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there is a high probability that in year two, they may have difficulty paying taxes and insurance. Looking at the program’s structure, years ago, when proprietary products were introduced, the comparison was the FHA [Federal Housing Administration] product gives you so much more principal limit. The difference was that the costs were financed, and you had to get more principal limit to cover the closing costs. In other words, if it was a $300,000 property value up to the maximum claim amount, and the closing costs were say

$14,000, you would have to have at least $14,000 more on your principal limit because that was your initial balance. From the proprietary side, many of them began saying if I am going to make a loan on a $3 million property, I had better check to see if there had been a prior history of tax delinquency because the property taxes on a $3 million home is huge. So, where is this all going? I have seen suggestions that we eliminate the servicing fee set aside and put taxes and insurance set aside as well. No matter how you get there,

you will have to reduce the principal limit and hold some money back. In the event the senior does not pay their taxes and insurance, there is money there to do it. That is the future. Let me talk about the servicing fee set aside. When I was involved in the primary design of this product, one of the difficulties was comparing the reverse mortgage and the way it is structured with origination costs, servicing costs, compared to the forward side of the business. In a forward mortgage, the servicing fee is built into the interest rate. But we couldn’t because the only product available was an adjustable loan product, and it has a line of credit feature. We never knew what the balance would be, and we

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didn’t want lenders to have an incentive. So, we created a fixed dollar amount that would be added to the borrower’s balance, regardless of the loan balance. That’s how we got $30, $360 a year. Now, that’s all a lender can get for servicing the loan. However, that is a consistent revenue stream, and in the forward mortgage business, your income goes down as the loan balance goes down because it is a function of the interest rate. But I believe now, if you look at the fixed-rate product that is available, most of those loans are eventually going into securities. And I think you can do away with the servicing fee set aside because you already know what the balance is. You can make the servicing fee as part of the interest rate and put in a tax and insurance set aside for emergencies. Those are concepts that have been talked about that I think have legs. What are the prospects and some challenges for the industry? There is a significant group of seniors that still have home equity that will have a need for this product. The current challenges are convincing both federal and state regulators that (a) the product is sound; and (b) that there are significant controls to protect the consumer. The counseling component is huge. Over the years, it hasn’t been funded. A couple of years ago, counseling agencies were asking lenders for money. That was the only way we were going to get any loans closed. Now, that’s all been shut off. And the customer is paying for counseling. It will come to ongoing scrutiny of individual mortgage company, either non-bank or bank-owned, as to playing by the rules and total transparency. The days of what I am going to call “the mortgage cowboy” are gone. They are gone because they never had any capital to start with and, essentially, after they closed the loan, they were selling it to whoever the highest bidder was. And they were using different margins because they could get a different SRP, depending on how they can convince the senior to take product “A” over “B.” That’s exactly where we were. Unfortunately, the forward mortgage business has been around a lot longer than 20 years. Talking about the future, with the continuing cloud of yield spread premiums now under scrutiny at the state level, I think eventually they will be gone. So, that takes one leg of the three legs of the three-legged stool away, brokers relying on the yield spread premium. That comes down to origination income and selling your loans servicingreleased and servicing income. I think it is going to be more of a restricted playing field. At the end of the day, any lender who wants to play by the rules can do so and do so nicely provided they have capital and a line of credit, and they have the trust of the senior consumer. continued on page 22