Reverse mortgage advisors talk about lines of credit and equity modeling

Reverse mortgage educators Dan Hultquist and Jim McMinn brought their ‘Rules of the Game’ presentation back to this year’s edition National Association of Reverse Mortgage Lenders (NRMLA) Annual Meeting and Expo in San Diego.

After starting with the importance of targeted information and certain features of reverse mortgage products, the pair delved into other long-standing elements that some industry participants may have been misinformed about.

During the interactive presentation, the presenters wear referee shirts. They enlisted the public to call certain incorrect sample statements “violations” by equipping them with whistles, with the goal of correcting the record based on the black and white reverse mortgage product and program rules.

Partial prepayments and line of credit

The reverse mortgage line is often seen by initiators in the sector as a powerful and convincing instrument to get customers on board. But some misconceptions about how the line of credit is affected by partial Home Equity Conversion Mortgage (HECM) prepayments were raised by Hultquist and McMinn.

“Mr. Wilson,” McMinn began to a hypothetical customer with a reverse mortgage. “Yes, partial prepayments will reduce your loan balance, but because payments are applied to mortgage insurance first, we cannot increase your line of credit until you have repaid all accrued MIP and accrued interest.”

The whistle blew immediately. Hultquist characterized this particular misconception as one that has persisted for many years.

“There are still a lot of people in this industry who believe that if you prepay on a reverse mortgage, your line of credit will not grow dollar for dollar because of the cascade of repayments,” he said. “You can go to any of the modeling software to model what happens if you make a prepayment – ​​the line of credit goes up.”

There’s certainly a maintenance waterfall that’s important to keep in mind for tax and accounting purposes, Hultquist explains. If payments of more than $600 are made in a calendar year, the borrower will receive a Form 1098 from the Domestic Tax Authorities (IRS) specifying these amounts.

But HECM’s adjustable rate mortgage letter states that the borrower “may specify whether a prepayment is to be credited to that portion of the principal balance representing the month or to the line of credit,” Hultquist explained.

However, if the borrower does not specify this, the lender will “apply any partial prepayment to an existing line of credit or create a new line of credit,” Hultquist said.

But there are specific circumstances in which partial prepayments will not result in an increase in the line of credit. This makes it important to stay away from definitive statements, as the couple previously explained.

Relationship between debt and equity

McMinn continued with the next misconception, again speaking to a hypothetical borrower.

“Ms. Jones, a reverse mortgage is a loan with ‘increasing debt and decreasing equity,’ he said. “As your debt – the amount you owe – increases, your equity decreases.”

The whistle immediately sounded again.

A reverse mortgage repayment schedule, Hultquist explained, is a “federally regulated document.” Industry regulators – including U.S. Department of Housing and Urban Development (HUD) certified HECM consultants are required to use similar language. It concerns the definitive statements made in such language. And there is a key element that is overlooked in such a statement.

“The appreciation of your home is the biggest driver of your stock position, your home equity,” says Hultquist. “Who in their right mind could model a flat home value over a 30-year period? You have to be clinically insane to do that, right? Historically, that would be extremely, extremely unlikely.”

Take the example of a $400,000 home with an assumed rate of appreciation of 4% per year, which assumes an increase in value of approximately $16,000 in the first year. If the reverse mortgage were for $100,000 – 25% of the home’s value – then the interest on the loan would have to be 16% or higher before the homeowner would lose equity.

“Is that likely? No, and yet that’s how we sell it,” Hultquist said. “If you do a quick Google search, you’ll find: ‘As your loan balance increases, your equity decreases.’ That is a definitive statement that I would say is historically inaccurate.”