If you decide to download and use the free HUD HECM software you may find the following instructions helpful. It outlines basic information abou the input fields and reports out put by the suystem.

HUD-HECM SOFTWARE
This software can be learned by clicking on the “Help” menu at the top of the screen, and then reading each item in the “Contents” file. It can also be learned by following the instructions at the very bottom of the screen.

KEY ENTRY TERMS
In making entries into the software, users encounter a variety of key terms.

A) Expected Interest Rate means the “expected average mortgage interest rate,” which is the constant rate used to calculate loan advances. This rate is never charged on the loan; it is only used to determine the loan payments to the borrower. (The interest rate charged on the loan is called the “initial” or “note” rate.)

1) For an adjustable rate loan, the expected rate equals the current U.S. Treasury Securities rate adjusted to a constant maturity of 10 years (also known as the 10-year Treasury rate) plus the “lender’s margin.”

2) As the only current purchaser of HECM loans, Fannie Mae sets the margin at which it will purchase HECMs. At present (2/05), the margin for HECMs with annually adjustable interest is 310 basis points or 3.1%. The margin for monthly adjustable HECMs is 150 basis points or 1.5%.

a) The 10-year Treasury index is used because it represents the financial market’s best current estimate of what interest rates are likely to average during the course of the loan.

b) The Treasury rates are published every Tuesday in the “Money & Investing” section of the Wall Street Journal in a small box called “Key Interest Rates.”

B) Maximum Claim Amount is whichever is less: 1) the appraised value of the home, or 2) HUD’s 203(b) limit for the area in which the home is located. This maximum claim amount is the greatest amount HUD will pay to a lender on a claim for insurance benefits.

C) Upfront Premium is the first part of the HECM insurance premium (MIP), which is calculated at 2% of the “Maximum Claim Amount.” Enter a “O” if the borrower intends to pay this fee in cash at closing. Otherwise, press the “enter” key without entering anything in the field, and “FINANCED” will appear. The premium will then be calculated by the software program.

D) Other Closing Costs includes all closing costs being financed by the borrower (title search & insurance, appraisal fee, required inspections, etc.) PLUS the origination fee. The origination fee may not exceed the greater of $2,000 or two percent of the “Maximum Claim Amount”. The origination fee is what the lender earns for completing all HUD mortgage requirements through closing.

E) Initial Draw means the amount of cash a borrower elects to receive at closing. — Enter the total amount of any cash the borrower chooses to receive at closing.

1) At closing, a borrower may choose to receive a lump sum of cash in addition to any scheduled payments.

2) A borrower may also request the lender to “set aside” funds to pay for required repairs or for taxes, insurance, special assessments, or ground rents. “Set asides” are not added to the loan balance until they are paid out.

F) Monthly Servicing Fee is the fixed dollar amount that is added to the loan balance each month to pay for all services performed by the lender after the loan closes. Lenders may also sell servicing rights to another company that specializes in HECM servicing.

1) The monthly servicing fee may not exceed $30 for HECMs withannually adjusting interest, and may not exceed $35 for HECMs with monthly adjusting interest.

ACTIONS
After completing all the required entries, the user selects the “Actions” menu, and then clicks on “Calculate.” Other actions on this menu enable the user to compare one loan to another, and to generate reports on individual loans.

KEY OUTPUT TERMS
After selecting “Calculate” or “Reports,” a software user sees a variety of key outputs.

A) Calculate

1) Prin Lim - Shared Prem Fac — The 3-digit decimal (.XXX) to the left of the hyphen is the Principal Limit Factor. It is used to determine the maximum Principal Limit (see below) for any given mortgage. These factors are determined by the expected interest rate and the age of the youngest borrower. For a complete set of these factors, select “Factor Table” from the “Reports” menu or see Appendix 20 of the HECM Handbook. The 2-digit figure to the right of the hyphen is the Shared Premium Factor. It represents the percentage of the insurance premium that lenders may retain if they elect not to assign a HECM to HUD. This option has rarely, if ever, been selected by lenders.

2) Principal Limit is the current maximum permissible mortgage balance for this borrower. Put another way, it is the most cash a borrower could get in a lump sum at closing if she paid for all loan costs (except interest) in cash.

a) At closing, the principal limit is determined by multiplying the Principal Limit Factor times the Maximum Claim Amount.

b) After closing, the principal limit increases each month at a rate equal to 1/12th of the sum of the “note” rate (the interest rate actually being charged on the loan) plus the annual rate of the monthly insurance premium, which is 50 basis points (0.5%).

3) Monthly Servicing Fee The dollar figure in the “Calculated” column equals the “present value” of the monthly servicing fee from closing until the borrower would reach age 100. This amount is NOT added to the loan balance at closing. Instead, it is “set aside,” and then the monthly fee is taken from this amount and added to the loan balance once each month. Since very few borrowers live to age 100, the total amount set aside by the HECM program overstates the actual total amount likely to be charged on most HECMs during the life of the loan.

a) Loan servicers make both scheduled and unscheduled payments to borrower, accept prepayments from borrowers, make mortgage insurance premium payments to HUD, keep accurate records of mortgage balances, send out regular statements of mortgage activity to borrowers, pay property taxes and insurance if requested by borrowers, ensure that borrowers are in compliance with the loan agreement (including the verification of continued occupancy of theproperty), and process borrower requests for payment plan changes.

b) Most consumers are perplexed by the monthly servicing fee. Hardly any have ever encountered it before, and most wonder why it is charged on reverse mortgages when it is not charged on forward
mortgages. In fact, it is charged on forward mortgages, but it is included in the interest rate, so it is never explicitly identified and quantified.

c) Forward mortgage balances are greatest in the early years of the loan, and do not begin to decline at a significant rate until many years later. As a result, servicing fees charged as a percent of the loan balance remain substantial for many years, often up to the time the loan is paid back (due to sale of the home) or refinanced. By contrast, reverse mortgage balances are smallest in the early loan years and grow larger at a compounding rate over time. As a result, servicing fees charged as an interest rate add-on would be relatively small in the early years, and then grow much larger over time.

d) To even out the amount of the servicing fee, most reverse mortgage lenders charge a flat monthly servicing fee. HECM rules explicitly permit lenders to include the cost of loan servicing within their interest rates. As more data on HECM loans become available for analysis, it is likely that loan servicers will investigate the technical mechanics and potential competitive advantages of a “no servicing fee” loan.

4) Net Principal Limit at origination is the principal limit minus any initial payments to or on behalf of the borrower, e.g., closing costs, upfront MIP, cash payments, set-aside funds. Put another way, it is the most cash a borrower could get in a lump sum at closing if she finances all of her loan costs, that is, if she adds these costs to her loan balance. Net Principal Limit also equals the maximum line of credit available at closing if the borrower finances all loan costs and does not want any regularly scheduled monthly advances.

B) Reports

1) The Annual and Monthly Amortization reports project the loan balance. They assume that the loan balance will grow larger by the “expected rate” used to calculate the loan’s principal limit.

a) Loan Balance This column shows what the future loan balance would be based on any initial draw, monthly advances, and the expected interest rate. It does NOT include any creditline draws.
(Other software described in Tab 11 does include creditline draws specified by the borrower.) Even though this printout may show that the Loan Balance may eventually be greater than the projected future home value, the borrower’s debt is limited by the value of the home. In other words, this “Loan Balance” figure does not take the loan’s nonrecourse limit into account. It shows what the loan balance would be without the nonrecourse limit. In reality, a borrower would not be required to
repay any more than the home’s future value, even if a theoretical “loan balance” is greater than the home’s value.

b) Line of Credit This column shows how the creditline would grow if the borrower takes no creditline draws.

c) Property Value This figure assumes that the home’s value will grow at a rate of 4% every year. Software users may not enter any other appreciation assumption.

2) Shared Appreciation This report covers an optional feature of the original HECM program that no lender has chosen to implement.

3) Total Annual Loan Cost (TALC) This report provides a cost disclosure required by Truth-in-Lending law.

A Few More Related Articles of Interest:

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HECM Lender Comparison 10/31/2007 vs 10/31/2006