1. RESIDENTIAL RELOCATION: Cafeteria Style Reverse Mortgages Mortgage Interest Differential Payments Income Determination Tuesday, June 25, 2013 11:00 AM - 12:30 PM

2. Reverse Mortgages in Relocation Assistance aka Home Equity Conversion Mortgages (HECMs). Marshall Wainright Realty Team Leader FHWA Resource Center Residential Relocation: Cafeteria Style

3. 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.

4. 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.

5. 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)

6. 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

7. 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

8. 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)

9. 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

10. 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.

11. 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 ?

12. 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$200,000 FMV of subject property$200,000 Equity in subject property0 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?

13. 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

14. 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.

15. 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.

16. 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

17. Solutions FHWA is considering (not finalized)- continued Calculation of Prepayment Penalty Amount 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 age86 Current monthly revenue$700 Average passbook rate over historical period3.5% Likely remaining life based on actuarial tables 6.31 years 75 monthly periods Prepayment penalty due for early termination$47,093

18. Questions? Marshall Wainright Realty Team Leader FHWA Resource Center (404) 562-3692 Marshall.Wainright@dot.gov

19. The Progression of Mortgage Interest Differential Payments Lisa Barnes SR/WA, R/W-RAC

20. Why was the mortgage interest differential payment included in the Uniform Act?

21. Legislative History Senate 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.

22. 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.

23. Legislative History (cont.) House Committee on Public Works House 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.”

24. The 1970 Mortgage Fixed rate, amortizing mortgage Interest typically paid in arrears Monthly payments applied to interest for prior month and then principal reduction AmountRateTermPaymentInterestPrincipalBalance $20,0008.5%30 yrs153.78141.6712.1119,987.89 141.5812.2019,975.69 141.4912.2919,963.40

25. 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

26. Buydown Process 49 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”

27. 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

28. Let’s Look at Difference Original Loan (July 1975)$31,725.00 Interest Rate9% Monthly payments (p&i)$255.27 Date of displacementJuly 1984 Principal balance$28,856.76 Remaining term252 months Prevailing interest rate14.75%

29. MIDP Calculation Difference Discounted to Present Value Monthly payment on $28,856.76 for 252 months @ 14.75% $371.81 Payments on current mortgage$255.27 Difference116.54 252 payments of $116.54 discounted to PV @5% (passbook savings rate in 1984) $18,601.61 Mortgage interest differential payment$18,601.61

30. MIDP Calculation Buydown Method Remaining principal balance$28,856.76 Remaining term252 months Monthly principal & interest payment$255.27 Interest rate on replacement mortgage14.75% 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

31. 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

32. 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

33. 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.

34. 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).

35. Example Remaining principal balance$223,456.75 Remaining term301 months Monthly principal & interest payment$1,177.21 Interest rate on replacement mortgage4.25% 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

36. 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.

37. 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

38. Example Remaining principal balance$200,000.00 Remaining term for interest-only payments60 months Current interest rate4.0% Monthly interest payments$666.67 Interest rate on replacement mortgage4.25% New monthly interest-only payments$708.33 Less existing interest-only payments$666.67 Difference$41.66 Remaining term for interest-only payments60 months MIDP payment$2,499.60

39. 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/relocat ion/midpcalcs/

40. House Report No. 91-1656 December 2, 1970 The 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.”

41. INCOME DETERMINATION: Rental Assistance Payment Calculation Aaron Adkins SR/WA, R/W-URAC, R/W-NAC, R/W-RAC

42. 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.§24.1(b)

43. Rental Assistance Payment Who is Eligible? Residential Displaced Person [§24.2(a)(9)(i)]§24.2(a)(9)(i) Tenant Owner of Less than 180 Days Who is NOT Eligible? Persons Not Displaced [§24.2(a)(9)(ii)]§24.2(a)(9)(ii) i.e. A person who is not lawfully present in the United States [§24.208]§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

44. Why Do You Need to Know the Displacee’s Income? Rental Assistance Payment [§24.402(b)]§24.402(b) (Comparable Rent + Utilities) – (Base Monthly Rent) x 42 Base Monthly Rent (Lesser Of) [§24.402(b)(2)]§24.402(b)(2) 30% of Monthly Gross Household Income Rent and Utilities (Actual or FMR) Shelter and utilities - welfare assistance payment

45. 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

46. 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

47. HUD Low Income Limits Greater Than 8 Person Household? http://www.fhwa.dot.gov/real_estate/practitioners/uniform_act/policy_and_guidan ce/low_income_calculations/ualicfaq.cfm http://www.fhwa.dot.gov/real_estate/practitioners/uniform_act/policy_and_guidan ce/low_income_calculations/ualicfaq.cfm

48. What is Considered Income? Household Income [§24.2(a)(14)]§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

49. 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

50. 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?

51. 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 PERSON2 PERSON3 PERSON4 PERSON5 PERSON6 PERSON7 PERSON8 PERSON Oklahoma City, OK MSA3150036000405004495048550521505575059350

52. Case Study Momma Adkins: $12,000.00 (wages) Aaron Adkins: $15,500.00 (wages) $ 4,800.00 (room rent) $ 1,200.00 (child support) Aaron Adkins, Jr.: $10,000.00 (military pay) Mary Jane Adkins: $ 6,000.00 (net income from business) Annual Gross Household Income $49,500.00 1 PERSON2 PERSON3 PERSON4 PERSON5 PERSON6 PERSON7 PERSON8 PERSON Oklahoma City, OK MSA3150036000405004495048550521505575059350

53. Case Study Momma Adkins: $12,000.00 (wages) Aaron Adkins: $15,500.00 (wages) $ 4,800.00 (room rent) $ 1,200.00 (child support) Aaron Adkins, Jr.: $10,000.00 (military pay) Mary Jane Adkins: $ 6,000.00 (net income from business) Annual Gross Household Income $43,500.00 1 PERSON2 PERSON3 PERSON4 PERSON5 PERSON6 PERSON7 PERSON8 PERSON Oklahoma City, OK MSA3150036000405004495048550521505575059350

54. Case Study Momma Adkins: $12,000.00 (wages) Aaron Adkins: $15,500.00 (wages) $ 4,800.00 (room rent) $ 1,200.00 (child support) Aaron Adkins, Jr.: $10,000.00 (military pay) Mary Jane Adkins: $ 6,000.00 (net income from business) Annual Gross Household Income $44,700.00 1 PERSON2 PERSON3 PERSON4 PERSON5 PERSON6 PERSON7 PERSON8 PERSON Oklahoma City, OK MSA3150036000405004495048550521505575059350

55. Case Study Momma Adkins: $12,000.00 (wages) Aaron Adkins: $15,500.00 (wages) $ 4,800.00 (room rent) $ 1,200.00 (child support) $ 3,600.00 (child support) Aaron Adkins, Jr.: $10,000.00 (military pay) Mary Jane Adkins: $ 6,000.00 (net income from business) Annual Gross Household Income $47,100.00 1 PERSON2 PERSON3 PERSON4 PERSON5 PERSON6 PERSON7 PERSON8 PERSON Oklahoma City, OK MSA3150036000405004495048550521505575059350