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].
