The Reverse Mortgage

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The Reverse Mortgage
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Sun West Mortgage Overview

• Full service mortgage banker since 1980
• FHA/VA originator since 1980.
• FHLMC approved seller-servicer in 1986,
  FannieMae approved in 1988.
• Privately held
• Flexibility to respond to Customers needs.
• Also owns XL Dynamics, a mortgage technology
  company.
• Extensive experience with specialty and FHA
  products
• Was the largest originator, securitizer, and
  servicer of HUD Title I and 203K (rehab) loans
• Extensive Experience with Reverse Mortgage
  products
• Approved with FNMA as RM Servicer in August 2004
  began production in August 2006
• Developed fully integrated web-based Reverse
  Mortgage (RM) Automated Underwriting software
  system for origination and servicing
• GNMA HMBS approved issuer, servicer, master
  servicer
• Currently servicing 3,200 Reverse loans as of
  March 31, 2008
• Among the top five originators of reverse
  mortgages in the US

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Sun West Mortgage Overview

• Sun West is a leader in developing reverse
  mortgage products, including
• HECM LIBOR (4th Quarter of 2007)
• HECM FIXED (January 2008)
• Innovation in loan servicing
• First to break the FNMA moratorium for new
  reverse mortgage Seller/Servicer in 2004
• Only approved Ginnie Mae HMBS issuer, servicer
  and master servicer
• Innovation in capital markets
• Only end-to-end reverse mortgage factory
  ability to self-issue government backed bonds
• Innovation in Technology
• ReverseSoft web-based origination through loan
  servicing system for reverse mortgages
• The most intuitive, user-friendly technology
• Fully developed in house, fully customizable,
  secure, scalable and reliable

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MET LIFE Study

• For seniors between age 65 and 69
• 1 out of 10 live below poverty level
• 80 own homes
• Net worth with equity 114,000
• Net worth without equity 27,588
• Majority of income goes to housing, food, and
  health care

Based on HUD maximum claim amount of 362,790.
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Seniors Income vs. Equity
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Why Reverse Mortgages? Why Now? Facts

• Only 64 of retired Americans say they are
  financially prepared for retirement. (Sun Life
  Financial survey, 2007)
• The average American is on track to replace 58
  of his or her income in retirement. (Fidelity
  Investments 2007)
• 55 of people ages 50-59 say theyre very
  concerned about running out of savings in
  retirement. (Merrill Lynch, 2006)
• 4. Theres a 50 chance that at least one member
  of a 65-year old couple will live to 92.
  (Kiplingers Personal Finance February 2007)
• 5. Today, 19 of Americans have a defined-benefit
  plan. (Boston College Center for Retirement
  Research, 2007)
• 6. Less than half of non-government American
  workers participate in their employers
  retirement savings plan. (Wall street Journal,
  March 18 2007)

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• What is a Reverse Mortgage?
• A reverse mortgage is a loan against the equity
  of a home that provides cash advances to a
  borrower requiring no repayment until a future
  time. The most commonly used and well known
  reverse mortgage product is known as a HECM (loan
  plan).
• What does HECM stand for?
• Home Equity Conversion Mortgage (HECM). With a
  HECM, the borrower converts their home equity
  into cash without having to
• Sell and move
• Make monthly loan repayments

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• How is a reverse mortgage different from a
  traditional home equity loan?
• A reverse mortgage is different from a
  traditional home equity loan because you DO NOT
  need an income to qualify and you DO NOT need to
  make monthly repayments. Rather, cash advances
  are made to the borrower by the lender.

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• Repayment
• A reverse mortgage does not need to be repaid
  until the last surviving borrower dies or when a
  borrower sells or permanently moves away.
• Purpose of Reverse Mortgage
• The purpose of a reverse mortgage is to generate
  cash by converting the equity that someone has in
  their home, which they can spend however they
  wish, while they continue to live in this home.
  This is different from that of a traditional
  forward mortgage or home equity loan where you
  must have income and use debt to generate equity.
  In a reverse mortgage they already have a
  substantial amount of equity and use debt to
  generate income. In other words, a Reverse
  Mortgage is a loan with rising debt and falling
  equity. 

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• Who retains ownership of the home in a reverse
  mortgage?
• The borrower and or borrowers heirs retain
  ownership of the home. When a reverse mortgage
  becomes due and payable, neither the lender nor
  the federal government receives the house. The
  lender does have a creditor interest in the home,
  which gives them the right to have the loan paid
  back to them. But, they do not have equity or
  ownership in the house.

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• What happens when the loan becomes due and
  payable?
• The borrower, or heirs can refinance the home, or
  sell it
• Loan balance must be repaid
• If amount owed is less than home value, then the
  borrower or heirs get the rest.
• EXAMPLE
• Net sale proceeds are 200,000
• Amount owed is 110,000
• Remaining 90,000 goes to borrower or heirs

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• What if the loan balance is greater than the home
  value?
• Loan balance could be a LOT greater than the home
  value.
• Do the borrower or heirs have to pay the
  difference? Or does the lender take a loss?
• Neither. This is why there is a non recourse
  limit and why there is mortgage insurance. When
  the loan limit catches up to the value of the
  home, the non recourse limit applies.
• What is a non recourse limit?
• The non-recourse limit on a reverse mortgage
  means that
• The lender does not have recourse or cannot seek
  repayment from anything other than the homes
  value.
• Instead, HUD pays the difference to the lender
• The borrowers estate and heirs are protected
  against deficiency judgments.
• The borrower cannot owe more than the value of
  the home

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• What is the purpose of reverse mortgage
  insurance?
• The purpose of reverse mortgage insurance is to
• Protect lenders against loan losses so they are
  not responsible for the difference between the
  loan balance and the home value.
• It also protects borrowers with the non recourse
  limit so that the loan balance cannot ever exceed
  what the home is worth
• And, this is also what allows the borrowers to
  remain in their homes as long as they desire.

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• How does the mortgage insurance control the risk?
• Reverse mortgage insurance controls the risk of
  loan losses by
• Controlling the amount of the loan advances.
• Charging a premium on all loans to create a
  reserve fund.
• So, the mortgage insurance program instructs the
  lenders as to how much money they can advance any
  given borrower. Then, they also charge and
  collect a mortgage insurance premium on all the
  loans to create a reserve pool of funds. So, in
  the event you have a case where the borrower
  lives a long time, and the loan balance catches
  up or exceeds the value of the home, then the
  losses are paid off from this insurance fund.
  This way, the borrowers never have to pay more
  than what the house is worth and the lenders are
  protected from loan losses.
• Reverse Mortgage Insurance
• Limit loan advances (to limit loan losses).
• Charge a monthly premium (MIP) on all loans (to
  create a reserve fund)/
• Use (loan loss) reserve fund to pay for loan
  losses.

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• How Are Loan Advances Determined?
• Loan advances must be set just right, not too
  much and not too little. They must be large
  enough to attract homeowners but not so large
  that they generate large loan losses and require
  large MIPs. But, they must also be moderate
  enough that they generate moderate loan losses
  and require MIPs that homeowners are willing to
  pay. Thus, loan advance amounts are set and are
  dependent on
• Borrowers age (62 years will obviously be less
  than 85)
• Home Value
• Interest Rate
• Other Loan Costs
• In the HECM program
• A unique loan amount is calculated for each
  borrower depending upon the
• Borrowers Age
• Home Value
• Interest Rate
• Other Loan Costs

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• To qualify for a HECM loan
• All owners must be aged 62 or over.
• Condominiums must be FHA-approved.
• Mobile home and Cooperatives are NOT eligible,
  but manufactured housing units may be eligible.
• Existing debt on home must be paid off BEFORE
  or WITH the HECM loan. In other words, they
  pay off the existing debt with an initial advance
  from the HECM loan. In fact, some people use a
  HECM loan just for this purpose. If they have a
  substantial first mortgage and/or second mortgage
  that they are paying large payments on each
  month, they may be able to get enough from the
  HECM to pay off that debt and then just not have
  a monthly payment to make.
• Borrower must NOT be delinquent on any federal
  debt (for example, a student loan) these will
  have to be paid off with the HECM loan proceeds
  at closing.
• Home CANNOT be a new construction. Rather, it
  must have been lived in by someone for at least
  one year before the closing date.
• The home must meet FHA minimum property standards
• The borrower must live in the home as a principal
  residence. This means that they must live there
  for at least half of the calendar year (6
  months).
• To be eligible for a HECM loan, a homeowner must
  receive HECM counseling from a HUD approved
  counseling agency to which this agency issues a
  certificate to the borrower certifying that the
  homeowner received the counseling. The
  homeowner must submit this certificate to a
  lender for submission to HUD as part of the
  lenders application for HECM insurance.

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• There are several payment options in the HECM
  program
• A fixed monthly advance for as long as the
  borrower lives in the home.
• A fixed monthly advanced for a period chosen by
  the borrower.
• A Line of Credit that lets the borrower select
  the timing and the amount of the loan advances.

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• What are the 5 HECM payment plans for the cash
  advances?
• Term
• Tenure
• Line of Credit (LOC, aka Credit Line)
• Includes Initial Advance (Lump Sum at closing)
• Modified Term (monthly payments with LOC)
• Modified Tenure (monthly payments with LOC)

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• Even more flexibility a borrower can
• Change payment plan any time for a small fee
  (20)
• Change terms of plan (for example, length of
  term)
• Suspend monthly payments
• Request an unscheduled lump sum
• No limit on how often changes may happen, as long
  as money is there.

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• The HECM loan may be used to pay the following
  items related to the loan
• Repairs needed to meet FHA minimum property
  standards.
• Standard closing costs.
• 2 mortgage insurance premium.
• The origination fee.
• In other words, the start up costs of the loan
  can be paid for with the loan, which reduces the
  out of pocket costs of the borrower.

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• A reverse mortgage will turn ALL of the homes
  EQUITY into these three things
• Loan Advances (Payments to the borrower)
• Loan Costs
• Leftover Equity (To the Homeowner and/or heirs)

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• HECM Loan Costs
• Mortgage Insurance Premium (MIP) 2 of Maximum
  Claim Amount (the homes value or max 203b limit,
  whichever is less).
• Origination Fee may not exceed 2 of Maximum
  Claim Amount for the first 200,000 1 of the MCA.
  No less than 2500, and never to exceed 6000.
• 3rd Party Closing Costs usual, customary and
  necessary costs of doing the loan. For example,
  title and appraisal.
• Monthly Servicing Fee may not exceed
• 25-35 for monthly adjusting interest
• 30 for fixed HECM
• Servicing Fee Set Aside (SFSA)
• Equals present value of monthly fee calculated
  out for 10 years.
• Is subtracted from principal limit, but set aside
  and then is only added to the loan balance each
  month.

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• Total Annual Loan Cost (TALC)
• The TALC (Total Annual Loan Cost) combines all of
  a reverse mortgages costs into a single annual
  average rate.
• TALC disclosures can be useful when comparing one
  type of reverse mortgage to another. But they
  also show the true, total cost of an individual
  reverse mortgage loan can vary by a lot, and can
  end up being much more or less expensive than you
  might have imagined.
• TALC disclosures reveal that a reverse mortgages
  generally are more costly when the borrower will
  live in the home for only a few years after
  closing the loan, which is due to high start up
  costs. But as the loan balance grows larger over
  time then the start up costs are a much smaller
  part of the debt. An explanation of how TALC
  rates are calculated can be found on the internet
  at www.reverse.org/talcuto.htm.
• In summary, home equity will turn into one to
  three things (loan advances, loan costs or
  leftover equity). It is very important for the
  homeowner to be able to compare all available
  options and try not to focus on just what funds
  are received, but what will the loan will cost
  them and what will be left at any future point.
  In other words, if you use too much now, they may
  not have what they will need later.

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PRODUCTS

• Home Equity Conversion Mortgage (HECM)
• Adjustable Rate
• LIBOR Index (The Simple HECM)
• Treasury Index
• Fixed Rate
• FHA insured
• Subject to FHA county limits Currently 417,000.

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DEFINITIONS

• 1. Expected Interest Rate
• Current Index lenders margin.
• For CMT based loans, Current Index Previous
  weeks average yield of the 10 year Treasury Bond
• For LIBOR based loans, Current Index Previous
  weeks average of the 1 year LIBOR swap.
• Good News! Reversoft track all this for you so
  you dont need to look this up!
• The Expected Interest Rate is NOT the rate
  charged on the loan. It is only used to compute
  the Principal Limit Factor.
• Subject to change every Tuesday.
• HUD locks in the Expected Interest Rate with
  automatic float down for 120 days from
  application date.
• Rule The lower the Expected Interest Rate, the
  more money the borrower will receive.
• Exception The Expected Interest Rate floor is
  5.56. BORROWER WILL NOT GET ANY MORE MONEY IF
  THE EXPECTED INTEREST RATE DROPS BELOW 5.56.

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EXPECTED INTREST RATE
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DEFINITIONS

• 2. Principal Limit In forward mortgage terms
  this is the maximum loan amount that FHA will
  permit for that borrower/property
• 3. Net Principal Limit In forward mortgage
  terms this is the loan amount net of all closing
  costs.
• Take the Principal Limit (Gross Amount that a
  borrower could receive)
• Subtract Mortgage Insurance Premium (MIP)
• Subtract Other Closing Costs
• Origination Fees
• 3PrdP Party Closing Costs
• Subtract Servicing Fee Set Aside (SFSA)
• Equals the Net Principal Limit (NPL)

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PRINCIPAL LIMITS/ NET PRINCIPAL LIMIT
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DEFINITIONS

• 6. Origination Fee
• See MORTGAGEE LETTER 2008-34
• The loan origination fee limit will be the
  greater of 2500 or two percent of the maximum
  claim amount of the mortgage, up to a maximum
  claim amount (MCA) of 200,000, plus one percent
  of any portion of the maximum claim amount
  greater than 200,000. The total amount of the
  loan origination fee may not exceed 6,000.

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ORIGINATION FEE
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• Good News! You dont need to understand the HUD
  formula because Reversesoft will calculation the
  Principal Limit for you. All you need to input
  is
• Age of the youngest borrower
• Estimated Value of the Property
• The software then takes the Maximum Claim Amount
  which equals the value of the home OR 417,000
  limit, which ever is LESS.
• And Finally, takes the Principle Limit Factor ()
  multiplied by the Maximum Claim Amount and then
  uses that to compute the Principal Limit.

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Account Executivescontact information

• Danielle Hartigan Office 562-916-1490 Cell
  949-350-8559 Fax [phone] Email
  danielle.hartigan_at_swmc.com
• Tami Pickel Office 562-916-1487
  Cell714-616-4239 Fax[phone] Email
  tami.pickel_at_swmc.com