Glossary of Commonly Used Reverse Mortgage Industry Terms
This Glossary will provide the meaning of some industry terminology. These terms are commonly used by industry professionals and it may be helpful to understand these terms. Our goal is to educate our clients and their advisors about everything they need to know to become acquainted with the many reverse mortgage options available.
Conventional Conforming Loan Limits: Fannie Mae and Freddie Mac are restricted by law to purchasing single-family mortgages with origination balances below a specific amount, known as the “conforming loan limit.” Loans above this limit are known as jumbo loans. The national conforming loan limit for mortgages that finance single-family one-unit properties increased from $33,000 in the early 1970s to $417,000 for 2006-2008, with limits 50 percent higher for four statutorily-designated high-cost areas: Alaska, Hawaii, Guam, and the U.S. Virgin Islands. Since 2008, various legislative acts increased the loan limits in certain high-cost areas in the United States. While some of the legislative initiatives established temporary limits for loans originated in select time periods, a permanent formula was established under the Housing and Economic Recovery Act of 2008 (HERA). The 2021 loan limits have been set under the HERA formula.
Fannie Mae (FNMA) and Freddie Mac (FHLMC): large agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders. Fannie Mae and Freddie Mac were created by Congress. They perform an important role in the nation’s housing finance system – to provide liquidity, stability and affordability to the mortgage market. They provide liquidity (ready access to funds on reasonable terms) to the thousands of banks, savings and loans, and mortgage companies that make loans to finance housing.
Fiduciary Responsibility: A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests. A fiduciary may be responsible for the general well-being of another (e.g. a child’s legal guardian), but often the task involves finances; managing the assets of another person, or a group of people, for example. Money managers, financial advisors, bankers, insurance agents, accountants, executors, board members, and corporate officers all have fiduciary responsibility.
Foreclosure: The legal process by which a mortgage company seizes and sells a home because a homeowner does not make their payments or otherwise defaulted on the terms of their home loan. Oregon allows for two different foreclosure processes: judicial and nonjudicial. Foreclosure can also occur when a homeowner does not pay their property taxes, a court judgment, or other liens on the property. This covers Nonjudicial Foreclosure.
H4P: This is the abbreviation for the HECM for Purchase program.
HECM: The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage (HECM). If you are a homeowner age 62 or older and have paid off your mortgage or paid down a considerable amount, and are currently living in the home, you may be able to participate in FHA’s HECM program.You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing. This HECM is often referenced as the H4P program.
Home Equity: Home equity is the market value of a homeowner’s unencumbered interest in their real property, that is, the difference between the home’s fair market value and the outstanding balance of all liens on the property. The property’s equity increases as the debtor makes payments against the mortgage balance, or as the property value appreciates. In economics, home equity is sometimes called real property value.
Initial Principal Limit: the amount of money a reverse mortgage borrower can receive from the loan. The initial principal limit depends on the borrower’s age at the time of application, the loan’s interest rate and the home’s appraised value.
Interest Rate: An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited or borrowed. It is defined as the proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage.It is the rate a bank or other lender charges to borrow its money, or the rate a bank pays its savers for keeping money in an account.
Jumbo Mortgage: In the United States, a jumbo mortgage is a mortgage loan that may have high credit quality but is in an amount above conventional conforming loan limits. This standard is set by the two government-sponsored enterprises, Fannie Mae and Freddie Mac, and sets the limit on the maximum value of any individual mortgage they will purchase from a lender. When FNMA and FHLMC limits don’t cover the full loan amount, the loan is referred to as a “jumbo mortgage”.
A jumbo reverse mortgage is a loan for seniors that allows access to loan amounts above $1,089,300. These are also referred to as proprietary or private reverse mortgages. All jumbo reverse mortgages are proprietary loans, but not all proprietary loans are jumbos.
LIBOR (London Interbank Offered Rate): A benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans. LIBOR serves as a globally accepted key benchmark interest rate that indicates borrowing costs between banks. The rate is calculated and will continue to be published each day by the Intercontinental Exchange (ICE), but due to recent scandals and questions around its validity as a benchmark rate, it is being phased out. According to the Federal Reserve and regulators in the UK, LIBOR will be phased out by June 30, 2023, and will be replaced by the Secured Overnight Financing Rate (SOFR). As part of this phase-out, LIBOR one-week and two-month USD LIBOR rates will no longer be published after December 31, 2021.
Life Expectancy Set Aside (LESA): A LESA is a type of escrow account set up by carving out a chunk of the principal limit into a set-aside that is preserved solely for the payment of property charges. The exact amount of the carve out varies widely from borrower to borrower because it is based on age and the cost of the property charges.
Line of Credit: a credit source extended to a government, business or individual by a bank or other financial institution. It is effectively a source of funds that can readily be tapped at the borrower’s discretion. Interest is paid only on money actually withdrawn. Lines of credit can be secured by collateral, or may be unsecured. Lines of credit are often extended by banks, financial institutions and other licensed consumer lenders to creditworthy customers (though certain special-purpose lines of credit may not have creditworthiness requirements) to address liquidity problems; such a line of credit is often called a personal line of credit.
Maximum claim amount (MCA): The reverse mortgage maximum claim amount (MCA) is used to calculate proceeds and is equal to either the appraised value of the home or the FHA lending limit, whichever is less.
Mortgage Broker: A mortgage broker is an intermediary who brings mortgage borrowers and mortgage lenders together, but who does not use their own funds to originate mortgages. A mortgage broker helps borrowers connect with lenders and seeks out the best fit in terms of the borrower’s financial situation and needs. The mortgage broker also gathers paperwork from the borrower and passes that paperwork along to a mortgage lender for underwriting and approval purposes. Mortgage Brokers have a fiduciary responsibility to their clients.
Mortgage Insurance Premium (MIP): This is put in place by the FHA to protect you and your heirs by insuring that the amount required for repayment of the loan will never exceed the value of the home when payment is due. If, at that time, the proceeds from the sale of your home are insufficient to pay off the loan balance, FHA will cover any shortfall. An initial premium will be due upon closing your loan. This payment can be financed as part of your HECM loan
proceeds. The Initial MIP is regulated at 2% of the Maximum Claim Amount and the annual MIP rate is one-half of one percent of the outstanding mortgage balance.
Mortgage Lender: A mortgage lender is a financial institution or mortgage bank that offers and underwrites home loans. Lenders have specific borrowing guidelines to verify your creditworthiness and ability to repay a loan. They set the terms, interest rate, repayment schedule and other key aspects of your mortgage.
Mortgage Loan: A mortgage loan or, simply, mortgage is used either by purchasers of real property to raise funds to buy real estate, or alternatively by existing property owners to raise funds for any purpose, while putting a lien on the property being mortgaged. The loan is “secured” on the borrower’s property through a process known as mortgage origination. This means that a legal mechanism is put into place which allows the lender to take possession and sell the secured property (“foreclosure” or “repossession”) to pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms.
Mutual Mortgage Insurance Fund (MMIF): The Mutual Mortgage Insurance Fund (MMIF) is a federal fund that acts as the insurer of mortgages that are guaranteed by the Federal Housing Administration (FHA). It supports both FHA mortgages used to buy homes and home equity conversion mortgages.
Net Principal Limit: A reverse mortgage net principal limit is the amount of money a reverse mortgage borrower can receive from a loan once it closes, after accounting for its closing costs. The net principal limit can depend on several factors primarily centered around the home’s equity value and how much the borrower has to pay in upfront fees.
Non-Borrowing Spouse: The spouse, as determined by the law of the state in which the spouse and Borrower reside or the state of celebration, of the Borrower at the time of closing and who is not a Borrower of the HECM loan.
- Eligible Non-Borrowing Spouse: A Non-Borrowing Spouse who meets, and continues to meet, the Qualifying Attributes requirements established by the Secretary of HUD, or authorized representatives, that the Non-Borrowing Spouse must satisfy to be eligible for deferral of the due and payable status.
- Ineligible Non-Borrowing Spouse: A Non-Borrowing Spouse who does not meet the Qualifying Attributes requirements established by the Secretary of HUD, or authorized representatives, that the Non-Borrowing Spouse must satisfy to be eligible for deferral of the due and payable status.
Nonjudicial Foreclosure: In this process, which occurs outside of the court system, a homeowner will receive a Danger Notice, Notice of Default, and/or a Notice of Sale by certified mail. If a homeowner disputes the facts or right to foreclose, homeowner must file a lawsuit in court to challenge the sale. Nonjudicial foreclosure auctions may occur quickly, typically between 120 and 180 days from the first notice date.
Origination Fee: A payment associated with the establishment of an account with a bank, broker or other company providing services handling the processing associated with taking out a loan. The origination fee for HECM reverse mortgages is regulated for all lenders and brokers at 2% on the first $200,000 borrowed and 1% after that with the maximum Origination Fee allowed at $6,000.
Proceeds: How much money one makes from the sale of an item. Example: You sold your home for $100,000, paid off the bank loan that was $50,000 leaving you with $50,000 in proceeds.
Proprietary Reverse Mortgage: A loan that lets senior homeowners retrieve the equity in their homes through a private company. They are not federally insured and are not bound by traditional lending limits. Not all proprietary loans are jumbo reverse mortgages but all jumbo reverse mortgages are proprietary loans.
Secured Overnight Financing Rate (SOFR): a benchmark interest rate for dollar-denominated derivatives and loans that is replacing the London interbank offered rate (LIBOR). Interest rate swaps on more than $80 trillion in national debt switched to the SOFR in October 2020. This transition is expected to increase long-term liquidity but also result in substantial short-term trading volatility in derivatives. The secured overnight financing rate, or SOFR, is an influential interest rate that banks use to price U.S. dollar-denominated derivatives and loans. The daily secured overnight financing rate (SOFR) is based on transactions in the Treasury repurchase market, where investors offer banks overnight loans backed by their bond assets.
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