residential relocation: cafeteria style reverse mortgages mortgage interest differential payments...
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RESIDENTIAL RELOCATION:
Cafeteria Style
Reverse MortgagesMortgage Interest Differential Payments
Income Determination Tuesday, June 25, 2013
11:00 AM - 12:30 PM
Reverse Mortgages in Relocation Assistance
aka Home Equity Conversion Mortgages (HECMs).
Marshall Wainright Realty Team Leader
FHWA Resource Center
Residential Relocation: Cafeteria Style
HECM Program Eligibility Requirements• Age: Borrower (or youngest borrower must be at least
62 years old.• Ownership: The borrower must hold title to the
property. • Principal residence: Borrower must occupy the property
as a principal residence• Sole mortgage: Any existing mortgages must be paid off
at closing.• Property standards: Property must meet minimum
housing quality standards as prescribed by FHA.
Repayment Triggers• Death: Borrower (or last co-borrower) dies.• Move-out: Borrower (or last co-borrower) moves out of
house permanently.• Extended absence: Borrower (or last co-borrower) does
not physically reside in property for more than 12 months due to illness or other reasons.• Sale or gift of property: Borrower (or last co-borrower)
sells the property or otherwise transfers title to third party.• Failure to fulfill obligations: Borrowers fails to pay taxes,
insurance, or keep home in good repair.
Mortgage Amount Based On• Age of youngest borrower• Current interest rate• Lesser of appraiser value or the HECM FHA mortgage
limit of $625,000 or sales price; and• Initial mortgage premium (HECM Standard or HECM
Saver)
HECM Costs• Mortgage insurance premium• Third party charges (closing costs)• Origination fee – depends on value of home• Interest rate – adjustable or fixed• Servicing fee – account statements, disbursing loan
proceeds, assuring loan requirements are met
Why Choose a Reverse Mortgage?• Allows homeowners to draw down equity and
continue to reside in existing home for extended period (age in place)• This equity conversion helps meet expenses in
retirement• Choose between income stream to assist with
everyday expenses, a line of credit for major expenses, or combination• No monthly payments to a lender ever required –
interest accrues over life of loan and debt is satisfied when borrower dies or sells the home
Disbursement Options• Tenure – equal monthly payments as long as borrower
lives and continues to occupy property• Term – equal monthly payments for a fixed period of
months selected• Line of credit – unscheduled payments or in installments,
at borrower’s choosing until LOC is exhausted• Modified tenure – combination of LOC and tenure
payments• Modified term – combination of LOC and term payments• Lump Sum – all or most equity drawn up front (now
accounts for 70% of market)
Challenges for Displacing Agencies• Agency obligations under the Uniform Act to displaced
homeowners with a reverse mortgage• Consistent, equitable guidance for handling these
situations• HECMs not similar to type of mortgage envisioned under
original increased interest provision of Uniform Act – owner is obtaining either a revenue stream or a revenue package by drawing down on the property’s equity• Various disbursement options present different
challenges for solutions
Example
Existing HECM Tenure Payments(accrues interest and mortgage insurance monthly that apply to mortgage balance)
$800/month
Balance of HECM at time of acquisition $64,200
FMV of subject property $300,000
Equity in subject property $235,800
Comparable replacement property $320,000
Price differential payment $20,000
The homeowner should have sufficient equity plus the price differential payment to obtain a HECM for purchase for the comparable replacement dwelling that provides a similar monthly tenure payment (based on new actuarial tables at current age).Homeowner also eligible for fees & costs associated with new HECM and increased interest rate, if any.
It Gets Complicated…• The homeowner with the HECM has little or no equity
in the subject property at the time of acquisition…now what??• Does the Agency still have to offer comparable
replacement housing?• What options are available ?
ExampleExisting HECM Tenure Payments (accrues interest and mortgage insurance monthly that apply to mortgage balance)
$800/month
Balance of HECM at time of acquisition $200,000
FMV of subject property $200,000
Equity in subject property 0
Comparable replacement property $210,000
Price differential payment $10,000
This situation presents several challenges for the displacing Agency;1.Is the monthly tenure payment an eligible portion of the MIDP or replacement housing payment?2.Since the owner only has the $10,000 price differential payment available to purchase a replacement dwelling, how does the Agency get her into another house?
Solutions FHWA is considering (not finalized)• Compute a rental assistance payment for the
displaced homeowner – convert owner to tenant status• Provide assistance under Housing of Last Resort• Supplemental payment to enable the homeowner to
reestablish a replacement HECM for purchase – this supplemental payment may include the amount needed to reestablish a HECM that pays out the same monthly revenue stream previously received• Provide a direct loan to the homeowner with the same
terms as the original reverse mortgage – amount and tenure payment calculated on current age of owner and actuarial tables
Solutions FHWA is considering (not finalized) - continued• Provide assistance under Housing of Last Resort• Create a life estate for the homeowner with the Agency as the
remainderman – homeowner responsible for taxes, insurance and maintenance of property• Purchase a replacement dwelling and rent/lease back to
homeowner for life – homeowner responsible for taxes and insurance. Maintenance may be Agency responsibility since it is the owner.• Provide a lump-sum payment based on the monthly tenure
payment for the actuarial remainder of the homeowner’s life, discounted at the historical passbook savings rate.
Solutions FHWA is considering (not finalized)- continued
Make a payment under 49 CFR 24.106 Expenses incidental to transfer of title to the Agency(a) The owner of the real property shall be reimbursed for all reasonable expenses the owner necessarily incurred for:(1) Recording fees, transfer taxes, documentary stamps, evidence of title, boundary surveys, legal descriptions of the real property, and similar expenses incidental to conveying the real property to the Agency. However, the Agency is not required to pay costs solely required to perfect the owner's title to the real property;(2) Penalty costs and other charges for prepayment of any preexisting recorded mortgage entered into in good faith encumbering the real property; and [emphasis added](3) The pro rata portion of any prepaid real property taxes which are allocable to the period after the Agency obtains title to the property or effective possession of it, whichever is earlier.(b) Whenever feasible, the Agency shall pay these costs directly to the billing agent so that the owner will not have to pay such costs and then seek reimbursement from the Agency.
Solutions FHWA is considering (not finalized) - continued• When homeowners do not have sufficient equity to
reestablish a reverse mortgage with similar monthly revenue stream, the prepayment provisions of §24.106 may apply• Payoff of the reverse mortgage terminates
the loan contract- the owner will no longer receive the periodic payments of equity guaranteed under the terms of the mortgage• This is a prepayment penalty created by
early termination of the loan caused by Agency’s acquisition
Solutions FHWA is considering (not finalized)- continued
Calculation of Prepayment PenaltyAmount of penalty determined as the present value of future payments to owner based on actuarial equivalent of owner’s remaining life, discounted at average passbook savings rate.
Owner’s current age 86
Current monthly revenue $700
Average passbook rate over historical period 3.5%
Likely remaining life based on actuarial tables 6.31 years
75 monthly periods
Prepayment penalty due for early termination $47,093
The Progression of Mortgage Interest
Differential PaymentsLisa Barnes
SR/WA, R/W-RAC
Why was the mortgage interest differential payment included in the
Uniform Act?
Legislative HistorySenate Committee on Government Operations – February 26, 1969
Colloquy between Senators Moss and Muskie
Senator Moss. As to the difference between the interest rate on the mortgage, that is perhaps harder to calculate but I think, nevertheless, some computation should be made to compensate a landowner for that, . . .But it is astonishing, the difference in the interest rate, now and the rate of just 5 years ago, and certainly 10 years ago, for money that was borrowed on real estate, on property.Senator Muskie. Yes; we know here in this area.
Legislative History (cont.)
Senator Moss. To be shopping in the housing market soon establishes that in one’s mind.Senator Muskie. And 2 percent difference is not a rarity at all.Senator Moss. No; and that projected out for a 25-year payment on a piece of property that has considerable value make a lot of dollars.Senator Muskie. Two percent of $10,000 would be what? $200. It is a lot of money.Senator Moss. Yes, it is.
Legislative History (cont.)
House Committee on Public WorksHouse Report No. 91-1656 - December 7, 1970
“Replacement housing satisfying these requirements must be available to the homeowner before displacement, at terms he can reasonably afford and that do not worsen his economic condition. In other words, the displaced person should not have to spend more for monthly payments of principal and interest on a mortgage for the comparable replacement dwelling.”
The 1970 Mortgage
• Fixed rate, amortizing mortgage• Interest typically paid in arrears• Monthly payments applied to interest for prior
month and then principal reduction
Amount Rate Term Payment Interest Principal Balance
$20,000 8.5% 30 yrs 153.78 141.67 12.11 19,987.89
141.58 12.20 19,975.69
141.49 12.29 19,963.40
Original Calculation of Mortgage Interest Differential Payments• Based on the increased monthly interest amount
discounted to a present value • Uniform Act prescribed this method of calculation • When interest rates increased (as high as 18%) in
early 1980’s, interest differential payments were BIG• The calculation method was deleted from the URA
in 1987 amendments
Buydown Process49 CFR 24.401(d)
• Payment amount must be amortized at the same monthly payment for principal and interest over the same time period as the remaining term of the old mortgage
• Reduces displacee’s replacement mortgage through the “buydown”
What You Need For Calculation
Existing Loan
Remaining principal balance
Remaining term
Interest rate
Monthly principal & interest payment
New Mortgage
Principal amount
The term
Interest rate (prevailing rate)
Points & origination fees
Let’s Look at Difference
Original Loan (July 1975) $31,725.00
Interest Rate 9%
Monthly payments (p&i) $255.27
Date of displacement July 1984
Principal balance $28,856.76
Remaining term 252 months
Prevailing interest rate 14.75%
MIDP CalculationDifference Discounted to Present Value
Monthly payment on $28,856.76 for 252 months @ 14.75%
$371.81
Payments on current mortgage $255.27
Difference 116.54
252 payments of $116.54 discounted to PV @5% (passbook savings rate in 1984)
$18,601.61
Mortgage interest differential payment $18,601.61
MIDP CalculationBuydown MethodRemaining principal balance $28,856.76
Remaining term 252 months
Monthly principal & interest payment $255.27
Interest rate on replacement mortgage 14.75%
How much can displacee borrow at 14.75% for 252 months and have principal and interest payments of $255.27?Answer: $19,811.94
Existing principal balance $28,856.76
Reduced principal balance $19,811.94
Mortgage interest differential payment $9,044.82
Adjustable Rate Mortgage• Authorized by Congress in 1982• Interest rate periodically adjusts based on an index
and specified margin• Typically has a cap on the periodic rate adjustment
and total rate adjustment for life of loan• Generally offer lower rates up front in exchange for
risk assumed by borrower
What You Need For Calculation
1. Terms of existing ARM:
• Current interest rate• Index• Cap rate (initial interest +lifetime cap)• Remaining term of ARM
2. Current prevailing rate for fixed rate mortgage
MIDP Calculation for Adjustable Rate Mortgage• When ARM’s current rate is LESS than prevailing
rate for fixed rate mortgage Agency may consider using a replacement ARM for the MIDP determination.
• If an ARM is available with same index and adjustment terms, Agency must determine whether to use the ARM or a fixed rate loan for the MIDP calculation.
MIDP Calculation for Adjustable Rate Mortgage (cont.)
Determine LESSER of: Example:
A. The difference between the current ARM cap rate and the available ARM cap rate
Current ARM cap rate = 8%Available ARM cap rate = 8.5%
Difference = 0.5%
B. The difference between the current adjustable interest rate and the prevailing fixed interest rate
Current adjustable rate = 4.0%Prevailing fixed rate = 4.25%
Difference = 0.25%
Select LESSER of A or B
In example “B” is lesser
Use the current adjustable interest rate and prevailing fixed interest rate as the “rate” components to compute the MIDP payment in manner described in Appendix A, §24.401(d).
ExampleRemaining principal balance $223,456.75
Remaining term 301 months
Monthly principal & interest payment $1,177.21
Interest rate on replacement mortgage 4.25%
Existing principal balance $223,456.75
Reduced principal balance $217,201.68
Mortgage interest differential payment $5,749.07
How much can displacee borrow at 4.25% for 301 months and have principal and interest payments of $1,177.21?Answer: $217,201.68
What if an ARM is Not Available with Same Index & Adjustment Terms?Use the current adjustable interest rate and the prevailing fixed interest rate as the “rate” components to compute the MIDP.
Interest-Only Mortgages• The maximum payment eligibility and actual
payment calculation use the same basic considerations as the adjustable rate mortgage – determine the “lesser of” differences between current cap rates and current rates paid
• MIDP is calculated based on the remaining interest-only period of the loan
ExampleRemaining principal balance $200,000.00
Remaining term for interest-only payments 60 months
Current interest rate 4.0%
Monthly interest payments $666.67
Interest rate on replacement mortgage 4.25%
New monthly interest-only payments $708.33
Less existing interest-only payments $666.67
Difference $41.66
Remaining term for interest-only payments 60 months
MIDP payment $2,499.60
Mortgage Interest Differential Payment (MIDP) Calculators
Available on FHWA Office of Real Estate Website:•Traditional Buy Down Method
•Adjustable Rate Mortgage
•Interest Only Mortgage
www.fhwa.dot.gov/real_estate/practitioners/uniform_act/relocation/midpcalcs/
House Report No. 91-1656December 2, 1970The Committee on Public Works
“The tools in the reported bill are adequate to deal with the problem. The Congress, however, can only provide such tools. Their effective use depends upon the attitudes and skill of the officials in the executive branch of the government responsible for their administration. The principle of adequate housing, for example, will require not only the use of more liberal financial allowances authorized by the reported bill, but also imagination, ingenuity, and a desire on the part of its administrators to translate this authorization into equitable and satisfactory conditions for the people affected.”
INCOME DETERMINATION:
Rental Assistance Payment Calculation
Aaron Adkins SR/WA, R/W-URAC, R/W-NAC, R/W-RAC
Uniform Act
• [§24.1(b)] The purpose of this part is to….. ensure that persons displaced as a direct result of Federal or federally-assisted projects are treated fairly, consistently, and equitably so that such displaced persons will not suffer disproportionate injuries as a result of projects designed for the benefit of the public as a whole.
Rental Assistance Payment• Who is Eligible?
• Residential Displaced Person [§24.2(a)(9)(i)]• Tenant • Owner of Less than 180 Days
• Who is NOT Eligible? • Persons Not Displaced [§24.2(a)(9)(ii)]
• i.e. A person who is not lawfully present in the United States [§24.208]• What if some of the members of the household are present
lawfully but others are present unlawfully (illegal alien)? • i.e. A person who initially enters into occupancy of the property after
the date of its acquisition
Why Do You Need to Know the Displacee’s Income? • Rental Assistance Payment [§24.402(b)] • (Comparable Rent + Utilities) – (Base Monthly Rent) x 42
• Base Monthly Rent (Lesser Of) [§24.402(b)(2)]• 30% of Monthly Gross Household Income • Rent and Utilities (Actual or FMR)• Shelter and utilities - welfare assistance payment
Determine if Classified as “Low Income”• HUD’s Annual Survey of Income Limits for the
Public Housing and Section 8 Programs• http://www.fhwa.dot.gov/realestate/ua/ualic.htm• Updated Annually • Metropolitan Area • Non-metropolitan County
Low Income Example• Momma Adkins, her son (Aaron) and his three children are being displaced. The
information obtained from the family and verified by the Agency is as follows: • Momma Adkins, receives disability payments of $6,000/yr.• Aaron Adkins, employed, earns $21,000/yr.• Aaron Adkins, Jr., 21, employed, earns $10,000/yr.• Mary Jane Adkins, 17, student, has a paper route, earns $3,000/yr.
• (Income is not included because she is a dependent child and a full time student under 18)• Sammie Adkins, 10, full time student, no income.
• Adkins family gross annual household income = $37,000($21,000 + $6,000 + $10,000 + $0 + $0 = $37,000)
• Displaced residence is located in the Oklahoma City, OK.• Low income limit for a 5 person family in Oklahoma City, OK = $48,550. (Based
on FY 2013 income limits)• Adkins family income of $37,000 is less than $48,550• The Adkins family is considered "Low Income" for purposes of the Uniform Act
HUD Low Income Limits
• Greater Than 8 Person Household? • http://www.fhwa.dot.gov/real_estate/practitioners/uniform_act/
policy_and_guidance/low_income_calculations/ualicfaq.cfm
What is Considered Income? • Household Income [§24.2(a)(14)] • Gross Income Received For a 12 Month Period From All
Sources (earned and unearned) • Wages / Salary • Alimony and Child Support • Unemployment Benefits • Workers Compensation • Social Security • Disability• Net Income From a Business• Periodic Payments From Annuities, Pensions or Death Benefits
Income Exclusions
• HUD Income Exclusions• http://www.fhwa.dot.gov/realestate/• Amounts Specifically Excluded by Other Federal Statutes • Program Benefits Not Considered Income by Federal
Law • Food Stamps• Women Infants and Children (WIC) Program
• Income Received by Dependent Children• Full Time Students MAY be Assumed to be a Dependent
• Income Received by Full Time Students Under 18 Years of Age
Income Documentation
• How Do Agencies Document Income? • Income Tax Returns• Pay Stubs• Self-Certification (i.e. self-cert form, affidavit)
• Displacee Refuses to Provide Income Information?
Case Study• Momma Adkins, her son (Aaron) and his three children are being displaced from
the hotel, which is their permanent residence. Tenant occupants of 300 days. • Momma Adkins, 60
• Day laborer• Wages: $12,000.00/yr. (paid in cash)• Momma is not lawfully present in the U.S. and has been determined to be ineligible for relocation
assistance in accordance with §24.208• Aaron Adkins, 39
• Hotel manager • Wages: $15,500/yr. + free room • Similar room in hotel rents for $400/mo. • Received $1,200 in child support over last 12 months• Child support order is $3,600/yr. Court will start garnishing spouse’s wages next month
• Aaron Adkins, Jr., 21• Army Reserve income: $10,000/yr. • Food stamps $300/mo.
• Mary Jane Adkins, 20• Full time student• Net income from summer landscaping business $6,000/yr.
• Sammie Adkins, 10 • Full time student. No Income.
1 PERSON 2 PERSON 3 PERSON 4 PERSON 5 PERSON 6 PERSON 7 PERSON 8 PERSONOklahoma City, OK MSA 31500 36000 40500 44950 48550 52150 55750 59350
Case Study
1 PERSON 2 PERSON 3 PERSON 4 PERSON 5 PERSON 6 PERSON 7 PERSON 8 PERSONOklahoma City, OK MSA 31500 36000 40500 44950 48550 52150 55750 59350
Case Study
1 PERSON 2 PERSON 3 PERSON 4 PERSON 5 PERSON 6 PERSON 7 PERSON 8 PERSONOklahoma City, OK MSA 31500 36000 40500 44950 48550 52150 55750 59350
Case Study
1 PERSON 2 PERSON 3 PERSON 4 PERSON 5 PERSON 6 PERSON 7 PERSON 8 PERSONOklahoma City, OK MSA 31500 36000 40500 44950 48550 52150 55750 59350
Case Study
1 PERSON 2 PERSON 3 PERSON 4 PERSON 5 PERSON 6 PERSON 7 PERSON 8 PERSONOklahoma City, OK MSA 31500 36000 40500 44950 48550 52150 55750 59350