LHFS Wholesale
Understanding the
HECM LIBOR Product Training
Great Rates. Great Programs. Great Service.
Objective
• You will know what the HECM LIBOR
product is, benefits, and disadvantages.
• You will also gain knowledge of the
mechanics of the rates, calculations, balance
and credit line growth & disbursements.
• You will recognize the importance of the
application signature.
John and Jane’s Story
• Recently a couple shared their story. They
had been married for years and have 3
children and 7 grandchildren. John was
diagnosed with a serious condition and his
Doctor had given him 2 years to live. Since
his diagnosis, they had been depleting their
retirement account to provide the medicine
he needed. They were being buried with
their bills.
Think about it…
•
•
•
•
•
•
•
John is 85 and Jane is 75
Home value = $294,100
Retirement Account = $40,000
Lien of = $120,000 to pay off ($850 PMT)
Income = $1,200
Monthly expenses = $2,000
Additional medical expenses = $800
What is Jane thinking about?
Think About it Continued…
• What is truly important in this scenario?
• What kind of options can we offer John and
Jane that will provide “the best” alternative?
• Remember them and we will explore their
options at the end of this presentation.
What is the HECM LIBOR?
• HECM = Home Equity Conversion Mortgage
• LIBOR = London Interbank Offered Rate
• The HECM is an FHA insured mortgage
secured by a Deed of Trust.
• The HECM LIBOR offers the same benefits as
the Fixed with three main differences.
1. It is an adjustable rate
2. It offers more cash disbursement options
3. It allows unused equity to grow
History always repeats itself
• 2008 – HUD Announces HECM Fixed Standard
• 2009 – Introduction of HECM for Purchase and Lending Limit
Increase to $625,500
• 2010 – Monthly MI is increased from .5% to 1.25% and interest rate
floor is lowered from 5.5% to 5.00% (officially 5.06)
• 2013 – Elimination of HECM Fixed Standard on April 1, 2013
• 2013 – Effective October “Standard and Saver” choices were
eliminated and one universal *product was launched. Principal
limits were lowered
• 2014 - August 4, Principal limits increased and Non-Borrowing
Spouse given rights to remain in the home after borrower’s death
• *New Program: Both fixed and adjustable rates available. IMIP
went to 2.5 for draws over 60% of Principal limit and .5 for those
under 60%
HECM LIBOR Product Pros
•
•
•
•
•
•
•
•
•
•
•
Disbursement options
Disbursement changes without refinancing
Repayment option (Can pay like a forward mtg)
No prepayment penalty
No monthly mortgage payments required
Unused Available Equity Can Increase Over Time
(Credit Line)
Non recourse loan – FHA insured
Hedge against property and economic fluctuation
Tax free money
Very little or no upfront out of pocket cost
Rate CAP (Initial rate at close plus 5%)
HECM LIBOR Product Cons
• Adjustable rate
• Possible compound negative amortization
• Responsible for taxes and insurance
payments and maintenance of the property
• IMIP .50% - 2.5% % Based on initial loan
amount taken (Same as Fixed rate)
• Annual 1.25% Mortgage Insurance charge.
Applied on a monthly basis.
Rate Sheet
Initial Rate
Initial Rate: Is the 1 Month LIBOR Index plus the Margin
offered by the lender. Together they make up the Initial
Interest Rate.
The true initial rate will be effective on day of closing.
It will adjust monthly and will start the compound
negative amortization on the balance of the loan.
Expected Rate
For a fixed rate loan, the expected rate is the fixed interest
rate. For an adjustable rate loan, the expected rate is the
sum of the lender’s margin plus the 10 year swap.
The expected rate is also one of the three factors used
to calculate how much a borrower qualifies for.
Also know as…Principal Limit!
Principal Limit
Principal Limit – The amount that the borrower can receive
from a reverse mortgage. The Principal Limit at origination
is based on the age of the youngest borrower, the expected
average mortgage interest rate, and the Max Claim Amount
(value of property or HUD lending limit, whichever is less.)
Expected Rate Continued…
The higher the expected rate is the less equity can
be accessed. (Actual rate is 5.06 printed rate is
rounded down)
Expected Rate Continued…
Rate Cap
Rate Cap: This rate is the assumption that you are
closing the loan the day you created your quote.
Based on this date’s Initial Interest Rate plus 5%
make up the rate cap. The true rate cap will be
determined the day the loan closes.
5
Monthly Services Fees
• The good news! Not applicable to our
products today
• The bad news! It’s good to understand them
in the event they ever come back.
• Monthly Servicing Fee would apply to:
– Line of Credit – Maintenance of credit line and delivering of
disbursements to the borrower.
– Servicing Fee Set Aside – The lender may choose to
assess a servicing fee and set it aside from the Principal
Limit at closing
Why would you choose a HECM Libor?
•
•
•
•
•
•
•
•
Security
Equity
Heirs
Risk
Situation
Choice
Want vs. Need
Financial Advisors
Loan Amount
• Loan Amount: The funded amount at time of
closing.
• For LIBOR products it is the sum of the cash
draw, liens paid off and net closings cost.
• Any equity left in a credit line or monthly
disbursements are NOT included in the loan
balance at the time of closing.
• Maximum of 60% or mandatory obligations plus
10% of the Principal Limit in the first year.
• Fixed rate product amount at closing is final,
(10% plus mandatory) no further draws for life of
loan (Closed end loan)
• (CRITICAL AT TIME OF DOC ORDERING)
LIBOR Disbursement Options
• Flexibility is the main benefit this product
offers. Borrower has full control of the net
equity available to the them.
– Lump Sum: The client has the ability to draw up to 60% or
10% of PL above mandatory obligations at closing
– Credit Line: All net available cash is defaulted into a Line
of Credit unless otherwise specified. Loans may take up to
60 days to access so plan for that.
– Tenure Disbursement: Guaranteed monthly disbursements
calculated from the available equity at closing for the life of
the loan.
– Term: Guaranteed monthly disbursements for a set
amount of months.
Libor Disbursement Options Continued…
• Combination: The client can choose to draw some
cash at closing, keep some cash in the credit line and
have either a monthly tenure disbursement or a term
disbursement for a specific amount simultaneously.
• They can change their disbursement choices
as often as the would like. Minimal fee is
typical with most servicers.
Credit Line Growth Rate
• Line of Credit (“LOC”) Growth Rate
– The LOC available to the borrower at any point in the loan
term is equal to their Principal Limit less the loan balance
and any set asides. The Principal Limit is determined at
closing and increases each month by one-twelfth of
the sum of the current interest rate plus the annual
MIP rate.
– The “Growth Rate” mirror images the interest rate + the
annual MIP applied monthly(1.25%). Even if it hits the
rate cap, the LOC will grow at the same rate.
(NEVER CALL IT INTEREST!!)
Credit Line Growth Rate
Continued…
Do you remember Jane?
Jane’s Dilemma
– CASE WAS BASED ON PRE 10/01/2013 GUIDES
• She needs immediate cash for prescriptions
• She needs her mortgage payment to
disappear.
• She wants to have a lump set aside for
services and burial
• She needs monthly amount to insure she
does not deplete all of her remaining
retirement.
First Option for Jane
• Monthly Term: Guaranteed monthly disbursements for a
set amount of months
• Combination: The client can choose to draw some cash
at closing, keep some cash in the credit line and have
either a monthly tenure disbursement or a term
disbursement for a specific amount simultaneously.
Second Option for Jane…
Current Expenses
After Reverse Mortgage
$850 Mortgage
$850 Mortgage
$800 Medical
$800 Medical
$1150 Everything Else
$1150 Everything Else
$2800 Total Monthly Expenses
$2000 Total Monthly Expenses
Current Income
New Income + Proceeds
$1200 Social Security
$1200 Social Security
$1200 Total Income
$(1600) Net Income
$1153.20 Term Payment
$2353.20 Total Income
$353.20 Net Income
Jane’s Solution
With Option #1
Jane has cash ($4500) at closing for expenses, a
$10,000 line of credit to use for burial fees when
needed. In addition, she will receive $1153.20 per
month for 24 months to cover the monthly
shortfall. That draw nets her an additional $353.20
while John is living, for them to visit their family
and make some memories. Once she is on her
own, she will no longer have the $800 medical
bills, so her social security will cover her expenses
entirely.
Jane’s Solution
• With Option #2
• Jane will receive $4500 to fund the next few
months, but she is still short nearly $600 per
month to cover expenses. She also has no line
of credit to use for burial expenses, so she will
need to continue to pull from her diminishing
retirement account in order to cover her monthly
and lump sum expenses.
• She and John will have no money to see family
or do things while he is still living.
• After John passes, Jane would be able to cover
her bills entirely with her Social Security.
What’s the next step:
How to Secure the HECM Libor
• The principal limit gets locked in by the
expected rate in place when the client “signs
and dates” their application.
• When the FHA case number is pulled, that is the
trigger to begin the 120 day expected
rate/principal limit lock. Clock starts at case
number, but rate goes to signed application
date.
• If the day docs are drawn (provided it is within
120 days) we have a lower expected rate with a
higher principal limit, they will get the better of
the two, docs drawn or application signed.
Let’s travel through time…
• Dates become extremely important in a
unpredictable market. As you know rates are
adjustable and do not lock until the loan
closes. (Different from the principal limit
lock!)
• With the principal limit lock, If you truly
understand this process, it can be a
wonderful tool for creating “urgency” with
your borrowers.
• Time affects available equity!!!
Let’s travel through time
continued…
Conclusion
• HECM LIBOR loan is different in many ways
but it offers many of the same benefits as a
HECM Fixed loan.
• There are many parts involved in the
mechanics of the HECM LIBOR including
rates, calculations and disbursement
options.
• Timing is key in this market. As rates
increase, it is crucial to understanding how
time affects availability equity.
Re-Cap
• The Fixed rate option only allows for one
lump sum draw at closing. The max allowed
is the mandatory obligations plus 10% of the
Principal limit OR 60% of the principal limit.
• The Libor Adjustable allows for maximum
flexibility
– Initial draw is 60% or mandatory plus 10%. That includes
any payments or additional LOC available 1st year.
– Borrower chooses, no payments, make payments; line of
credit, term or tenure or a combination of both. Unused
Line of Credit is the most aggressive financial tool in the
market today.
Explore your marketplace
•
•
•
•
•
•
•
HECM for PURCHASE!
Financial Advisors
Boomers working towards retirement
Self-Employed but tough to qualify
Poor credit or limited income
Estate Planning
Tax Planning
SEE YOU IN ESCROW!!!
LHFS Wholesale
Understanding the
HECM LIBOR Product Training
Great Rates. Great Programs. Great Service.
Please note that all information is provided on this web site for informational purposes only, for the exclusive use of licensed mortgage professionals, and not for the general public. This information does
not represent an offer or commitment to enter into a loan agreement by Land Home Financial Services Wholesale Division (LHFSW). Not all programs are available in all areas and rates and costs stated do
not apply to all loans made. LHFSW’s underwriting guidelines and program restrictions apply. Terms and programs listed are subject to change without notice. LHFSW only conducts business in states
approved to. LHFSW is a Division of Land Home Financial Services and is an Equal Housing Opportunity Lender. Click here for complete licensing information - Company NMLS #1796.