FHA’s
Home Equity Conversion Mortgage
(HECM)
UNDERSTANDING IT AS A CASH-FLOW MANAGEMENT TOOL
FOR MATURE HOMEOWNERS
Your Presenters: Mary Jo and Amanda
HECM Defined
A federally-guaranteed home loan with deferred repayment:
◦ primary residence
◦ single-family residence
◦ HUD...
HECM Defined
Insured by HUD
◦ non-recourse
◦ no personal liability
(only subject property is liable
for accrued debt)
HECM Defined
 Primary residence
 Borrower must be
62+
 Loan amount is lower
if NBS is younger
HECM Defined
Repayment deferred until Triggering
Event:
Death of last remaining borrower or
eligible non-borrowing spouse...
Sequence of Returns &
Reverse Dollar Cost Averaging
A Different Kind of Cash Flow Management Tool:
 Variable interest rat...
HECM Defined
Lump Sum
◦ Fixed-interest rate
◦ NOT a revolving LOC
◦ Extinguish existing mortgage
and consumer debt to redu...
Availability of funds
Variable interest rate
(lender’s margin + Annual LIBOR)
◦Revolving Line of Credit
◦Tenure – lifetime...
Flexibility of variable rate loan
Borrower can choose combo
of any/all options at closing
◦ LOC + lump sum + tenure
or te...
Amortization of 72 year old: $50K Lump Sum,
$50K LOC, Tenure payments $1,642/month
HECM vs. HELOC
The HECM loan is vastly more flexible and offers
protections not available in other types of lines of credi...
What’s new?
Lower IMIP for borrowers accessing <60% year
one.
Eligible non-borrowing spouse now protected for
life
Defa...
What’s new?
 Lifetime interest rate cap lowered from 10 to 5.
 Borrower has option for no set up fee loan
 Higher rate ...
HUD’s formula
 10-year LIBOR swap (used in Expected Rate)
and
 Age of youngest borrower
determines
 Principal Limit Fac...
No Longer a Last Resort
Michael Kitces, recently spoke at
NAPFA May 2015, “Taking a Fresh
Look at Reverse Mortgages”
Bar...
Application Timing?
When LIBOR increases, $$ available to Borrower decreases.
Example: 73 year old
5% Exp Rate = 58% Prin...
Case Studies
Sequence of Returns in Draw Period – Line of Credit
Drawing more than recommended – Tenure
Health care – T...
62 year
old, Line
of Credit
72 year
old,
Tenure
Payment
82 year
old,
Term
Payment
What else?
Downsizing:
◦Eliminate existing mortgage
payments
and
◦Beef up Investment Portfolio
Downsizing scenario
Step One:
Sell existing home 1,650,000
Pay off existing mortgage (541,000) (eliminate monthly mortgage...
No Longer a Last Resort
Based on current academic and
scholarly research, advisors may
have a fiduciary responsibility to
...
Enhance Portfolio Longevity
Protect Against Unfavorable Sequence of Returns in Retirement
with a HECM LOC
(Home Equity Con...
All research posted on-line at:
www.FhaReverseBlog.com
Mary Jo Lafaye, nmls# 246222
415.259.4979
info@MaryJoLafaye.com
Tha...
Presenting the FHA's HECM
of 27

Presenting the FHA's HECM

FHA's HECM Rules
Published on: Mar 4, 2016
Published in: Economy & Finance      
Source: www.slideshare.net


Transcripts - Presenting the FHA's HECM

  • 1. FHA’s Home Equity Conversion Mortgage (HECM) UNDERSTANDING IT AS A CASH-FLOW MANAGEMENT TOOL FOR MATURE HOMEOWNERS
  • 2. Your Presenters: Mary Jo and Amanda
  • 3. HECM Defined A federally-guaranteed home loan with deferred repayment: ◦ primary residence ◦ single-family residence ◦ HUD-approved condos ◦ 1-4 unit buildings ◦ Co-ops, not yet….
  • 4. HECM Defined Insured by HUD ◦ non-recourse ◦ no personal liability (only subject property is liable for accrued debt)
  • 5. HECM Defined  Primary residence  Borrower must be 62+  Loan amount is lower if NBS is younger
  • 6. HECM Defined Repayment deferred until Triggering Event: Death of last remaining borrower or eligible non-borrowing spouse (NBS) 12 consecutive months of all residents being out of the home  Choose to sell, re-fi or transfer title  Convert to rental property
  • 7. Sequence of Returns & Reverse Dollar Cost Averaging A Different Kind of Cash Flow Management Tool:  Variable interest rate (lender’s margin + Annual LIBOR)  Revolving Line of Credit (LOC) ◦ LOC restores if borrower ever chooses to make a payment (always optional) ◦ Growth Rate of credit line is automatic and federally-guaranteed ◦ regardless of home value or outside factors available proceeds uncapped over life of loan  Draws are tax-free
  • 8. HECM Defined Lump Sum ◦ Fixed-interest rate ◦ NOT a revolving LOC ◦ Extinguish existing mortgage and consumer debt to reduce draw rate from investment portfolio
  • 9. Availability of funds Variable interest rate (lender’s margin + Annual LIBOR) ◦Revolving Line of Credit ◦Tenure – lifetime payment to borrower based on age ◦Term – choose number of months or monthly amount
  • 10. Flexibility of variable rate loan Borrower can choose combo of any/all options at closing ◦ LOC + lump sum + tenure or term payment Borrower can restructure at any time and as needed
  • 11. Amortization of 72 year old: $50K Lump Sum, $50K LOC, Tenure payments $1,642/month
  • 12. HECM vs. HELOC The HECM loan is vastly more flexible and offers protections not available in other types of lines of credit ◦ LOC cannot be arbitrarily frozen or reduced ◦ Non-recourse ◦ Never re-casts into a P&I payment ◦ Zero monthly repayment ◦ Open ended term (lifetime residency) ◦ Unlimited Draw period ◦ Federally-regulated
  • 13. What’s new? Lower IMIP for borrowers accessing <60% year one. Eligible non-borrowing spouse now protected for life Default reduction plan instituted by HUD • Minimal financial and credit assessment done at application • LESA (set-aside) created for borrowers with prop tax / home owner’s insurance delinquency
  • 14. What’s new?  Lifetime interest rate cap lowered from 10 to 5.  Borrower has option for no set up fee loan  Higher rate = faster increase in LOC funds
  • 15. HUD’s formula  10-year LIBOR swap (used in Expected Rate) and  Age of youngest borrower determines  Principal Limit Factor (Percentage of 625,500 or home value, whichever is less)
  • 16. No Longer a Last Resort Michael Kitces, recently spoke at NAPFA May 2015, “Taking a Fresh Look at Reverse Mortgages” Barry Sacks, “Reversing Conventional Wisdom” Salter and Evensky, “Standby Reverse Mortgages: A Risk Management Tool for Retirement Distrbutions” Boston College Center for Retirement Research, “Using Your House for Income in Retirement”
  • 17. Application Timing? When LIBOR increases, $$ available to Borrower decreases. Example: 73 year old 5% Exp Rate = 58% Principal Limit Factor 6% Exp Rate = 49% Principal Limit Factor 8% Exp Rate = 37% Principal Limit Factor 10% Exp Rate = 28% Principal Limit Factor
  • 18. Case Studies Sequence of Returns in Draw Period – Line of Credit Drawing more than recommended – Tenure Health care – Term Combo (LOC/Term/Tenure) Extinguish mortgage Downsize Divorce/inheritance – Settle the estate Avoid Capital Gains - Stay in home
  • 19. 62 year old, Line of Credit
  • 20. 72 year old, Tenure Payment
  • 21. 82 year old, Term Payment
  • 22. What else? Downsizing: ◦Eliminate existing mortgage payments and ◦Beef up Investment Portfolio
  • 23. Downsizing scenario Step One: Sell existing home 1,650,000 Pay off existing mortgage (541,000) (eliminate monthly mortgage payments) Sale fees estimated (95,000) Capital gains (100,000) (check with your tax advisor) Cash left over from sale $914,000 Step Two Downsizing to put cash to work and eliminate monthly mortgage payments for good: Cost of new home 700,000 HECM proceeds (350,000) +/- depending on age and interest rate at time of application Buyer pays 350,000 from cash on hand (out of 914,000 from sale of current home) $$$ Cash left over after purchase, to save or invest $564,000 +/-
  • 24. No Longer a Last Resort Based on current academic and scholarly research, advisors may have a fiduciary responsibility to evaluate -- for each client entering retirement -- the potential effectiveness of the FHA’s HECM to reduce the probability of untimely portfolio exhaustion.
  • 25. Enhance Portfolio Longevity Protect Against Unfavorable Sequence of Returns in Retirement with a HECM LOC (Home Equity Conversion Mortgage) Line of Credit
  • 26. All research posted on-line at: www.FhaReverseBlog.com Mary Jo Lafaye, nmls# 246222 415.259.4979 info@MaryJoLafaye.com Thank You!

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