1 Reverse Mortgages and Retirement Planning Financial Planning Association July 19, 2005 Trish Kauker, Business Development Manager

2 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

3 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

6 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

7 FHA 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)

8 Consumer Education Requirements: Required for all borrowers prior to application process Safeguard for borrower: non-biased 3 rd 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

9 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

10 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)

11 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 Growth rate on available balanceLine of Credit: advances available in any amount, at any time. Revolving feature allows access to partial repayments. Growth 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

12 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

13 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

14 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

15 Loan Repayments: Automatically due & payable –Last surviving borrower vacates property –Sale of property –Title conveyance –Not principal residence for more than 12 consecutive months

16 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

17 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% 38% 29% 14% 3%

18 HECM 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: 65Age: 70Age: 75Age: 80Age: 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

19 Home Keeper FNMA – Home 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

20 Property Requirements: Principal residence only Single family property Planned Unit Developments (PUDs) FNMA approved condos (spot approvals permitted) NO multi-family properties permitted

21 Payment Plan Options: Tenure Plan: equal monthly payments for life of loan NO growth rateLine of Credit: advances available in any amount, at any time. NO 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

22 Home Keeper Examples: $360,000 Value Age: 70Age: 75Age: 80Age: 85 $114,800 Equity $142,750 Equity $173,400 Equity $205,800 Equity $858 monthly income $1239 monthly income $1563 monthly income $1977 monthly income

23 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

24 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

25 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

26 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

27 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

28 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

29 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

30 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

31 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

32 Cash Account Examples: $750,000 Value Age : 70 Age : 75 Age : 80 Age : 85 $ 185,874 Standard $ 225,174 Standard $ 284,949 Standard $ 352,524 Standard $ 202,725 Simply Zero $ 242,025 Simply Zero $ 301,800 Simply Zero $ 369,375 Simply Zero

33 Cash Account Examples: $1,500,000 Value Age: 70Age: 75Age: 80Age: 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 $754,950 Simply Zero

34 Typical Retirement Assets IlliquidLiquid

35 Typical Retirement Income Cash IRA, 401K Stocks & Bonds Cash IRA, 401K Stocks & Bonds $ $

36 Typical Retirement Income With a Reverse Mortgage Cash IRA, 401K Stocks & Bonds Reverse Mortgage Cash IRA, 401K Stocks & Bonds Reverse Mortgage $$$

37 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

38 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, to LTC carrier and at end of 10 th year, policy is paid in full

39 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, in additional monthly income Long Term Care premium of $423/month for lifetime care

40 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

41 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

42 The Older Population in the 21 st 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 ( females, 16.3 – males) Over 2 million persons celebrated their 65 th 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 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

44 Online Reference Sources National Reverse Mortgage Lenders Association AARP National Council on Aging (NCOA) National Center for Home Equity Conversion (NCHEC)

45 Contact Information: Trish Kauker, CSA AIG Bank Reverse Mortgage Division Toll free Direct Fax