Reverse Mortgages and
Retirement Planning
Financial Planning Association
July 19, 2005
Trish Kauker, Business Development Manager
Trish.kauker@aig.com 877-244-1532
1
The Senior Profile:
• Concerns –
– Health
– Quality of Life
– Money
– Living beyond assets
– Burden on children
• Want to stay in home as long as possible
• May want to move closer to family
2
Reverse Mortgage History
• 1961 First reverse mortgage (RM) loan made by Deering Savings &
Loan in Maine
• 1984 First open-ended, risk pooling RM offered in New Jersey
• 1987 Congress passes FHA RM insurance proposal
Fannie Mae & Freddie Mac announce intention to purchase RM
• 1989 HUD selects 50 lenders by lottery to make FHA-insured RM
• 1990 Congress increases FHA insurance authority to 25,000 loans
• 1995 HUD publishes regulations allowing Direct Endorsement
lenders underwriting authority on HECM loans
• FNMA introduces the conventional RM – “Home Keeper”
• ABA House of Delegates adopted a resolution that supports
continued development of RMs as a viable option for older
homeowners
3
Common Misconceptions
• “The lender takes the house”
– Homeowner retains full ownership
– Reverse Mortgage is a loan
• “I can be thrown out of my home”
– Homeowner can stay in home until loan maturity event
occurs
• “I can owe more than my home is worth”
–
Homeowner can never owe more than value of home
• “My heirs will be against it”
– Experience demonstrates heirs are in favor of Reverse
Mortgages
Reverse Mortgage Basics
Reverse Mortgages are non-recourse loans that allow
senior homeowners age 62 years of age or older to
convert home equity into cash
• Borrower will always retain title
• NO income or credit qualifications
• NO monthly mortgage payments
• NO repayment is due until they sell the house or move
out permanently
• Interest may be tax-deductible upon loan repayment
• Proceeds are tax-free
Current Reverse Mortgage Products:
– HUD/FHA Insured - HECM
• Maximum Lending Limit - $312,895
– Fannie Mae – Home Keeper
• Maximum Lending Limit - $359,650
– Jumbo Loan Product – CASH Account
• Standard Option
• Zero Point Option
• Simply Zero Option
– Virtually No Home Value Limit
6
FHA HECM
• FHA Mortgage Insurance (MIP)
– 2% charged at loan closing, financed into loan
balance
• FHA guarantees that the borrower will receive all
payments that are due them as long as they live
in the property
• Ensures that borrowers, their estate, or heirs are
never liable for more than the market value of
their home (non-recourse)
7
Consumer Education Requirements:
• Required for all borrowers prior to application
process
• Safeguard for borrower: non-biased 3rd party
ensures borrowers understand how RMs
work, costs, benefits and options available
• Face to face session with provider in home or
office and optional telephone counseling if
requested
• HECM Counseling certificate will be issued to
borrower
8
Eligibility Requirements:
• Homeowners age 62 and older
• Property title holder
• Clear title at closing
– Any existing liens must be satisfied at closing
with loan proceeds
– Foreclosures & bankruptcies can be
considered
9
Property Requirements:
• Must be borrower’s principal residence
• Single family residence
• 1-4 unit property as long as borrower resides in
one of the units
• Planned Unit Developments (PUDs)
• FHA approved condominiums (spot approvals
permitted)
10
Payment Plan Options:
• Tenure Plan: equal monthly payments for life of loan
• Term Plan: equal monthly payments for a specified
period of time – determined by borrower
• Line of Credit: advances available in any amount, at
any time. Revolving feature allows access to partial
repayments. Growth rate on available balance
• Lump Sum: All available funds may be received at
disbursement
• Combinations: Any combination of the above is
allowed. Payment plan may also be changed after
closing at any time
11
Reverse Mortgage Interest Rates:
Reverse Mortgages charge interest at a monthly, annual or semiannual adjustable rate, depending on which loan is selected:
Index - 1 year T-bill (FHA - HECM) – 5.02%
Index - 1 month CD (FNMA - Home Keeper) – 6.75%
Index - 6 month LIBOR (Jumbo - Cash Account) – 8.27%
– Which means the interest rate that is charged can change
periodically
– However, this does NOT affect the amount of money borrower(s)
receive
– Rather this only affects the amount that will be required to be
paid back when the loan becomes due and payable
12
Application Overview:
• Appraisal required: property must meet FHA
minimum standards
• Credit report: tri-merged in-file required to
verify judgments, etc.
• Proof of date of birth
• Proof of Social Security number
• Proof of consumer education
• Copy of homeowners insurance policy
13
Borrower Compliance:
• Occupancy
– Annual certifications sent by mail, borrower
must sign & return
• Property Maintenance
– Maintained in same condition as closing, with
required repairs completed
• Taxes & Insurance
– Proof of payment required with annual
renewal
14
Loan Repayments:
• Automatically due & payable
– Last surviving borrower vacates property
– Sale of property
– Title conveyance
– Not principal residence for more than 12
consecutive months
15
Repayment Process:
• Amount due = loan balance + interest & fees
• Payoff will be due in one lump sum payment
• Typically paid from the sale of home
• Timeframe = “good faith efforts” to market –
typically 180 days
• NON-RECOURSE FEATURE: neither the
borrower nor their heirs will be liable for more
than the current market value of the property
at time of payoff
16
Uses for Home Equity
Conversions
Hospital/Health Care Costs
67%
Repay existing mortgages
55%
Reduce burden on children
50%
Home repair/Improvement
50%
Pay property taxes
38%
Daily expenses
29%
Travel, Something special
Gifts
14%
3%
17
HECM Examples*:
$240,000
Value
$240,000
Value
$240,000
Value
$240,000
Value
$240,000
Value
Age: 65
Age: 70
Age: 75
Age: 80
Age: 85
$134,700
Equity
$145,300
Equity
$156,400
Equity
$168,100
Equity
$179,300
Equity
$779
monthly
income
$886
monthly
income
$1029
monthly
income
$1240
monthly
income
$1581
monthly
income
*Based on rates and terms as of July 18, 2005
18
FNMA – Home Keeper Mortgage:
• Allows senior homeowners easy access to
their home equity
• Similar in structure to the FHA HECM
– NO income qualifications
– NO credit qualifications
– NO monthly mortgage payments
• Home Keeper for home purchase feature
19
Property Requirements:
•
•
•
•
Principal residence only
Single family property
Planned Unit Developments (PUDs)
FNMA approved condos (spot approvals
permitted)
• NO multi-family properties permitted
20
Payment Plan Options:
• Tenure Plan: equal monthly payments for life
of loan
• Line of Credit: advances available in any
amount, at any time. NO growth rate
• Lump Sum: All available funds may be
received at disbursement
• Combination: Any combination of the above
is allowed. Payment plan may also be
changed after closing at any time
21
Home Keeper Examples:
$360,000
Value
$360,000
Value
$360,000
Value
$360,000
Value
Age: 70
Age: 75
Age: 80
Age: 85
$114,800
Equity
$858
$142,750
Equity
$173,400
Equity
$205,800
Equity
$1239
$1563
$1977
monthly
income
monthly
income
monthly
income
monthly
income
22
Home Keeper for Home Purchase:
• Allows seniors to purchase a new home
without using all their personal resources to
fund the purchase
• Flexibility that is not available through
standard purchase money mortgages
• Attractive NO mortgage payment feature
makes this a viable financial tool
23
The Purpose :
• Senior (62 or older) wants to purchase a
home that better fits their lifestyle
• Has access to funds via savings,
investments, sale of current home
– Doesn’t want to make monthly payments
– Doesn’t want to tie up all of their personal
funds in the purchase of a home
– May want funds for updates/modifications
24
The Process:
• Senior completes required consumer
education
• Senior identifies new property & lender will
estimate reverse mortgage amount
• Senior applies for Home Keeper and
negotiates home purchase
• Senior determines combination of personal
funds and RM funds to be used
• Senior completes origination process with
lender
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Benefits:
• Purchase a home with NO monthly payments
• NO repayment due as long as they live in the
property
• More flexibility than “forward” mortgages
• Lower down payment and keep more cash
• Qualify for higher priced home
– NO income qualifications
– NO credit qualifications
– NON-RECOURSE features
26
Jumbo CASH Account
• Proprietary product with NO restrictions on
how the funds are used
• Proceeds are NOT taxable
• Similar to home equity lines with no required
monthly repayment until loan matures
• Provides maximum equity release with
virtually NO maximum home value limit
27
Similar to FHA & FNMA loans
•
•
•
•
•
•
•
•
•
NO income or credit qualifications
Minimum age requirement of 62
Primary residence
Counseling by an independent counselor
conducted via telephone
Existing liens to be satisfied at closing
Non recourse loan
Repayment process
Home must meet FHA standards
Borrower compliance
28
Standard Option
• Origination fee = Scaled percentage of home
value
• Maximum origination fee of 2%
• No prepayment penalty
• Open-ended revolving line of credit
• Unused line of credit grows by 5% per annum
• Minimum draw is $500
29
Zero Point Option
• Origination fee = NONE
• Minimum draw at closing = 75% of maximum
available proceeds
• Closing costs capped at $3,500*
• NO prepayment penalty; partial prepayment
not allowed for first 5 years
• Full repayment permitted at any time
* Excluding applicable state or local taxes
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Simply Zero
• Origination fee = NONE
• Closing costs =
NONE*
• Draw at closing = 100% of maximum
available
• NO prepayment penalty; partial prepayment
not allowed for 5 years
• Full prepayment permitted at any time
• Lowest cost reverse mortgage loan product
available
*Excluding applicable state or local taxes
31
Cash Account Examples:
$750,000
Value
$750,000
Value
$750,000
Value
$750,000
Value
Age: 70
Age: 75
Age: 80
Age: 85
$ 185,874 $ 225,174 $ 284,949 $ 352,524
Standard
Standard
Standard
Standard
$ 202,725 $ 242,025 $ 301,800 $ 369,375
Simply Zero Simply Zero Simply Zero Simply Zero
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Cash Account Examples:
$1,500,000
$1,500,000
$1,500,000
$1,500,000
Value
Value
Value
Value
Age: 70
Age: 75
Age: 80
Age: 85
$ 378,469
Standard
$478,969
Standard
$603,319
Standard
$727,969
Standard
$405,450
$505,950
Simply Zero
$630,300
$754,950
Simply Zero Simply Zero Simply Zero
33
Typical Retirement Assets
Illiquid
Liquid
House
Cash
IRA, 401K
Stocks and Bonds
34
Typical Retirement Income
Cash
IRA, 401K
Stocks & Bonds
$
35
Typical Retirement Income With
a
Reverse Mortgage
Cash
IRA, 401K
$$$
Stocks & Bonds
Reverse Mortgage
36
Reverse Mortgages and Retirement Planning
Proceeds can be used to fund a variety of financial
products including:
•
Annuities
•
Long term care
•
Estate planning
•
Life insurance
•
Investments
•
Charitable and family gifting
•
Retirement home purchase
37
Reverse Mortgage Case Study #1
• Client Profile:
• Couple, both age 75
• Assets:
• $2,500,000 home (primary residence)
• Problem:
• Clients wish to purchase LTC Policy
• Solution:
• Proceeds of $577,654 generated through use of reverse mortgage
• Purchase SPIA, certain period 10-years on husband in amount of
$124,359
• SPIA pays monthly premium of $1,223.92 to LTC carrier and at end
of 10th year, policy is paid in full
38
Reverse Mortgage Case Study #2
• Client Profile:
• 75 year old Male
• Assets:
• $300,000 home (primary residence)
•
•
Stocks, bonds & CD’s
Problem:
• Client would like to increase monthly income to purchase Long Term Care
Insurance
•
Solution:
• Proceeds of $184,000 generated through a reverse mortgage
• Purchase an AIG SPIA and receive $1,630.70 in additional monthly
income
• Long Term Care premium of $423/month for lifetime care
39
Reverse Mortgage Case Study #3
• Client Profile
• 80 year old Female
• Type II Diabetes & TIA (mini stroke) 10 years prior
• Assets
• $500,000 home (primary residence)
• Income
• $1,500 Social Security
• $1,000 Pension
• Problem
• Increase monthly income to fund Long Term Care
• Solution
• $210,000 proceeds from RM
• Purchase an AIG Impaired Risk Annuity generating $3,414/month
in lifetime income
40
Reverse Mortgage Case Study #4
• Client Profile
– 70 year old Male
– $1,000,000 home (primary residence)
• Income
– $2,300 from Social Security
– $1,000 Pension income
• Problem
– Client wants to purchase Life Insurance to reduce estate tax liability
• Solution
– $270,300 reverse mortgage proceeds
– AIG SPIA provides $24,000/annually to purchase $700,000 in Life
Insurance
41
The Older Population in the 21st Century:
In the Year 2000 –
• Persons 65+ numbered over 35 million
• Persons reaching age 65 had an average life expectancy of an
additional 17.9 years (19.2 - females, 16.3 – males)
• Over 2 million persons celebrated their 65th birthday (5,574 /
day)
• People 65+ represent almost 13% of the population in 2000, but
are expected to grow to be 20% of the population by 2030
• By 2030, there will be about 70 million older persons, more
than twice their number in 1999
42
The Current Market
• 21+ million senior homeowners
• 60% of market is 65 -70
Huge demographic wave underway
• 85% want to remain in home (AARP study)
• $ 3 trillion in home equity
• Loan volume has increased by 70% per year for
the past two years
• Fannie Mae studies show 90+% satisfaction rate
Online Reference Sources
• National Reverse Mortgage Lenders Association
www.nrmla.org
• AARP
www.aarp.org
• National Council on Aging (NCOA)
www.ncoa.org
• National Center for Home Equity Conversion (NCHEC)
www.reverse.org
44
Contact Information:
Trish Kauker, CSA
AIG Bank
Reverse Mortgage Division
1-877-244-1532 Toll free
1-302-661-8977 Direct
1-302-830-4534 Fax
trish.kauker@aig.com
45