Educational Module-2: The Reverse Mortgage Ecosystem

Today's Reverse Mortgage ecosystem has been created and is managed by the Federal Government, which began proactively intervening in the US housing market since the Great Depression.

While Government activity since that time has been extensive, the only activities covered in this Module will be related to Reverse Mortgages.

The Department of Housing and Urban Development (HUD) is the major government entity involved with all residential housing, especially the 1-to-4-unit properties, which include Reverse Mortgages.

The Federal Housing Authority (FHA), an agency within HUD, which provides mortgage insurance for residential loans with low down payments originated by private lenders. A Mortgage Insurance Premium (MIP) is added to the loan's monthly payment.

HUD and the FHA collect data on all 1-to-4-unit residential housing loans and study the financial profile of homeowners in each of the nation's 3,283 counties, which then is used to set the loan limits that FHA will insure in each county.

HUD sponsors third-party housing counseling agencies throughout the country to provide free or low-cost advice on buying a home, renting, default, foreclosure avoidance, or credit issues and Reverse Mortgages,

Reverse Mortgage Lenders. Today the largest and most active Reverse Mortgage lenders are single-purpose non-bank companies. The remainder of the lender marketplace is comprised of smaller financial institutions and independent companies.

Mortgage Loan Originators (MLOs). The mortgage loan industry's salespeople, who may be employed directly by lenders or financial institutions or may be independent mortgage brokers or mortgage loan agents. MLOs take the loan application and arrange the details of each Reverse Mortgages loan's structure.

The National Multi-State Licensing System (NMLS): Each State has its own laws regarding real estate agent's licensing, which includes MLOs. As part of the recovery from the 2008 housing industry meltdown the Federal Government created the NMLS so that there was one blanket system for vetting 1-to-4-unit residential mortgage lenders and MLOs, regardless of what specific licensing requirements exist in each State.

Loan Processors. An industry professional who prepares the loan application for mortgage underwriters, collects and organizes documents, evaluates credit history, and communicates along with the MLO with borrowers and other parties.

Underwriters. An industry professional who applies the current statutory rules and the lender's specific loan program guidelines to evaluate a prospective borrower's financial situation to determine if they qualify for a loan. Underwriters work for lenders and are part of the mortgage origination process.

Appraisers: Trained, experienced and licensed professionals that establish a subject property's estimated monetary value at a specific time based on recent sales, replacement cost and the income of similar properties in the surrounding area. The comparable sales approach is normally used as the primary indicator of a subject property's value.

The Government National Mortgage Association (GNMA or Ginnie Mae). A government-owned corporation within HUD that provides a "secondary market" for the sale of housing loans, including Reverse Mortgages.

The Secondary Market. Reverse Mortgage lenders, like all conventional loan lenders, sell their loans to recoup and recycle the loan monies to use for future loans. Reverse Mortgage loans are packaged and then sold via Ginnie Mae for FHA insured Reverse Mortgages or via other financial center firms that sell them to other investors.

Mortgage Interest Rates: A rate (%) used against the loan amount over its term to determine the monthly payment.

For fixed-rate loans the interest rate quoted is the actual rate throughout the term of the loan.

Adjustable-rate loans are usually calculated by adding the value of money based on an Index, plus a Margin to result in the loans interest rate. Adjustable-Rate Mortgages (ARMs) usually have an initial fixed interest rate period then adjust to the current Index plus the pre-determined Margin.

The Index is usually defined as a publicly available interest rate that fluctuates with market conditions, such as the U.S. Prime Rate (established by the Federal Reserve Board) or the Constant Maturity Treasury (CMT) rate (which are US Government Treasury Bonds with the rate determined by market conditions).

The Margin is a fixed percentage of the loan amount that the lender determines is needed to cover all the costs and a targeted profit for all participants in the loan process from origination through closing.

Impounds or Escrows: Refers to the property tax, the hazard insurance, the HOA monthly dues or other mandatory monthly costs to be paid by the borrower, where one or or more of these costs are bundled into the borrower's monthly payment as part of the loan contract. The lender then holds the impounded. Escrowed monies and when appropriate directly pays those costs.

Title and Escrow Companies and Attorneys: As part of the mortgage loan closing process, title companies are involved to provide insurance that the "title" to the real estate property has a clean chain-of-title. The escrow companies provide a third-party service to hold, account and disburse the transaction's monies and to make sure that all of the loan's documentation is in order. Some States require licensed attorneys to be involved in the escrow and closing activities. Escrow Officers oversee the signing of the loan documents either in person or via a mobile licensed Notary.

Loan Servicing: Once mortgage loan is closed, and for as long as it is in force, the payments, accounting and record keeping functions are provided by the servicing department within the lender's company or by third-party servicing companies who provide the borrower's monthly loan statement. Sometimes, when a loan is sold it may result in a different servicer providing these services as "servicing rights" may also sold.

The industry participants above provide safety and security to the residential property buyers/borrowers as part of the complex process that from start to finish can take only a few weeks.

The above members of the Reverse Mortgage Ecosystem will be referred to in the Education Modules that follow.