• Principal Limit: the maximum mortgage amount; equals the maximum claim amount times the principal limit factor
• Principal Limit Factor: the percent of the maximum claim amount that equals the principal limit; determined by the age of the youngest borrower and the expected average mortgage interest rate
• Net Principal Limit: the maximum mortgage amount minus financed loan costs and set asides
• Maximum Claim Amount (MCA): whichever is less: the appraised value of the home, or HUD's national mortgage limit
• 203-b Limit (no longer used as of 11/2009): the maximum amount of home value that could be used to calculate the principal limit; varied by county, and also equals the limit on HUD's loan insurance under section 203 (b) of the National Housing Act
• HUD's national mortgage limit: Single national limit which replaced the 203(b) limit for the purposes of determining Maximum Claim Amounts, beginning November 2009.

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• 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.

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• 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, historically, Fannie Mae has only purchased such loans if the rate were capped at 10% over the initial rate charged on the loan. This may be subject to change if other investors begin purchasing HECM loans.
• Adjustable rates are composed of an index + a margin
• The lender's margin is controlled by the lenders and their investors (Fannie Mae is the primary investor) and may vary from lender to lender and from week to week until loan closing. However, once it is set for a particular loan, it never changes throughout the life of the loan.
• HECM adjustable-rate loans can be indexed to either the Treasury (CMT) rate or the London Interbank Offered Rate (LIBOR). A given loan must use either Treasury or LIBOR for both the initial and the expected rates.
• The initial rate on a monthly-adjustable loan may use the 1-year CMT, 1-month CMT, or 1-month LIBOR as an index.
• The initial rate on an annually-adjustable loan may use the 1-year CMT or the 1-year LIBOR.
• The expected rate on adjustable-rate HECMs may use the 10-year Treasury (CMT) or the 10-year LIBOR swap rate as an index.
• The expected interest rate is used to determine loan amounts; it equals the 10-year Treasury rate or the 10-year LIBOR swap rate + the lender's margin.
• HUD does not specify an index for fixed-rate HECM loans; these rates are determined by lenders and/or their investors.
• For a fixed-rate HECM, the expected rate=the initial rate.
• The total "compounding rate" charged on the loan balance equals the current interest rate being charged on the loan + 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 2% and the lender's margin is 3.5%, then the compounding rate is 6% (2% + 3.5% + 0.5%)
• 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 (e.g., 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 late April 2009, the creditline growth rate on a monthly adjustable HECM was 4.55% (1-year Treasury rate was 0.55% + 3.5% margin + 0.5%), while a national average bank money market rate was 1.61% and a national average bank 1-year CD rate was 2.08%, according to www.money-rates.com.
• For a fuller discussion of HECM interest rates, go to Tab 6 in the Training Manual, and www.aarp.org/money/personal/articles/picking.html

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• 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
  
  • TALC Introduction
  • TALC Tutorial - see the Training Manual, Appendix D
  • TALC Regulations
    (This document is in 'PDF' format. Click here if you need to download Acrobat Reader.)

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• Assisted Living:
  http://www.aarp.org/families/housing_choices/assisted_living/a2004-02-27-assistedlivinghousing.html
• CCRCs:
  http://www.aarp.org/families/housing_choices/other_options/a2004-02-26-retirementcommunity.html
• Home Sharing:
  http://www.aarp.org/families/housing_choices/other_options/a2004-02-26-homesharing.html
• Nursing Homes:
  http://www.aarp.org/families/housing_choices/nursing_homes/

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• 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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