d).
Example
Remaining principal balance
Remaining term
Monthly principal & interest payment
Interest rate on replacement mortgage
$223,456.75
301 months
$1,177.21
4.25%
How much can displacee borrow at 4.25% for 301
months and have principal and interest payments
of $1,177.21?
Answer: $217,201.68
Existing principal balance
$223,456.75
Reduced principal balance
$217,201.68
Mortgage interest differential payment
$5,749.07
What if an ARM is Not Available with Same
Index & Adjustment Terms?
Use the current adjustable interest rate and the
prevailing fixed interest rate as the “rate”
components to compute the MIDP.
Interest-Only Mortgages
• The maximum payment eligibility and actual
payment calculation use the same basic
considerations as the adjustable rate mortgage –
determine the “lesser of” differences between
current cap rates and current rates paid
• MIDP is calculated based on the remaining interestonly period of the loan
Example
Remaining principal balance
Remaining term for interest-only payments
Current interest rate
Monthly interest payments
Interest rate on replacement mortgage
$200,000.00
60 months
4.0%
$666.67
4.25%
New monthly interest-only payments
$708.33
Less existing interest-only payments
$666.67
Difference
$41.66
Remaining term for interest-only payments
60 months
MIDP payment
$2,499.60
Mortgage Interest Differential Payment (MIDP)
Calculators
Available on FHWA Office of Real Estate Website:
• Traditional Buy Down Method
• Adjustable Rate Mortgage
• Interest Only Mortgage
www.fhwa.dot.gov/real_estate/practitioners/uniform_act/relocat
ion/midpcalcs/
House Report No. 91-1656
December 2, 1970
The Committee on Public Works
“The tools in the reported bill are adequate to deal with
the problem. The Congress, however, can only provide
such tools. Their effective use depends upon the
attitudes and skill of the officials in the executive branch
of the government responsible for their administration.
The principle of adequate housing, for example, will
require not only the use of more liberal financial
allowances authorized by the reported bill, but also
imagination, ingenuity, and a desire on the part of its
administrators to translate this authorization into
equitable and satisfactory conditions for the people
affected.”
INCOME DETERMINATION:
Rental Assistance Payment Calculation
Aaron Adkins
SR/WA, R/W-URAC, R/W-NAC, R/W-RAC
Uniform Act
• [§24.1(b)] The purpose of this part is to….. ensure that
persons displaced as a direct result of Federal or federallyassisted projects are treated fairly, consistently, and
equitably so that such displaced persons will not suffer
disproportionate injuries as a result of projects designed for
the benefit of the public as a whole.
Rental Assistance Payment
• Who is Eligible?
• Residential Displaced Person [§24.2(a)(9)(i)]
• Tenant
• Owner of Less than 180 Days
• Who is NOT Eligible?
• Persons Not Displaced [§24.2(a)(9)(ii)]
• i.e. A person who is not lawfully present in the United States [§24.208]
• What if some of the members of the household are present
lawfully but others are present unlawfully (illegal alien)?
• i.e. A person who initially enters into occupancy of the property after
the date of its acquisition
Why Do You Need to Know the
Displacee’s Income?
• Rental Assistance Payment [§24.402(b)]
• (Comparable Rent + Utilities) – (Base Monthly Rent) x 42
• Base Monthly Rent (Lesser Of) [§24.402(b)(2)]
• 30% of Monthly Gross Household Income
• Rent and Utilities (Actual or FMR)
• Shelter and utilities - welfare assistance payment
Determine if Classified as “Low
Income”
• HUD’s Annual Survey of Income Limits for the
Public Housing and Section 8 Programs
•
•
•
•
http://www.fhwa.dot.gov/realestate/ua/ualic.htm
Updated Annually
Metropolitan Area
Non-metropolitan County
Low Income Example
• Momma Adkins, her son (Aaron) and his three children are being displaced. The
information obtained from the family and verified by the Agency is as follows:
•
•
•
•
Momma Adkins, receives disability payments of $6,000/yr.
Aaron Adkins, employed, earns $21,000/yr.
Aaron Adkins, Jr., 21, employed, earns $10,000/yr.
Mary Jane Adkins, 17, student, has a paper route, earns $3,000/yr.
•
(Income is not included because she is a dependent child and a full time student under 18)
• Sammie Adkins, 10, full time student, no income.
• Adkins family gross annual household income = $37,000
($21,000 + $6,000 + $10,000 + $0 + $0 = $37,000)
• Displaced residence is located in the Oklahoma City, OK.
• Low income limit for a 5 person family in Oklahoma City, OK = $48,550. (Based
on FY 2013 income limits)
• Adkins family income of $37,000 is less than $48,550
• The Adkins family is considered "Low Income" for purposes of the Uniform Act
HUD Low Income Limits
• Greater Than 8 Person Household?
• http://www.fhwa.dot.gov/real_estate/practitioners/uniform_act/policy_and_guidan
ce/low_income_calculations/ualicfaq.cfm
What is Considered Income?
• Household Income [§24.2(a)(14)]
• Gross Income Received For a 12 Month Period From All
Sources (earned and unearned)
•
•
•
•
•
•
•
•
Wages / Salary
Alimony and Child Support
Unemployment Benefits
Workers Compensation
Social Security
Disability
Net Income From a Business
Periodic Payments From Annuities, Pensions or Death Benefits
Income Exclusions
• HUD Income Exclusions
• http://www.fhwa.dot.gov/realestate/
• Amounts Specifically Excluded by Other Federal Statutes
• Program Benefits Not Considered Income by Federal
Law
• Food Stamps
• Women Infants and Children (WIC) Program
• Income Received by Dependent Children
• Full Time Students MAY be Assumed to be a Dependent
• Income Received by Full Time Students Under 18
Years of Age
Income Documentation
• How Do Agencies Document Income?
• Income Tax Returns
• Pay Stubs
• Self-Certification (i.e. self-cert form, affidavit)
• Displacee Refuses to Provide Income Information?
Case Study
• Momma Adkins, her son (Aaron) and his three children are being displaced from
the hotel, which is their permanent residence. Tenant occupants of 300 days.
• Momma Adkins, 60
•
•
•
Day laborer
Wages: $12,000.00/yr. (paid in cash)
Momma is not lawfully present in the U.S. and has been determined to be ineligible for
relocation assistance in accordance with §24.208
• Aaron Adkins, 39
•
•
•
•
•
Hotel manager
Wages: $15,500/yr. + free room
Similar room in hotel rents for $400/mo.
Received $1,200 in child support over last 12 months
Child support order is $3,600/yr. Court will start garnishing spouse’s wages next month
• Aaron Adkins, Jr., 21
•
•
Army Reserve income: $10,000/yr.
Food stamps $300/mo.
• Mary Jane Adkins, 20
•
•
Full time student
Net income from summer landscaping business $6,000/yr.
• Sammie Adkins, 10
•
Oklahoma City, OK MSA
Full time student. No Income.
1 PERSON
2 PERSON 3 PERSON
4 PERSON 5 PERSON
6 PERSON 7 PERSON 8 PERSON
31500
36000
40500
44950
48550
52150
55750
59350
Case Study
• Momma Adkins:
• Aaron Adkins:
$12,000.00 (wages)
• Aaron Adkins, Jr.:
• Mary Jane Adkins:
$10,000.00 (military pay)
Annual Gross Household Income
$49,500.00
Oklahoma City, OK MSA
$15,500.00 (wages)
$ 4,800.00 (room rent)
$ 1,200.00 (child support)
$ 6,000.00 (net income from business)
1 PERSON
2 PERSON 3 PERSON
4 PERSON 5 PERSON
6 PERSON 7 PERSON 8 PERSON
31500
36000
40500
44950
48550
52150
55750
59350
Case Study
• Momma Adkins:
• Aaron Adkins:
$12,000.00 (wages)
• Aaron Adkins, Jr.:
• Mary Jane Adkins:
$10,000.00 (military pay)
Annual Gross Household Income
$43,500.00
Oklahoma City, OK MSA
$15,500.00 (wages)
$ 4,800.00 (room rent)
$ 1,200.00 (child support)
$ 6,000.00 (net income from business)
1 PERSON
2 PERSON 3 PERSON
4 PERSON 5 PERSON
6 PERSON 7 PERSON 8 PERSON
31500
36000
40500
44950
48550
52150
55750
59350
Case Study
• Momma Adkins:
• Aaron Adkins:
$12,000.00 (wages)
• Aaron Adkins, Jr.:
• Mary Jane Adkins:
$10,000.00 (military pay)
Annual Gross Household Income
$44,700.00
Oklahoma City, OK MSA
$15,500.00 (wages)
$ 4,800.00 (room rent)
$ 1,200.00 (child support)
$ 6,000.00 (net income from business)
1 PERSON
2 PERSON 3 PERSON
4 PERSON 5 PERSON
6 PERSON 7 PERSON 8 PERSON
31500
36000
40500
44950
48550
52150
55750
59350
Case Study
• Momma Adkins:
• Aaron Adkins:
$12,000.00 (wages)
• Aaron Adkins, Jr.:
• Mary Jane Adkins:
$10,000.00 (military pay)
Annual Gross Household Income
$47,100.00
Oklahoma City, OK MSA
$15,500.00 (wages)
$ 4,800.00 (room rent)
$ 1,200.00 (child support)
$ 3,600.00 (child support)
$ 6,000.00 (net income from business)
1 PERSON
2 PERSON 3 PERSON
4 PERSON 5 PERSON
6 PERSON 7 PERSON 8 PERSON
31500
36000
40500
44950
48550
52150
55750
59350