HECM Resources
Technical Topics for HECM Counselors

This page summarizes selected basic information on a variety of key technical topics for HECM counselors. Most topics also include sources of more detailed additional information. Since none of the information below comprehensively covers each topic, be sure to review the additional sources as well.

    • Net Principal Limit: the maximum mortgage amount minus financed loan costs and set asides
    • Maximum Claim Amount: whichever is less: the appraised value of the home, or HUD's 203-b limit for the county in which the home is located

    • 203-b Limit: the maximum amount of home value that can be used to calculate the principal limit; varies by county, and also equals the limit on HUD's loan insurance under section 203 (b) of the National Housing Act

  • HECM Roles

  • Federal Housing Administration (FHA) is the part of HUD that administers the HECM insurance program.
  • Fannie Mae purchases HECM loans, in effect, providing the funds that are advanced to HECM borrowers.
  • HECM Interest Rates

    • The expected interest rate is used to determine loan amounts; it equals the 10-year Treasury rate + the lender's margin

    • The initial and current interest rate equal the 1-year Treasury rate + the lender's margin

    • The total "compounding rate" charged on the loan balance equals the
      current interest rate being charged on the loan (current 1-year Treasury rate + the lender's margin) + 0.5%

    • The 0.5% is the second part of the mortgage insurance premium (the first part of the premium is the 2% charged at closing)

    • Example: if the 1-year Treasury is 5% and the lender's margin is 1.5%, then the compounding rate is 7% (5% + 1.5% + 0.5%)

    • The lender's margin is set by Fannie Mae and currently (9/05) equals 1.5% for monthly-adjusting interest, and 3.1% for annually-adjusting interest

    • The borrower can choose between a monthly-adjusting versus an annually-adjusting interest rate

    • Annually-adjusting interest cannot change by more than 2% in any one year or by more than 5% over the life of the loan; these caps are set by the HECM program
    • Monthly-adjusting interest is not capped by the HECM program; however, Fannie Mae will only purchase such loans if the rate is capped at 10% over the initial rate charged on the loan.
    • The unused portion of the HECM creditline (the amount of credit remaining available to the borrower) grows by the compounding rate, that is, by the same total rate that is currently being charged on the loan balance (current 1-year Treasury rate + lender's margin + 0.5%)
    • HECM creditline growth rates are likely to be greater than money market or CD interest rates. For example, in early February, 2005, the creditline growth rate on a monthly adjustable HECM was 4.89% (1-year Treasury rate was 2.89% + 1.5% margin + 0.5%), while a national average bank money market rate index was 1.22% and a national average bank CD rate index was 3.13%, according to money-rates.com.
    • For a fuller discussion of HECM interest rates, go to section 6-6 in the Training Manual, and www.aarp.org/revmort/Articles/a2003-03-27-picking.html

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  • TALC Disclosures

    • TALC disclosures project the future total cost of the loan

      • at 0%, 4%, and 8% assumed appreciation.

      • at 2 years after closing, at the borrower's life expectancy, and at 40% beyond that life expectancy.

      • assuming that 50% of any creditline is withdrawn at closing, and none thereafter.

      • assuming that the initial interest rate charged on the loan never changes.

    • TALC rates

      • generally are greatest in the early part of the loan, and then decline over time because

        • the upfront costs become a smaller part of the growing loan balance, and

        • the likelihood increases that the loan balance will be limited by the loan's non-recourse limit.

      • generally are greatest when the loan term is shortest and appreciation is greatest.

      • generally are greatest through life expectancy - and vary the most over time - with tenure advances.

      • must include the costs and benefits of an annuity that the lender knows the borrower is purchasing with HECM loan advances.

      • are similar - but not exactly the same as - the "total annual rates" generated by software meeting AARP's model specifications for comparing reverse mortgages

    • For more information on TALC disclosures, go to

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  • Proprietary Reverse Mortgages are developed, owned, insured, and offered by private companies. The two main proprietary reverse mortgages available in the United States are the "Cash Account" from Financial Freedom and the "Home Keeper" from Fannie Mae.

     

  • "Cash Account" (Financial Freedom)
    • Not available in all states
    • Provides a lump sum at closing and/or a creditline; no monthly term or monthly tenure advances are available
    • Remaining available funds in creditline grow by 5% per year
    • Each creditline draw must be at least $500
    • Adjustable interest rate is 6-month LIBOR index + 3% margin for first 6 months, then LIBOR + 3.5% margin thereafter, and reset semi-annually 
    • Lifetime rate cap is 6-month LIBOR index + margin (3.5%) + 6%
    • Origination fee = 2% of maximum initial loan amount
    • Equity Choice feature lets borrower limit loan obligation to a stated percent of the home's future full market value; but this decrease the maximum available loan amount at closing. Borrowers can choose to limit their loan obligation to from 50% to 90% of the home's future value. 
    • "Combo" Option has no origination fee but requires minimum draw at closing of at least 75% of the maximum available loan amount and must be at least $200,000 

    • "Cash Out" Option has no origination fee and no 3rd-party closing costs (except for any state or local taxes), but requires draw at closing equal to 100% of the maximum allowable loan amount and must be at least $275,000 

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  • "Home Keeper" (Fannie Mae)

    • Available in all states
    • Eligible properties are one-unit, single-family properties, units in a Planned Unit Development (PUD), condominiums and certain properties held in trust or leasehold. Multi-family dwellings such as duplexes, triplexes, and 4-unit properties are not eligible.
    • Eligible borrowers are aged 62 or over; there can be no more than three borrowers per property.
    • In 2006, home values in excess of $417,000 generate the same loan amounts as homes valued at $417,000, which is called the "adjusted property value" (APV) for such homes.
    • Payment options are lump sum at closing, line of credit, tenure, and modified tenure; term payments (monthly for a fixed period of time) are not available.
    • The funds remaining available in a Home Keeper creditline do not grow larger over time.

    • The maximum origination fee is 2% of the adjusted property value (APV) or $2000 - whichever is greater.

    • The loan amount for each home is determined by the age(s) of the owner(s) and the home value (or APV, whichever is less). The current or expected interest rate is not a part of this calculation.

    • The adjustable interest rate is tied to the one-month CD rate.

    • Pre-existing liens must be paid off at or before closing.
    • A "Home Keeper for Home Purchase" feature of the program permits a borrower to purchase a home using a Home Keeper loan.

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  • HECM Property Repairs

    • If estimated repair cost exceeds 15% of maximum claim, repairs must be completed prior to closing.

    • If required repairs are to be completed after closing,

      • lender must set aside an amount equaling 150% of the estimated cost.

      • lender must include a repair rider in the closing documents to document this requirement.

      • borrower has 12 months in which to complete the repairs.

    • For more information, see HECM Handbook 4235.1 REV-1, Section 3-5 and Appendix 8

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  • Texas Variations: click here