Reverse Mortgages: What Are They and How Do You Account for Them?

What is Reverse Mortgage?

A reverse mortgage is utilized by homeowners age 62 or older to withdraw equity from their home and use it as a source of income. The cash flow from this product can be disbursed to the borrower in monthly payments and/or a line of credit. A reverse mortgage does not have to be repaid until the borrowers are no longer occupying the home as the primary residence. By law a reverse mortgage is a non-recourse loan which means that if the balance of the loan were to exceed the value of the property the lender may not seek recourse for the excess amount owed.

Most of the reverse mortgage market, approximately 99%, is underwritten and insured through the Federal Housing Administration (FHA) or Fannie Mae. The most popular product is the Home Equity Conversion Mortgage (HECM) and it makes up about 90% of the reverse mortgage market. A HECM reverse mortgage is underwritten and insured by the FHA and currently has a guaranty limit for as much $417,000. That limit will depend on the property's equity and location. Fannie Mae's Home Keeper product makes up about 9% of the reverse mortgage market and it also has a $417,000 insurance limit that depends on equity and location of the property.

Despite similar underwriting criteria and insurance limits there are major differences in the HECM and Home Keeper products. One difference is in the disbursement types available. The HECM product has five options for the disbursement of cash whereas the Home Keeper product has only three options. The HECM product also allows a borrower to change between these disbursement options for a small fee. Currently that fee is $20. These options are shown in the table below.

Disbursement Type Description HECM Home Keeper
Tenure Monthly disbursements until the borrower dies, uses another house as the primary residence, or sells the property Yes Yes
Term Monthly disbursements are made to the borrower for a specific period of time Yes Yes
Line of Credit A facility that allows the borrower to take cash advances up to the preset limit Yes Yes
Modified Tenure A combination of the line of credit facility and the periodic disbursements of the tenure option Yes Yes
Modified Term A combination of the line of credit facility and the set periodic disbursements of the term option Yes

All reverse mortgages have a variable interest rate but the adjustment period can either be monthly or yearly for the HECM and only monthly for the Home Keeper. The HECM has an annual cap of 2% and a lifetime cap of 5%. The Home Keeper does not have an adjustment period cap and carries a lifetime adjustment cap of 12%. The HECM loans are usually indexed with either the Constant Maturities Treasury rate (CMT) or London Inter-Bank Offering Rate (LIBOR). The Home Keeper uses the 1-month Federal Certificate of Deposit (CD) rate.

Each of the two mortgage types also vary in fees that can be charged. Each product has an origination fee that can be charged. The HECM's is the greater of $2,000 or 2% of the Maximum Claim Amount (MCA) and the Home Keeper's is greater of $2,000 or 2% of the adjusted property value. While Fannie Mae does not charge the borrower a fee for insuring a Home Keeper loan, the borrower does have to pay an upfront insurance premium of 2% of the MCA and annual premium of 0.5% of the MCA for a HECM loan.

Finally the mortgage servicers are paid differently with each product. The servicer would typically earn $30-$35 each month on every reverse mortgage serviced, but with the HECM product the servicing fee is retained by the lender and paid to the servicer when the loan is satisfied. On the Home Keeper product the servicing fees are sent out monthly.

Accounting for Reverse Mortgages

Because of the unique cash flow structure of reverse mortgages, managing the reverse mortgage product can be difficult. This is especially true when trying to account for reverse mortgages. Some challenges include:

  • Unlike traditional mortgages the cash flow is going out without a steady stream of incoming payments being received. Most companies book reverse mortgages in their systems as a debt and try to make a square peg fit a round hole. Many end up with intensive manual processes adjusting the entries monthly.
  • Because the HECM product allows borrowers to change the disbursement methods many systems can not easily transition from one payment type to the other without manual or top modifications.
  • The accrued interest on a previous line of credit draw does not affect the cash available to a borrower in future draws. A borrower can borrow $10,000 on a $30,000 line and will always have $20,000 available in the future no matter what the original $10,000 borrowed accrues in interest. Most systems can not properly split and maintain a line of credit into an available line and the principle balance.
  • On the HECM product the line of credit automatically grows every year. Most systems used today would require manual on top adjustments which could become cumbersome as their portfolio grows.

Primatics Financial: Evolv Loan Accounting Platform

The Evolv Loan Accounting Platform from Primatics Financial is a full spectrum loan accounting system that can handle a wide variety of loan products including regular residential mortgages, reverse mortgages, commercial loans, and syndicated loans. In contrast to many existing accounting applications that mainly function as a back end batch process, the Evolv accounting system provides a real-time event driven view to users. Information is available at individual loan level which provides an un-paralleled visibility and equips the user with the capacity to research and analyze financial information.

For More Information

Please call a Primatics Financial representative at +1 800.741.3051 or e-mail evolv@primaticsfinancial.com to learn how Evolv can help your company apply difficult loan accounting standards and automate costly and/or error prone manual processes.

For More Information

Please call a Primatics Financial representative at +1 800.741.3051
or e-mail evolv@primaticsfinancial.com to learn how Evolv can help your company apply difficult loan accounting standards and automate costly and/or error prone manual processes.