The Math Behind HECMs
P R E S E N T E R :
C R A I G B A R N E S , R E V E R S E M O R T G A G E F U N D I N G
Session Objectives
Today’s session will:
Illustrate how reverse mortgage interest rates are calculated.
Explain vital application doc calculations, including:
Amortization Schedule
TALC
TIL (Fixed Rate)
Describe reverse mortgage loan growth
LESA
Loan balance
Line of Credit
Partial Repayments
Review how to read a monthly statement
Agenda
Interest Rates
Expected Rates and Look Up Floor
Note Rates
Principal Limit Factors
Payment Plan Math
Ongoing MIP
Amortization Schedule
TALC
TIL
Loan Growth
LESA
Line of Credit
Expected Rate
Initial Rate +
Yield Curve
Monthly Statements
I N T E R E S T R A T E S , P L F S , M I P , A N D P A Y M E N T S
The Numbers
Principal Limit Factors
Principal limit tables determine the % of maximum claim
amount borrower(s) will receive.
The youngest borrower or non-borrowing spouse’s age
(within 6 months of Closing), and expected interest rate
determines what factor will be used.
HUD changes these factors from time to time; depending
on the projected performance of the HECM portfolio.
Currently there is an Effective Interest Rate Floor of 5%.
Expected rates of 5.06% (rounded) or less will provide the
same principal limit.
Principal limit factors stop increasing at age 90.
PLF Table – Sample
The partial table below shows the
factor used to calculate principal
limits for expected rates near 5% for
borrowers between 70-80. Rates are
rounded to the nearest 1/8%.
To see the table click HERE.
Illustration
72 year old borrower
with a $300,000
max claim
Expected Rate Principal Limit
5.06% $177,300
5.25% $168,000
70
5.000 0.576 5.125 0.560 5.250 0.544 5.375 0.529 5.500 0.513
71
5.000 0.583 5.125 0.568 5.250 0.552 5.375 0.537 5.500 0.521
72
5.000 0.591 5.125 0.575 5.250 0.560 5.375 0.545 5.500 0.529
73
5.000 0.599 5.125 0.583 5.250 0.568 5.375 0.552 5.500 0.537
74
5.000 0.606 5.125 0.591 5.250 0.575 5.375 0.560 5.500 0.545
75
5.000 0.614 5.125 0.598 5.250 0.583 5.375 0.568 5.500 0.553
76
5.000 0.622 5.125 0.607 5.250 0.592 5.375 0.577 5.500 0.562
77
5.000 0.631 5.125 0.616 5.250 0.601 5.375 0.586 5.500 0.571
78
5.000 0.640 5.125 0.625 5.250 0.610 5.375 0.595 5.500 0.580
79
5.000 0.648 5.125 0.633 5.250 0.618 5.375 0.604 5.500 0.589
80
5.000 0.657 5.125 0.642 5.250 0.627 5.375 0.612 5.500 0.598
Interest Rates – Expected Rate
• Based on the 10 year SWAP
from the previous week’s
average as published on the
Federal Reserve’s website.
• Add the lender’s margin to
the current 10 year SWAP to
calculate the expected rate.
• Expected rates of 5.06 or less
will maximize proceeds.
• Increasing expected rates will
decrease principal limit
amounts.
• The 10 year SWAP is a likely
indicator of what rates
MIGHT be in the future.
For the week
beginning
3/22/16, the
Expected Rate for
a LIBOR 300
would be 4.78%
Principal Limit Lock
Most lenders offer a Principal Limit Lock. A PLL allow the
borrower to receive the expected rate at application or
closing to be used which provides the most money,
provided they close within 120 days of FHA Case Number
Assignment.
LIBOR History
• Prior to 2007,
industry used the
Constant Mature
Treasury index.
• Industry adopted
LIBOR when
Mortgagee Letter
2007-13 was
published.
• LIBOR used more
on in the
secondary market
Interest Rates – Initial Rate
Used to calculate the loan balance.
The Monthly product is based on the 1-month LIBOR + the applicable
margin.
The Annual product is based on the 1-year LIBOR + the applicable margin
The rate is published in Monday’s Wall Street Journal effective Tuesday
through the following Monday. If Monday is not a business day, then the
rates are published on Tuesday.
Monthly adjusts the first day of the
second or third month after funding.
Yearly adjusts the first day of the
second year after funding.
Becomes the Note Rate.
All ARM loans have a interest rate
cap that is generally 5 or 10% of the
Note Rate.
For the week beginning 3/22/16, the Initial
Rate for an Annual LIBOR 300 would be
4.211%. Rates are rounded to 3 decimal
places
Calculating Tenure Payments
Tenure payments are
calculated using:
Available funds
Age of the youngest
borrower
Expected interest rate
When available funds are
equal, products (rates)
with a higher expected
rate will provide higher
monthly tenure payments.
Mandatory Obligations
Borrowers are limited to the amount they can access in the first 12 months
the loan is outstanding.
Select an ARM loan to set up payment plans.
Traditional single disbursement lump sum fixed rate products are closed-
end with no payment plans. Borrower leaves all additional funds
permanently unclaimed.
% of PL
Max Proceeds
in first
12mos.
MIP Paid
<=50% MO
60% PL
.5%
>50%
-60%
Up to +10%
.5% up to 60%
2.5% over 60%
>60%
Up to +10%
2.5%
A M O R T I Z A T I O N S C H E D U L E , T A L C A N D T I L
The Disclosures
Amortization Schedule
Uses expected rate by default; most likely average long-
term rate over a period of several years.
Although projections are shown annually the rate is
applied monthly.
The property value growth rate assumes 4% annual
growth.
Assumptions can be changed, but the final Amortization
Schedule will use the expected rate and 4% property
appreciation.
The rate is 1.25% annualized (set by HUD).
Amortization Schedule (cont.)
Projections go to the
youngest borrower’s 99
th
birthday.
May show bi-annually
depending on the
borrower’s age.
Will always show at least
5 years, regardless of age.
Calculating Monthly Totals
This monthly
breakdown
illustrates how
interest is
compounded
monthly. It
corresponds to
the Amortization
Schedule on the
preceding page.
Original Principal Limit
$225,200.00
Assumed Int
Rate
5.30%
FHA MIP
$2,000.00
MIP
1.25%
Orig
Fee
$6,000.00
Prop Value
$400,000.00
3rd Party Closing Costs
$3,571.95
Apprec
Rate
4.00%
Payoffs
$10,000.00
Net principal Limit
$203,628.05
Remaining
Prop
Remaining
Loan Balance
LOC
Value
Equity*
Advances
Interest
MIP
$21,571.95
$203,628.05
$400,000.00
$378,428.05
1
$95.28
$22.47
$21,689.70
$204,739.52
$401,333.33
$379,643.64
2
$95.80
$22.59
$21,808.09
$205,857.06
$402,671.11
$380,863.02
3
$96.32
$22.72
$21,927.12
$206,980.69
$404,013.35
$382,086.23
4
$96.84
$22.84
$22,046.81
$208,110.46
$405,360.06
$383,313.25
5
$97.37
$22.97
$22,167.15
$209,246.40
$406,711.26
$384,544.11
6
$97.90
$23.09
$22,288.14
$210,388.54
$408,066.96
$385,778.82
7
$98.44
$23.22
$22,409.80
$211,536.91
$409,427.19
$387,017.39
8
$98.98
$23.34
$22,532.12
$212,691.54
$410,791.94
$388,259.83
9
$99.52
$23.47
$22,655.11
$213,852.49
$412,161.25
$389,506.14
10
$100.06
$23.60
$22,778.77
$215,019.76
$413,535.12
$390,756.36
11
$100.61
$23.73
$22,903.10
$216,193.41
$414,913.57
$392,010.47
12
$101.16
$23.86
$23,028.11
$217,373.47
$416,296.62
$393,268.50
Annual total
$1,178
$278
Total Annual Loan Cost (TALC)
The TALC provides
an estimate of the
loan’s cost using a
given set of
conditions.
Disclosure periods
vary on the youngest
borrower’s age.
Disclosure periods are 2 years, ½ life expectancy, life expectancy
and 1.4 times life expectancy.
The annual cost is affected by the appreciation rate and the length of
time the loan is outstanding.
Calculated using a non-recourse formula assuming the property
might be sold at 93% of the projected property value.
TALC (cont.)
Property Value 400,000.00$ $193,822
0% 4% 8%
220,170.77$ 2 400,000.00$ 432,640.00$ 466,560.00$
343,957.03$ 9 400,000.00$ 569,324.72$ 779,601.85$
572,699.12$ 17 400,000.00$ 779,160.20$ 1,480,007.22$
$894,686.84 24 400,000.00$ 1,025,321.67$ 2,536,472.29$
Estimated Property Value
Loan Balance
Year
Beginning Loan Balance
2 9 17 24
0% Balance Balance Property Value Property Value
4% Balance Balance Balance Balance
8% Balance Balance Balance Balance
Disclosure Period (Years)
Appreciation
Rate
Only when the
loan balance
surpasses the
value, is the rate
affected.
Because of the
loan’s non-
recourse
provision, the
borrower has
received the full
benefit of the
loan, but is only
responsible to
pay back the
value of the
property.
This illustration shows whether the loan balance or the property
value must be paid back. When the loan balance must be paid
back, the cost is not effected by property appreciation. The cost
will decrease when the loan balance becomes greater than the
property’s value.
L E S A , L O C G R O W T H , L O A N G R O W T H ,
P R E P A Y M E N T S
The Projections
LESA – Example
Refer to HUD’s FA Guide sections 5.3 and 5.6 pages 76-77
Life Expectancy = 12 years x 12 = 144 months
Annual Taxes and HOI = $4,000 x 1.2 / 12 = $400
Expected Rate + Annual MIP = 5.25% / 12 = 0.4375%
Fully Funded LESA Partially Funded LESA
Expected Interest Rate
4.00%
Expected Interest Rate
4.00%
MIP
1.25%
MIP
1.25%
5.25%
5.25%
Rate+MIP/12
0.4375%
Rate+MIP
/12
0.4375%
Youngest Borrower Life Expectancy
(Column 3 on TALC)
12
Youngest Borrower Life Expectancy
(Column 3 on TALC)
12
Life Expectancy x 12
144
Life Expectancy x 12
144
Annual
Property Charges (property
taxes, HOI, Flood)
$ 4,000.00
MRIS (monthly
shortfall)
$ 100.00
Allowance for property charge
increases
1.2
Allowance for property charge
increases
1.2
Annual Property Charges
$4,800.00
Shortfall including allowance for
Property Charge increases
$120.00
Monthly Property Charges
$400.00
Annual Shortfall
$1,440.00
LESA
$42,854.18
LESA
$12,856.25
Line of Credit Growth
Growth is determined by the Note Rate on the last day of the previous
month + 1.25% / 12.
LOC growth allows borrowers to take advantage of the anticipated
property value growth.
The growth of the line is similar to a increase on a credit card. It is not
interest.
The growth rate will change in tandem with the Note Rate.
LOC Growth Calculation
Monthly
Growth
Note Rate on
3/31
4.211%
0.351%
+ Growth Rate
1.250%
0.104%
LOC Balance on
3/31
$75,000
Estimated Annual Growth Rate
5.461%
0.455%
Monthly LOC Growth for
April
$341.25
Loan Growth – Expected Rate
Loan balance grows to
$109,480 in year 10.
The LOC available: $215,677
Remaining equity: $334,143
Scenario/Assumptions
72 year old borrower
LIBOR 250
$300,000 Max Claim
$59,697 UPB
$46,683 LOC first year - $70,920
after
No LOC withdrawals
4% property appreciation
Expected rate (AM Sch. Default)
Loan Growth – Initial Rate +1%
With a 1% rate increase each year,
the loan balance grows to $150,591
in year 10.
The LOC available is $296,663.
Remaining equity is $ 296,663.
Scenario/Assumptions
72 year old borrower
LIBOR 250
$300,000 Max Claim
$59,697 UPB
$46,683 LOC first year - $70,920 after
No LOC withdrawals
4% property appreciation
Initial rate increase of 1% annually for 10
years.
Loan Growth – Yield Curve
Using the yield curve, the loan
balance grows to $111,232 in year
10.
The LOC available is $198,648.
Remaining equity is $332,841.
Scenario/Assumptions
72 year old borrower
LIBOR 250
$300,000 Max Claim
$59,697 UPB
$46,683 LOC first year - $70,920
after
No LOC withdrawals
4% property appreciation
Yield Curve
Loan Growth - Summary
Expected
Rate
Initial +
1%
Yield
Curve
Loan
Balance
$109,480
$150,991
$111,232
Available LOC
$215,677
$296,663
$198,648
Remaining
Equity
$334,143
$296,663
$332,841
Partial Repayments
When a repayment is made on a closed-end product, funds cannot be
re-drawn.
Partial repayments on ARM loans, however, go directly to reducing
the loan balance and increasing their LOC.
Although, the borrower sees a direct increase in their LOC and
decrease in their loan balance, behind the scenes the payment is
applied to the loan balance in a specific way:
Accrued MIP
Accrued monthly service fees (if app.)
Accrued interest
Principal
When a partial repayment is made that is large enough to reduce
accrued interest borrowers will receive a 1098 interest statement
according to IRS regulation.
Partial Repayment Illustration
Have a borrower struggling to make their monthly P&I payments?
All HECMs allow partial repayments
Loan balance
in 5 years
with $6,000
annual
payments.
Balance is
$108,225
Over 5 years the borrower saved nearly $5,838 in interest and
fees.
The $6,000 partial prepayments are available to be redrawn at
anytime, since this is an ARM loan.
No Partial Repayment
Loan balance
with no
payments or
withdrawals in
year 5.
Balance is
$144,063
Review
Interest Rates
Expected Rates and
Look Up Floor
Note Rates
Principal Limit
Factors
Payment Plan Math
Ongoing MIP
Amortization
Schedule
TALC
TIL
Loan Growth
Line of Credit
Expected Rate
Initial Rate +
Yield Curve