Forward on Reverse: Understanding Reverse-Speak, Part OneAtare E. Agbamu, CRMSReverse Mortgages, Senior Citizens, Alternative Mortgage Products, Industry Terminology An experienced Mortgage Broker and a reader of this column recently called me to discuss reverse mortgage options for his mother. "My mother's house is free-and-clear; what is the loan-to-value ratio (LTV) she can expect to get from a reverse mortgage lender?" he asked, unaware that there is a language difference between forward and reverse mortgages. Since the primary goal of my Forward on Reverse column is to promote understanding of reverse mortgages within the Mortgage Broker community, I have decided to devote both this and next month's column to the language reverse mortgage. The reverse lending process usually begins with mandatory reverse mortgage counseling by an approved counseling agency. The potential borrower is given a stack of papers generated from the industry's standard software, Financial Freedom Senior Funding Corporation's proprietary Reverse Mortgage Analyzer. One of the papers from the software is called Reverse Mortgage ComparisonSelected Plans. Let's begin here. Estimated Home Value The borrower's estimate of their home's value at the time of application, before an official appraisal report. For example, the borrower may think that their home is worth $100,000, based on knowledge of neighborhood home values. Of course, the appraisal's professional opinion carries more weight with the lender. Expected Interest Rate The interest rate that is used to decide the loan amount (or loan advance in reverse-speak). For FHA reverse products, the expected interest rate is connected to the 10-year Treasury note, plus a margin. Initial Interest Rate The note rate at closing. FHA-insured reverse products are usually monthly- or annually-adjustable rate mortgages (ARMs), that are linked to the one-year Treasury bill, plus a margin. At this column was written, the margin was 2.1 and 1.5 percent for annual and monthly ARMs, respectively. (Fannie Mae's proprietary Home Keeper reverse mortgage is indexed to the one-month certificate of deposit, plus a margin, while Financial Freedom's jumbo product, Cash Account, relies on the six-month London Interbank Offered Rate [LIBOR] index.) Interest Rate Cap The highest rate that the borrower can expect to pay, should the index rise abnormally during the life of the loan. It is identical to a forward mortgage's adjustable rate cap. Lending Limit (also referred to as Maximum Claim Amount) The dollar value used to calculate the reverse loan advance that the borrower will receive. For example, in the Twin Cities metro area, the FHA lending limit is currently $199,405, meaning a reverse borrower with a home valued at $300,000 is limited to $199,405 for FHA reverse products. The FHA lending limit varies from county to county, but a bill has been introduced in Congress to impose a single national limit, due the confusion and unfairness of the current system. Fannie Mae has one national limit of $300,700, and Financial Freedom's Cash Account is the only jumbo product in the market; it starts where Fannie Mae stops. If the caller whom I referred to earlier understood reverse-speak, he would have used the term "lending limit" instead of LTV, which would likely have cleared his confusion. Someday, phrases like "initial interest rate," "expected interest rate" and "lending limit," along with many other key phrases and acronyms from the reverse segment of the mortgage-credit industry (some of which will be examined in a future column) will become as commonplace for Mortgage Brokers as LTV or PITI. Let's change our thinking from forward to reverse. Atare E. Agbamu, CRMS, is a senior mortgage consultant and director of training at Inver Grove Heights, Minn.-based Peoples Choice Mortgage. Headquartered in Erlanger, Ky., Peoples Choice mortgage is a member of the National Reverse Mortgage Lenders Association. Mr. Agbamu has served on the Minnesota Association of Mortgage Brokers Inc. 2000-2001 Executive Council and currently serves on the Board of Little BrothersFriends of the Elderly in the Twin Cities. He can be reached by phone at (651) 389-1105 or e-mail [email protected].