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Reverse Mortgages and Retirement Planning

Financial Planning AssociationJuly 19, 2005

Trish Kauker, Business Development Manager

Trish.kauker@aig.com 877-244-1532

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The Senior Profile:

• Concerns –– Health– Quality of Life– Money– Living beyond assets– Burden on children

• Want to stay in home as long as possible• May want to move closer to family

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Reverse Mortgage History

• 1961 First reverse mortgage (RM) loan made by Deering Savings & Loan in Maine

• 1984 First open-ended, risk pooling RM offered in New Jersey• 1987 Congress passes FHA RM insurance proposal

Fannie Mae & Freddie Mac announce intention to purchase RM• 1989 HUD selects 50 lenders by lottery to make FHA-insured RM• 1990 Congress increases FHA insurance authority to 25,000 loans • 1995 HUD publishes regulations allowing Direct Endorsement

lenders underwriting authority on HECM loans• FNMA introduces the conventional RM – “Home Keeper”• ABA House of Delegates adopted a resolution that supports

continued development of RMs as a viable option for older homeowners

Common Misconceptions

• “The lender takes the house”– Homeowner retains full ownership– Reverse Mortgage is a loan

• “I can be thrown out of my home”– Homeowner can stay in home until loan maturity event

occurs

• “I can owe more than my home is worth”– Homeowner can never owe more than value of home

• “My heirs will be against it”– Experience demonstrates heirs are in favor of Reverse

Mortgages

Reverse Mortgage Basics

• Borrower will always retain title • NO income or credit qualifications• NO monthly mortgage payments

• NO repayment is due until they sell the house or move out permanently

• Interest may be tax-deductible upon loan repayment

• Proceeds are tax-free

Reverse Mortgages are non-recourse loans that allow senior homeowners age 62 years of age or older to convert home equity into cash

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Current Reverse Mortgage Products:– HUD/FHA Insured - HECM

• Maximum Lending Limit - $312,895 – Fannie Mae – Home Keeper

• Maximum Lending Limit - $359,650– Jumbo Loan Product – CASH Account

• Standard Option• Zero Point Option• Simply Zero Option

– Virtually No Home Value Limit

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FHA HECMFHA HECM

• FHA Mortgage Insurance (MIP)– 2% charged at loan closing, financed into loan

balance

• FHA guarantees that the borrower will receive all payments that are due them as long as they live in the property

• Ensures that borrowers, their estate, or heirs are never liable for more than the market value of their home (non-recourse)

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Consumer Education Requirements:

• Required for all borrowers prior to application process

• Safeguard for borrower: non-biased 3rd party ensures borrowers understand how RMs work, costs, benefits and options available

• Face to face session with provider in home or office and optional telephone counseling if requested

• HECM Counseling certificate will be issued to borrower

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Eligibility Requirements:

• Homeowners age 62 and older• Property title holder• Clear title at closing

– Any existing liens must be satisfied at closing with loan proceeds

– Foreclosures & bankruptcies can be considered

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Property Requirements:

• Must be borrower’s principal residence

• Single family residence

• 1-4 unit property as long as borrower resides in one of the units

• Planned Unit Developments (PUDs)

• FHA approved condominiums (spot approvals permitted)

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Payment Plan Options:

• Tenure Plan: equal monthly payments for life of loan

• Term Plan: equal monthly payments for a specified period of time – determined by borrower

• Line of Credit: advances available in any amount, at any time. Revolving feature allows access to partial repayments. Growth rate on available balanceGrowth rate on available balance

• Lump Sum: All available funds may be received at disbursement

• Combinations: Any combination of the above is allowed. Payment plan may also be changed after closing at any time

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Reverse Mortgage Interest Rates:Reverse Mortgages charge interest at a monthly, annual or semi-

annual adjustable rate, depending on which loan is selected:

Index - 1 year T-bill (FHA - HECM) – 5.02% Index - 1 month CD (FNMA - Home Keeper) – 6.75% Index - 6 month LIBOR (Jumbo - Cash Account) – 8.27%

– Which means the interest rate that is charged can change periodically

– However, this does NOT affect the amount of money borrower(s) receive

– Rather this only affects the amount that will be required to be paid back when the loan becomes due and payable

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Application Overview:

• Appraisal required: property must meet FHA minimum standards

• Credit report: tri-merged in-file required to verify judgments, etc.

• Proof of date of birth

• Proof of Social Security number

• Proof of consumer education

• Copy of homeowners insurance policy

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Borrower Compliance:• Occupancy

– Annual certifications sent by mail, borrower must sign & return

• Property Maintenance– Maintained in same condition as closing, with

required repairs completed• Taxes & Insurance

– Proof of payment required with annual renewal

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Loan Repayments:

• Automatically due & payable

– Last surviving borrower vacates property

– Sale of property

– Title conveyance

– Not principal residence for more than 12 consecutive months

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Repayment Process:

• Amount due = loan balance + interest & fees

• Payoff will be due in one lump sum payment

• Typically paid from the sale of home

• Timeframe = “good faith efforts” to market – typically 180 days

• NON-RECOURSE FEATURE: neither the borrower nor their heirs will be liable for more than the current market value of the property at time of payoff

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Uses for Home Equity Conversions

Hospital/Health Care

Costs

Repay existing

mortgages

Reduce burden on

children

Home

repair/Improvement

Pay property taxes

Daily expenses

Travel, Something

special

Gifts

67%

55%

50%

50%

38%

29%

14%

3%

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HECM ExamplesHECM Examples**::

*Based on rates and terms as of July 18, 2005

$240,000

Value$240,000

Value

$240,000

Value

$240,000

Value

$240,000

Value

Age: 65 Age: 70 Age: 75 Age: 80 Age: 85

$134,700 Equity

$145,300

Equity

$156,400

Equity

$168,100

Equity

$179,300

Equity

$779 monthly income

$886 monthly income

$1029

monthly income

$1240 monthly income

$1581 monthly income

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FNMA – Home KeeperHome Keeper Mortgage:

• Allows senior homeowners easy access to their home equity

• Similar in structure to the FHA HECM– NO income qualifications– NO credit qualifications– NO monthly mortgage payments

• Home Keeper for home purchase feature

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Property Requirements:

• Principal residence only• Single family property• Planned Unit Developments (PUDs)• FNMA approved condos (spot approvals

permitted)• NO multi-family properties permitted

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Payment Plan Options:

• Tenure Plan: equal monthly payments for life of loan

• Line of Credit: advances available in any amount, at any time. NO growth rateNO growth rate

• Lump Sum: All available funds may be received at disbursement

• Combination: Any combination of the above is allowed. Payment plan may also be changed after closing at any time

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Home Keeper Examples:Home Keeper Examples:$360,000 Value

$360,000 Value

$360,000 Value

$360,000 Value

Age: 70 Age: 75 Age: 80 Age: 85

$114,800

Equity

$142,750 Equity

$173,400 Equity

$205,800 Equity

$858 monthly income

$1239 monthly income

$1563 monthly income

$1977monthly income

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Home Keeper for Home Purchase:

• Allows seniors to purchase a new home without using all their personal resources to fund the purchase

• Flexibility that is not available through standard purchase money mortgages

• Attractive NO mortgage payment feature makes this a viable financial tool

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The Purpose :

• Senior (62 or older) wants to purchase a home that better fits their lifestyle

• Has access to funds via savings, investments, sale of current home– Doesn’t want to make monthly payments– Doesn’t want to tie up all of their personal

funds in the purchase of a home– May want funds for updates/modifications

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The Process:

• Senior completes required consumer education

• Senior identifies new property & lender will estimate reverse mortgage amount

• Senior applies for Home Keeper and negotiates home purchase

• Senior determines combination of personal funds and RM funds to be used

• Senior completes origination process with lender

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Benefits:

• Purchase a home with NO monthly payments• NO repayment due as long as they live in the

property• More flexibility than “forward” mortgages• Lower down payment and keep more cash• Qualify for higher priced home

– NO income qualifications– NO credit qualifications– NON-RECOURSE features

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Jumbo CASH Account

• Proprietary product with NO restrictions on how the funds are used

• Proceeds are NOT taxable

• Similar to home equity lines with no required monthly repayment until loan matures

• Provides maximum equity release with virtually NO maximum home value limit

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Similar to FHA & FNMA loans

• NO income or credit qualifications• Minimum age requirement of 62• Primary residence• Counseling by an independent counselor

conducted via telephone• Existing liens to be satisfied at closing• Non recourse loan• Repayment process• Home must meet FHA standards• Borrower compliance

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Standard Option

• Origination fee = Scaled percentage of home value

• Maximum origination fee of 2%• No prepayment penalty • Open-ended revolving line of credit• Unused line of credit grows by 5% per annum• Minimum draw is $500

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Zero Point Option

• Origination fee = NONE• Minimum draw at closing = 75% of maximum

available proceeds• Closing costs capped at $3,500*• NO prepayment penalty; partial prepayment

not allowed for first 5 years• Full repayment permitted at any time

* Excluding applicable state or local taxes

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Simply Zero

• Origination fee = NONE• Closing costs = NONE*• Draw at closing = 100% of maximum

available• NO prepayment penalty; partial prepayment

not allowed for 5 years• Full prepayment permitted at any time• Lowest cost reverse mortgage loan product

available

*Excluding applicable state or local taxes

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Cash Account Examples:Cash Account Examples:$750,000 Value

$750,000 Value

$750,000 Value

$750,000 Value

Age: 70 Age: 75 Age: 80 Age: 85

$ 185,874Standard

$ 225,174Standard

$ 284,949Standard

$ 352,524Standard

$ 202,725Simply Zero

$ 242,025Simply Zero

$ 301,800Simply Zero

$ 369,375Simply Zero

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Cash Account Examples:Cash Account Examples:$1,500,000 Value

$1,500,000 Value

$1,500,000 Value

$1,500,000 Value

Age: 70 Age: 75 Age: 80 Age: 85

$ 378,469

Standard

$478,969

Standard

$603,319

Standard

$727,969

Standard

$405,450

Simply Zero

$505,950

Simply Zero

$630,300

Simply Zero

$754,950Simply Zero

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Typical Retirement Assets

Illiquid Liquid

House

Cash

IRA, 401K

Stocks and Bonds

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Typical Retirement Income

CashIRA, 401K

Stocks & Bonds

CashIRA, 401K

Stocks & Bonds $$

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Typical Retirement Income Witha

Reverse Mortgage

Cash

IRA, 401K

Stocks & Bonds

Reverse Mortgage

Cash

IRA, 401K

Stocks & Bonds

Reverse Mortgage

$$$$$$

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Proceeds can be used to fund a variety of financial products including:

Reverse Mortgages and Retirement Planning

• Annuities

• Long term care

• Estate planning

• Life insurance

• Investments

• Charitable and family gifting

• Retirement home purchase

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Reverse Mortgage Case Study #1

• Client Profile:

• Couple, both age 75

• Assets:

• $2,500,000 home (primary residence)

• Problem:

• Clients wish to purchase LTC Policy

• Solution:

• Proceeds of $577,654 generated through use of reverse mortgage

• Purchase SPIA, certain period 10-years on husband in amount of $124,359

• SPIA pays monthly premium of $1,223.92 to LTC carrier and at end of 10th year, policy is paid in full

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Reverse Mortgage Case Study #2• Client Profile:

• 75 year old Male

• Assets: • $300,000 home (primary residence)

• Stocks, bonds & CD’s

• Problem:• Client would like to increase monthly income to purchase Long Term Care

Insurance

• Solution:• Proceeds of $184,000 generated through a reverse mortgage

• Purchase an AIG SPIA and receive $1,630.70 in additional monthly income

• Long Term Care premium of $423/month for lifetime care

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Reverse Mortgage Case Study #3

• Client Profile• 80 year old Female• Type II Diabetes & TIA (mini stroke) 10 years prior

• Assets• $500,000 home (primary residence)

• Income• $1,500 Social Security• $1,000 Pension

• Problem• Increase monthly income to fund Long Term Care

• Solution• $210,000 proceeds from RM• Purchase an AIG Impaired Risk Annuity generating $3,414/month

in lifetime income

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Reverse Mortgage Case Study #4

• Client Profile– 70 year old Male

– $1,000,000 home (primary residence)

• Income– $2,300 from Social Security

– $1,000 Pension income

• Problem– Client wants to purchase Life Insurance to reduce estate tax liability

• Solution– $270,300 reverse mortgage proceeds

– AIG SPIA provides $24,000/annually to purchase $700,000 in Life Insurance

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The Older Population in the 21st Century:

In the Year 2000 –

• Persons 65+ numbered over 35 million • Persons reaching age 65 had an average life expectancy of an

additional 17.9 years (19.2 - females, 16.3 – males)• Over 2 million persons celebrated their 65th birthday (5,574 /

day)• People 65+ represent almost 13% of the population in 2000, but

are expected to grow to be 20% of the population by 2030• By 2030, there will be about 70 million older persons, more

than twice their number in 1999

The Current Market

• 21+ million senior homeowners• 60% of market is 65 -70

Huge demographic wave underway• 85% want to remain in home (AARP study)• $ 3 trillion in home equity• Loan volume has increased by 70% per year for

the past two years• Fannie Mae studies show 90+% satisfaction rate

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Online Reference Sources

• National Reverse Mortgage Lenders Associationwww.nrmla.org

• AARPwww.aarp.org

• National Council on Aging (NCOA)www.ncoa.org

• National Center for Home Equity Conversion (NCHEC)www.reverse.org

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Contact Information:

Trish Kauker, CSA

AIG Bank

Reverse Mortgage Division

1-877-244-1532 Toll free

1-302-661-8977 Direct

1-302-830-4534 Fax

trish.kauker@aig.com