Patent Application
20090271223
Reverse mortgages are typically first mortgage loans which are non-recourse loans available to borrowers aged 62 and over. The reverse mortgage is usually against an owner occupied residential property and due generally upon either the death of the borrower, a lack of continuous owner occupation of the home, or upon default. Proceeds from the home sale may be the sole source of funds for repayment.
The present disclosure provides methods, systems and products for providing more efficient first mortgage loans to borrowers This disclosure provides means generally applicable to all first mortgage loans, with particular application to reverse mortgage loans.
As the portion of the population in the United States aged 65 and older is expected to double to 70 million in the year 2030, there is a growing demographic need to provide funded and tax efficient means for the aging population to access their savings in the form of home equity. Current estimates of unencumbered home equity held by persons in the United States aged 65 and over range from 1 trillion to 2 trillion dollars. Such wealth is held in illiquid form not amenable to easy conversion into an efficient lifecycle and consumption plan.
A product that has emerged which attempts to convert the vast holdings of older Americans into liquid annuity cashflows is the reverse mortgage (RM). A RM is a non-recourse loan to an individual who owns substantial unencumbered home equity. The loan is provided to the individual against a first mortgage lien on the individual's home. The individual RM borrower can receive loan proceeds in either a lump sum payment, annuity payments for a certain period or for life, or in the form of discretionary payments similar to those that can be obtained with a home equity line of credit (HELOC). All principal and interest payments are due upon the death of the homeowner (or the last surviving homeowner, if applicable and if both homeowners are borrowers under the RM). The individual receives all RM proceeds free of tax. Upon death, the individual's estate receives a tax deduction for interest paid on the RM.
Currently, the Federal Housing Administration (FHA), through the Housing and Urban Development agency (HUD), guarantees lenders providing the HUD Home Equity Conversion Mortgage (HECM) against default. These loans are available for homes which have appraised values less than $362,700, and less than this limit in areas with lower average home prices. A market for loans which are non-conforming to the government standards has emerged, typically for borrowers with home values which generally exceed the HECM limits (the “non-conforming” or “jumbo” market).
As can be seen in
A number of disadvantages currently inhibit the growth of RM originations and their efficient lifecycle use by individuals. First, the conventional RM is very risky to the lender since the lender bears substantial longevity and real estate value risk. If the individual lives well beyond life expectancy calculated when the RM loan was originated and if home values do not keep appreciating at a reasonably high rate, the lender will not be able to recover all principal and interest due upon the death of the borrower because the RM, unlike conventional mortgage products, is non-recourse. Thus, the loan rate and other fees charged the borrower on existing RM products are very high and have impeded substantial growth.
Second, traditional RM products, such as the HECM and existing jumbo products deliver proceeds to the borrower based upon the borrowers chronological age and standard mortality tables (such as the CDC decennial tables in the case of HECM's). Thus, a healthy 70 year will receive the same interest rate and upfront loan proceeds as a 70 year old who has a much shorter life expectancy due to illness and who therefore should receive greater proceeds that would be provided to a chronologically older borrower.
Third, current reverse mortgage products on the market often waive origination fees or closing costs or both if the borrower fully draws the proceeds to the approved mortgage limit, which is a function of appraised value and the age of the borrower. This is suboptimal in that the borrower will often not have use for all of the proceeds drawn and will invest these proceeds at a lower interest rate than the loan rate (“negative rate spread”). It also results in a loan which is much less valuable to investors as investors pay for loans based upon the possibility of future draws.
Fourth, reverse mortgage borrowers are charged interest rates based upon the full or maximum utilization of their principal limit. Under current state of the art loans, a borrower who owns a house worth $400,000 and is aged 70 might receive a principal limit of $200,000. While the borrower may only desire to draw, for example, $50,000 of this available credit line, the interest rate charged reflects that the borrower has the option to draw the entire line. Therefore, the interest rate must reflect the option for higher line usage and therefore a higher LTV and is higher than the rate the buyer should be charged if he could make a binding commitment not to draw the entire line, i.e., each marginal portion of the loan proceeds drawn are separate and distinct segments or loan tranches.
First mortgage loans in general, of which reverse mortgage loans are a subset, also are currently provided in an inefficient manner. In a typical first mortgage loan, the borrower receives a mortgage limit expressed as a loan to value (LTV) ratio and an interest rate. For example, the borrower might get a 30 year fixed mortgage at 80% of the home's appraised value at a rate of 7%. Similarly, in a reverse mortgage transaction, a reverse mortgage borrower aged 70, might be able to receive proceeds of 40% of the home's appraised value at an interest rate of 8% which varies with the three month LIBOR.
In both first mortgage loan transactions, the loans receive “average cost” pricing, meaning that the entire loan is priced against the maximum LTV which the market typically affords for such a loan. In the traditional first mortgage market, this LTV might be anywhere from 80-200% or more. In the reverse mortgage market, this ratio (which is called the “principal limit factor”) is based upon discounting back the home's future value at the borrower's expected age of death at the loan rate (and assuming some rate of home appreciation such as 4% in the case of HECM loans). In both these first mortgage loan cases, the home's capital structure comprises a level of debt up to the LTV limit (whether fully drawn at a particular time or not) and the homeowner's equity (e.g., of the LTV is 80%, the homeowner's equity is 20%). A homeowner can later take a second or third mortgage which is subordinate to the first mortgage but which is not part of the original first mortgage transaction. Furthermore, there is generally no large set of available options open to a first mortgage borrower whereby very senior and highly creditworthy marginal dollars borrowed—those corresponding to the lowest marginal LTV on indebtedness—bear lower interest rates than less senior and less creditworthy dollars borrowed.
A problem with the capital structure resulting from the first mortgage loans known in the art—both “forward” and reverse first mortgages—is that, contrary to modern financial securitization techniques, all parts of the debt capital structure receive the same loan terms. In particular, notwithstanding the fact that dollars borrowed at lower LTV's have lower risk to the lender, these dollars are borrowed at the same loan rate as dollars borrowed at higher LTV's, i.e., the interest rate on the loan is not priced to the marginal LTV.
Also, a need exists for a new RM product which a lender can issue at a lower cost to the borrower which, at the same time, addresses the economic risks to the lender in offering the RM at lower cost.
The present disclosure provides systems and methods and a loan product whereby the borrower's can receive a lower rate of interest on loan tranches which have lower LTV, thereby providing more efficient use of the credit line which (a) does not encourage overdrawing, (b) is marginally priced, and (c) does not provide the borrower an option (the option to draw the whole line) in exchange for a much higher overall or average rate.
A need is recognized for first mortgage loans, both traditional first mortgage loans and reverse mortgage loans, which provide multiple tranches of debt based upon LTV where lower LTV tranches have lower interest rates than do higher LTV tranches, and where the lower LTV tranches are senior to the lower LTV tranches.
It is therefore an aim of the present disclosure to provide first mortgage loans in which (1) an individual can create more than one debt tranche on a loan which would otherwise be a first mortgage loan of a single tranche; (2) where tranches at lower LTV's are senior to those at higher LTV's; and (3) where the lower LTV tranches have interest rates lower than those of the higher LTV tranches.
It is an additional aim of the present disclosure to provide a reverse mortgage loan in which a borrower may create more than one debt tranche on a loan which would otherwise be a first mortgage loan of a single tranche, where tranches at lower LTV's are senior to those at higher LTV's and the lower LTV tranches have interest rates lower than those of the higher LTV tranches.
It is an additional aim of the present disclosure to provide a reverse mortgage loan which provides the lender the right to purchase a lender owned life insurance policy on the life or lives of the borrowers whereby borrowers who qualify for life insurance receive a better reverse mortgage loan in terms of a lower rate or more proceeds or both than if they did not qualify.
It is an additional aim of the present disclosure to provide a reverse mortgage loan which provides the lender the right to purchase a lender owned life insurance policy on the life or lives of the borrowers whereby borrowers who do not qualify for life insurance receive a better reverse mortgage loan in terms of a lower rate or more proceeds or both than if they did not apply for the life insurance.
The present disclosure provides methods, systems and products to solve the following problems in first mortgage loans found in the current art: current RM products are too costly due to borrower moral hazard and lender risk; current first mortgage products do not provide the borrower with the opportunity to conveniently provide marginal pricing on dollars borrowed as a function of LTV; current RM products do not provide for better loans terms by providing for the possibility of lender owned life insurance; current RM products do not provide for better loan terms by allowing the borrower or borrowers to apply for life insurance to determine the life expectancy of the borrower; and current RM products are too risky and costly for lenders due to lack of additional collateral support provided by lender owned life insurance and marginal pricing on dollars borrowed as a function of LTV.
A need is recognized for a new RM product which is less costly to the borrower. A need is recognized to reduce the overall borrowing cost to the borrower through reduction of RM loan risk to the lender and through reduction of origination costs. A need is recognized to reduce risk to the lender by having the lender underwrite lender owned life insurance on one or more RM borrowers.
A need is recognized for a mortgage loan product which can supplant traditional first mortgage loans by allowing the borrower to create marginal loan terms along the continuum of risk as measured by LTV, wherein lower, senior LTV borrowed dollars, bear, in a preferred embodiment, lower interest rates than higher, subordinate LTV borrowed dollars.
A need is recognized for an incentive compatible mechanism to elicit accurate information regarding the life expectancy of a reverse mortgage borrower whereby such information is elicited by allowing the borrower to apply for a lender owned life insurance policy. According to one embodiment of a new mortgage loan, method, system or product for a new marginal price mortgage loan (MPML), the embodiment comprises the steps of: identifying the borrower for the MPML using a plurality of criteria; creating a capital structure comprising debt and equity for the borrower's home wherein the debt portion comprises at least one tranche and the equity portion at least one tranche; assigning seniority levels to the debt tranches so that lower LTV tranches are more senior creditor claims than the higher LTV tranches; and determining a marginal price of credit for each tranche of debt using a plurality of means.
According to another embodiment of a new reverse mortgage loan described here, a method, system and product for a new marginal price reverse mortgage loan (MPRML) comprises the steps of: i) determining a candidate for the purchase of the MPRML based on a plurality of criteria; ii) providing the borrower or borrowers to apply for a policy of lender owned life insurance; iii) determining the advance rate if the borrower obtains life insurance based upon the borrower's age, home appraisal value, cost of insurance and other factors; iv) determining the advance rate if the borrower does not obtain life insurance based upon the borrowers age, expected lifespan, home appraisal value, and other factors; v) after determining the advance rate, providing marginal pricing by creating tranches of the debt advance pursuant to the MPMR steps; and vi) having the lender of the MPRML purchase life insurance upon the life (or lives) of the borrower or borrowers from a plurality of carriers whereby such life insurance may be: (a) general account universal life insurance; (b) variable universal life insurance; (c) term life insurance; or (d) other types of life insurance such as whole life insurance where such borrower or borrowers are able to qualify for.
It should be appreciated that the subject technology can be implemented and utilized in numerous ways, including without limitation as a process, an apparatus, a system, a device, a method for applications now known and later developed or a computer readable medium. These and other unique features of the system disclosed herein will become more readily apparent from the following description and the accompanying drawings.
So that those having ordinary skill in the art to which the disclosed technology appertains will more readily understand how to make and use the same, reference may be had to the following drawings.
The present disclosure is described in relation to systems, methods, products and plans for the enablement of mortgage loans. These mortgage loans are intended to provide benefits over current first mortgage loans, both in the traditional mortgage market and in the growing reverse mortgage market. The advantages, and other features of the systems, products, plans, and methods disclosed herein, will become more readily apparent to those having ordinary skill in the art from the following detailed description of certain preferred embodiments taken in conjunction with the drawings which set forth representative embodiments of the present invention.
Referring now to the
The environment 10 includes one or more servers 11 which communicate with a distributed computer network 12 via communication channels, whether wired or wireless, as is well known to those of ordinary skill in the pertinent art. In a preferred embodiment, the distributed computer network 12 is the Internet. For simplicity, one server 11 is shown. Server 11 hosts multiple Web sites and houses multiple databases necessary for the proper operation of the financial system in accordance with the subject invention.
The server 11 is any of a number of servers known to those skilled in the art that are intended to be operably connected to a network so as to operably link to a plurality of clients 14, 16 via the distributed computer network 12. The plurality of computers or clients 14, 16 are desktop computers, laptop computers, personal digital assistants, cellular telephones and the like. The clients 14, 16 allow users to access information on the server 11. For simplicity, only two clients 14, 16 are shown. The clients 14, 16 have displays and an input device(s) as would be appreciated by those of ordinary skill in the pertinent art.
Referring to
At step 202 of
At step 204, the method determines the maximum amount of debt that can be supported by the home. In the case of an MPML, the loan limit will be a function of the home's value, the credit score (FICO) of the borrower, and other factors.
At step 206, the method determines the optimal capital structure for a home and related MPML based upon a plurality of factors. In a preferred embodiment, one such factor is the a comparison of the total loan cost that the borrower can achieve by subordinating greater portions of home equity to the total amount of debt on the home, and, in turn, subordinating more risky portions of the debt which attach at higher LTV's to those portions at lower LTV's. The Weighted Average Cost of Debt Capital (WACDC) is the sum-product of the amount of debt at a given LTV multiplied by the associated market interest rate. The Weighted Average Cost of Capital adds the cost of equity capital, roughly equal to the historical average home appreciation, multiplied by the amount of equity subordinated to the debt, and added to the WACDC.
Still referring to
where “w” is the portion of the capital structure and “y” is the required interest rate (return on equity for ye) for each respective portion of the capital structure.
Assume, for example, that y1, the lowest LTV tranche, has an interest rate of LIBOR+50 basis points. Assume y2, which attached from LTV 25% to 50% has an interest rate of LIBOR+80, and assume that y3, which attached from 50% to 75% has an interest rate of LIBOR+150. The WACDC is therefore equal to LIBOR+93.33 basis points. This average cost of debt is much lower than the marginal cost of debt on the highest LTV tranche (LIBOR+150), which was typically offered to borrowers on their entire loan balance using prior first mortgage loan approaches.
Referring still to
At step 210, the method creates a structured note or debt obligation after the debt and equity capital structure has been determined. In a preferred embodiment, a traditional first mortgage loan which would provide the lender seniority over the entire debt on the home and, as is common in the art, prices at a single rate, is inadequate to provide the marginally priced mortgage loan that results from the method of
At step 212 of
Referring to
Referring still to
The schematic 300 also has a third debt tranche 330 that corresponds to a debt obligation spanning 70% to 90% of LTV, subordinate to the second debt tranche 320 and therefore also to the first debt tranche 310. The third debt tranche 330 might bear an interest rate of LIBOR+175 basis points. The schematic 300 may also include a fourth debt tranche 340 that corresponds to the home equity equal to the remaining 10% of value. The fourth debt tranche 240 is subordinated to the entire debt structure represented by the first three tranches 310, 320, 330.
In another preferred embodiment, a CHMO offers an initial LTV to the borrower at a certain interest rate. For example, assuming the borrower is a reverse mortgage borrower aged 70, the lender may offer the borrower initial proceeds equal to 25% of the appraised value of the home. Additionally, in a preferred embodiment, the loan document may provide for one or more future appraisal dates or “reval” dates. For example, the loan document may provide for a reval date in two years. The loan document may also specify one or more property reference values or “hurdle” values for each reval date. If the appraised value of the property at the reval date is found to exceed the hurdle value for that date, the credit line availability may be adjusted upwards.
For example, if the initial home value for the reverse mortgage borrower aged 70 was $1 million, and the borrower received 25% or $250,000 initial proceeds at a 6% interest rate (which may be fixed or floating), the debt balance in two years has grown from $250,000 to $280,900. Assume the hurdle value for the reval date at the end of year 2 (2 years since loan origination) is $950,000. Further assume the home is appraised for $975,000. The loan document may provide that since the reval appraisal is higher than the specified hurdle value that the available credit line maybe increased to 40% of the reval appraised value or $380,000. In addition, the loan document may specify that since the LTV is being adjusted upward, the interest rate on the entire loan be adjusted upward. For example, the loan document may provide for the interest rate (“hurdle interest rate”) to rise from 6% to 8% should the credit line be increased at the reval date. In another preferred embodiment, the higher interest rate may apply to just the portion of the credit line which is increased at the reval date ($99,100 in the example, which is a difference between $280,900 and $350,000).
Referring now to
At step 402 of the flowchart 400, the method identifies suitable borrowers or purchasers. Suitable purchasers are those that might be of a certain age, insurable status, and have encumbered home equity of a certain threshold amount. For a reverse mortgage (RM) to conform to government guidelines such as FHA or Fannie Mae guidelines (under, for example, the FHA HECM or Fannie Mae Homekeeper programs), borrowers must be at least 62 years of age. For RMs which need not conform to federal standards, a lower age may apply, though typically the MPRML will be offered to those aged 62 and older.
RMs typically require unencumbered home equity at the time of loan origination. However, it is also possible to refinance existing home debt and add the balance to the newly originated RM provided there is sufficient equity in the home. Additionally, the identification of likely MPRML borrowers may include the analysis of prospective borrower's current portfolio holdings or potential holdings of risky assets, an analysis of their present and future tax liabilities, and their bequest motives for their heirs (i.e., an analysis of their utility function for leaving large amounts of wealth to heirs). Additionally, the state in which the MPRML borrower resides may be an important fact in determining the terms on which a MPRML may be offered.
For example, in order for the lender to purchase life insurance which offers sufficient collateral support to the lender, the borrower/insured should reside in a state in which the lender purchase of life insurance is not onerously regulated by that state's credit life insurance regulations. For example, the following is an excerpt from the relevant California statute: 779.2. All life insurance and all disability insurance sold in connection with loans or other credit transactions shall be subject to the provisions of this article, except (a) such insurance sold in connection with a loan or other credit transaction of more than 10 years duration, and (b) such insurance where its issuance is an isolated transaction on the part of the insurer not related to an agreement or a plan or regular course of conduct for insuring debtors of the creditor. Nothing in this article shall be construed to relieve any person from compliance with any other applicable law of this state, including, but not limited to, Article 6.5 (commencing with Section 790), nor shall anything in this article be construed so as to alter, amend, or otherwise affect existing case law. For the purpose of this article: (1) “Credit life insurance” means insurance on the life of a debtor pursuant to or in connection with a specific loan or other credit transaction, exclusive of any such insurance procured at no expense to the debtor. Insurance shall be deemed procured at no expense to the debtor unless the cost of the credit transaction to the debtor varies depending on whether or not the insurance is procured.
Typically, states except life insurance in connection with credit transactions based upon the duration of the loan (e.g., 10 or 15 years), where the insured does not pay for the policy, or where the loan is a first mortgage loan. Thus, for states with these exceptions, life insurance originated in connection with RM lending will not be subject to the statutes.
Referring still to
As an example of the loan limit determination, the following assumptions and calculations, in a preferred embodiment are shown in Table 2 below. In the example of TABLE 2, the loan limit of $263,228 is the amount, which, when compounded annually at the loan rate of 8% to the life expectancy of each borrower, grows to the forward appreciated home value of $973,950. Alternatively, a second to die lifespan longer than 17 years could have been used which would have resulted in a lower RM proceeds (principal limit factor). Different combinations of these principles, as is apparent to one skilled in the art, will lead to different loan limits.
At 406 of
From the 2001 VBT tables, the qt for a 65 year old male nonsmoker is equal to the values set forth in Table 2 below.
As can be seen from Table 2, the mortality charges increase with age at an increasing rate. The relationships between the annual probabilities of death and the survival probabilities are as follows:
That is, the probability of surviving from time t to T is the product of one minus the probability of dying in each year from t to T. For the above “hazard rates” derived from the 2001 Select VBT table, the probability distribution for the death of a select 65 year old male nonsmoker (select in the sense that this individual qualifies for life insurance) is as set forth in Table 3 below.
Referring still to
At step 410, the method provides for the actual selection and purchase of the life insurance on the lives of the MPRML borrowers who qualify for insurance at rates above a certain medical underwriting threshold. For example, all borrowers can be qualified based upon a standard—nonmoker-Table D rating and above. In a preferred embodiment, such life insurance will have the following characteristics: (1) a fixed universal life insurance policy structure (“fixed UL”); (2) no-lapse guaranteed premiums; and (3) a return of premium rider. In other preferred embodiments, variable universal life insurance, term insurance, or other types of life insurance with different structures may be used.
Also at step 410, if the borrower qualifies for life insurance acceptable to the lender, the lender may purchase such life insurance to provide additional security for the reverse mortgage loan made to the borrower. Since the MPRML now has more security due to the life insurance collateral, the lender may increase the reverse mortgage loan proceeds or reduce the reverse mortgage loan rate or both in order to provide a loan more favorable to the borrower based upon the additional life insurance collateral.
If the borrower or borrowers do not qualify for life insurance (again above a certain medical underwriting threshold), the lender would have obtained valuable information regarding the borrower or borrowers life expectancy compared to the average life expectancy. In particular, a borrower that may not qualify for life insurance has been judged by the underwriting department of the insurance company to have a statistically shorter lifespan that a borrower who does qualify. Because such a non-qualifying borrower has a shorter lifespan, he or she may be entitled to greater loan proceeds based upon this underwriting information as shorter lifespans (or older borrowers) receive more proceeds in the reverse mortgage market. Thus, a borrower who merely agrees to consent and apply for life insurance of the reverse mortgage product faces a classic “win-win” situation: if the borrower qualifies for life insurance, a better loan product is created; and if the borrower does not qualify, a better RM loan compared to that previously available had they not gone through the underwriting process is available.
To give borrowers the right incentive to reveal accurate health information to the life insurer, the lender may offer better terms to the borrower if the borrower qualifies for life insurance than if the borrower does not qualify, where both improved terms to the borrower who applies and goes through the life insurance underwriting process are better than for the borrower who does not apply at all. For example, in the example described above with respect to steps 404, 406, RM proceeds for the loan without applying for life insurance were equal to $263,228. If the borrower or borrowers successfully qualified for life insurance, then under one embodiment of this disclosure, the borrower's proceeds may be increased 10% to $289,551. If however, the borrower does not qualify, the borrower's proceeds may be increased from the original $263,228 by 5% to $276,390.
At step 412 of
At step 414 of
At step 416, the debt capital structure of the MPRML is priced. Preferably, the debt capital structure of the MPRML is priced in a manner which reflects credit market conditions and which minimizes the WACDC to the borrower as described above in connection with the MPML.
At step 418, the method creates the structured MPRML note. As a result, the traditional first mortgage note reverse mortgage is replaced by a structured note containing subordination rules, structure, and interest rates for each tranche of the MPRML. At step 420, the respective tranches of the structured MPRML note may be sold to investors or further securitized.
A great advantage of the method of
The method of
In the preceding specification, the present disclosure has been described with reference to specific exemplary embodiments thereof. Although many steps have been conveniently illustrated as described in a sequential manner, it will be appreciated that steps may be reordered or performed in parallel. It will further be evident that various modifications and changes may be made therewith without departing from the broader spirit and scope of the present disclosure as set forth in the claims that follow. The description and drawings are accordingly to be regarded in an illustrative rather than a restrictive sense. Those skilled in the art will readily appreciate that various changes and/or modifications can be made to the invention without departing from the spirit or scope of the invention as defined by the appended claims.
This application claims priority to U.S. Provisional Patent Application Ser. No. 61/125,352, filed Apr. 25, 2008, which is incorporated herein by reference.
| Number | Date | Country | |
|---|---|---|---|
| 61125352 | Apr 2008 | US |
