In this entry, we are going to provide instructions on how to add insurance to almost any loan you structure using eZMath or ZMath.

First, there are two main types of insurance that eZMath and ZMath calculate.  They are mortgage insurance and credit insurance.  Generally, mortgage insurance is for use on mortgages where the loan-to-value ratio is less than 80%.  This generally happens when the borrower does not have a sufficient downpayment.  Credit insurance is an insurance coverage that is generally offered on consumer loans (i.e. auto, boat and personal loans).  This insurance has two components, life and accident and health.  eZMath and ZMath calculate both premiums.

 Let's cover mortgage insurance first.  Once you have selected a loan type, click on Options and Variations and the screen below is displayed.  Mortgage insurances are covered in FHA, VA, PMI Standard, PMI Monthly and PMI Split Premium.  FHA is insurance offered through HUD loans.  VA is a funding fee charged on loans offered through the VA.  PMI is private mortgage insurance offered through insurance companies.  Standard is the old way of calculating the insurance where the first year's premium is prepaid at closing.  The second year's premium is collected with the monthly payments beginning in the first year, etc.  You are always one year ahead in this form of insurance.  Monthly is where there is no upfront premium and you are not paid one year in advance.  Split premium is like monthly but it has an upfront premium as well.  Make sure that you select the correct type of insurance by clicking on the correct radio button as the pane that is set up on the terms screen will be determined by your selection.

When you return to the terms screen, you will see a pane that has entries which are required for the calculation of the insurance.  What you need for these entries are the correct insurance rates.  These rates are readily available from the insurance carrier that you are using (including HUD and the VA).  These rates are usually stated as a rate per hundred dollar of indebtedness.  That is how we want the number entered.  For example, a common rate for FHA renewals is 0.50 per hundred.  That is what we want entered; 0.50.  You also need to enter what year the rate for that renewal period is valid through.

In addition to the rates, you must tell the engine what the premiums are calculated on; the beginning level balance or a declining balance.  If it is on the declining balance, you must select the beginning, average or ending balance.  In the same section of the insurance terms pane, if you have an upfront premium you are asked whether any of the upfront premium is financed.  You can enter that as a percentage or dollar amount.  You also enter the number of months, if any, of premium that are escrowed.  If there are months escrowed, please click on the radio button as to whether the escrowed months are used or refunded.  You can also select a number of months of premium to be prepaid.

One of the most important entries follows.  It is the LTV Cutoff value.  You are telling eZMath and ZMath where to cutoff the collection of insurance premiums.  This is required by regulation so accuracy with this entry is extremely important.  Generally, this value will be 80 or 78.  The final entry is what the appraised (or sale price, whichever is less) value of the property is.  This is the number that the LTV will be calculated on.  Again, since this is a regulatory requirement, accuracy is extremely important.

Once your entries are made, click on calculate.  At the output screen, your Truth-in-Lending figures will reflect the collection of insurance, your payment streams will reflect the effect of insurance premiums by being added to the regular principal and interest payment amounts, a total premium figure will be shown on the output, etc.

This is how mortgage insurace is added to mortgage loans in eZMath and ZMath.  Our next entry will cover credit insurance which is a different type of insurance.  As always, if you have any troubles with this or any other aspect of eZMath and ZMath, please feel free to contact us.

There has been an interesting development in lending that is borne of this economic crisis we're in.  What is it?  It it borrowers that take an FHA loan even if they have a sufficient loan-to-value ratio.  What does this do?  It requires that they pay the funding fee and mortgage insurance premiums for a minimum of five years.  This is certainly an expense that most borrowers avoiided if they had at least an 80% loan-to-value ratio.  However, since some lenders are only allowing FHA originations, borrowers are being forced into this added expense if they want a loan.  In a future post, we will be showing you how to use eZMath and ZMath to originate loans with mortgage insurance, including FHA.

In a previous post, I discussed the different types of balloon loans.  It is time to show you how to apply that in our loan calculation software.  While going through this tutorial, please refer fo the screen shot below.

First, select the loan type you need to work with as we offer the ability to calculate a balloon in virtually every loan type we offer.  For our discussion, I will be working with a level payment (i.e. fixed rate) loan.  Once you've selected the loan type and are in the base terms screen, select Options and Variations and make sure that the radio button Yes is selected under the Balloon heading.  Then click on OK.  When you return to the Base Terms screen, the Balloon Terms pane should be displayed.  Now, let's look at how we would structure each of the balloon types discussed in the previous blog post.

The first balloon that I discussed is where the borrower would like to pay a certain amount and pay any leftover principal balance with the final payment.  To structure this type of balloon, enter the Interest Rate, the Periods/Year, the Term, the Loan Amount, the Payment Amount, the Advance Date and the Date of 1st Pmt.  Then click on Calculate.  You will be taken to the Output screen.  Note that the entered payment is made for one period less than the entered term.  The final payment is the remaining principal balance plus the final accrued interest.  Please take care to note if your entered payment amount caused negative amortization.  That is, was the entered payment amount enough to reduce the principal balance.  If not, you may want to make an adjustment to prevent that problem.

The second balloon that I discussed is where the borrower chooses an amount to remain unamortized.  To structure this type of balloon, enter the Interest Rate, the Periods/Year, the Term, the Loan Amount, the Advance Date, the Date of 1st Pmt and the Balloon Amount.  Then click on Calculate.  You will be taken to the Output screen.  Note that the entered balloon amount plus the calculated payment constitutes the final payment.  The calculated payment is made for one period less than the entered term.

 The third and final balloon I discussed was the prepay balloon.  To structure this type of balloon, enter the Interest Rate, the Periods/Year, the Term (this is the number of periods the regular payment amount is based on or what we term the Amortization Term), the Loan Amount, the Advance Date, the Date of 1st Pmt and the Actual Term (this is the actual term of the loan).  Then click on Calculate.  You will be taken to the Output screen.  Note that both the payment amount and balloon have been calculated.  The payment amount is the payment that would be calculated on a loan that had the number of payments entered in Term.  The balance remaining is then calculated at the end of the number of payments entered in Actual Term.  This balance remaining is added to the regular payment amount to come up with the final (balloon) payment.

 If you follow the steps above, you should be able to successfully structure balloon notes for virtually any of the loan types we offer in our loan calculation software packages, eZMath and ZMath.  As always, if you have any troubles with these calculations, feel free to contact us.

Okay, you've chosen a loan type, you've entered the data and you've hit the Calculate button, now what?  Well, if all went as planned, you are taken to the output screen.  What output is shown depends upon what output you were last on.  In other words, if you had the Truth in Lending Statement up with your last calculation, you are taken to the same output with the current calculation.  If you were on the Amortization Schedule output with your last calculation, you are taken the Amortization Schedule output with the current calculation, and so on.  If you would like different output for the current calculation, select what you would like from the drop down menu at the top left of the screen next to the label "Output type:".  The choices for output are:  Truth in Lending Disclosure Statement, Amortization Schedule, Documentation, XML Output and Principal vs. Interest Chart.  Once you make a selection, click on the "Request Output" button.  If you have selected Amortization Schedule and you want the entire schedule, check the "Entire Schedule" box and click Request Output.  Note that you can customize the Amortization Schedule output by clicking on the Customize button.  There are many choices for customization available to you.

As you can see, we offer many output options in eZMath and ZMath.  Your experimentation and creativity are the only limits to the possibilities.

A question that we often deal with is how to structure balloon loans.  In a future post, we will look at how to mechanically structure balloons using eZMath and ZMath.  In this post we are going to discuss the different types of balloon loans and how they are structured.

 The first type of balloon loan is the type where a customer would like to pay a certain amount per month and the balance remaining on the loan with the final payment.  In order to have a balloon (i.e. a balance remaining at term), the desired payment must be less than the regular payment amount that would be calculated given the other terms (i.e. interest rate, term and amount) of the loan.  At the same time, it is usually essential that the payment amount desired by the borrower be enough that amortization (i.e. balance reduction) is occurring.  If those two criteria are met and a lender's policy will allow balloon lending, then the loan can be structured in this way.

 The second type of balloon loan is the type where the customer would like a certain amount of the loan to be left remaining (i.e. unamortized) at term.  That remaining balance will be paid with the final payment.  What occurs with this type of loan is that once the final balance is determined or set by the borrower, the regular payment amount is calculated.  That payment amount is made for one less than the number of payments in the loan and the final payment is the balance remaining plus the regular payment amount.  These types of balloons are often used when the borrower is expecting some kind of cash flow that coincides with the final payment of the loan (i.e. sale of the collateral, etc.) and the balance remaining equals or is slightly less than that cash flow.

 The final type of balloon loan is the type where the term upon which the payment amount is calculated (the amortization term) is less than the actual term of the loan.  We call this a prepay balloon.  This is the type of balloon loan that we commonly see in mortgage lending.  Sometimes it is termed a "X/Y Balloon Loan" where X is the amortization term and Y is the actual term (i.e. 30/7 Balloon Loan).  In this type of balloon, the payment amount is calculated based on the amortization term.  That payment amount is made for the number of payments in the actual term.  The resulting balance at term is paid in full (or refinanced) with the final payment.

That summarizes the types of balloon loans seen in the lending industry.  Our loan calculation software packages, eZMath and ZMath, easily calculate all three types.  In a posting in the Calculators 101 section in the next few days, we will look at how to structure each type.  In the mean time, if you ever have any questions on subject matter or the mechanics of running our software, please feel free to contact us.

Note:  For the purposes of the following blog entry, we are assuming that Level Payment Loan was the Loan Type selected.

Okay, we've set the defaults and selected what we need from options and variations and have returned to the loan entry screen.  What do we need to enter and in what form should it be entered in order to get  the results we expect?  First of all, you will notice that you are in the Base Terms pane.  Within that pane there are entries for Interest Rate, Periods/Year, Term, Loan Amount, Payment Amount, Prepaids, Advance (note) Date, Date of 1st Pmt and Maturity Date.  We will go through these entries one by one.  In the interest rate field, enter the interest rate.  Enter it as a whole number or as you say it (i.e. 8.5 not 0.085) not as a decimal.  Then hit <tab> to go to the next entry.  In Periods/Year enter the number of payments made per year.  For monthly payments, enter 12.  In the Term field enter the total number of payments made.  If this is a 5 year, monthly payment loan, enter 60.  In the Loan Amount field, enter the total dollar amount of the loan (prior to any financed insurance premium).  You will notice that the software skips over the Payment Amount field.  That is because the software will calculate the payment amount.  If you had Balloon selected, you may make an entry here.  We will discuss that in a future post.  In the Prepaids field, enter the total amount of prepaid fianance charges that are not calculated by the software.  The software, depending upon your choices in Options and Variations, will calculate prepaid interest, buydown amounts and mortgage insurance premiums and add them to this entered amount to come up with the total prepaid fianance charges.  In the Advance Date, enter the funding date, closing date or the date when interest begins to accrue on the loan.  Enter the date in the format, MM/DD/CCYY.  In the Date of 1st Pmt, enter the date that the first payment is due.  Unless you have an irregular final payment date, you do not need to put anything in the Maturity Date field.  Once all of your entries are filled, click on the Calculate button and you will be taken to the results screen.  We will cover the results screen in our next posting.

As always, if you have questions or problems operating the software, contact us for help.

Lately we've fielded a lot of calls and emails questioning where the ZMath Engine, eZMath and ZMath cutoff FHA MIP premiums.  Universally, the inquirer states that we are cutting off the MIP too early.  Invariably what is going on is that there is financed premium involved.  For that reason, the calculation of the cutoff is not as straight forward as calculatiing the percentage of the loan's balance and looking at the amortization schedule for that balance.  No, the calculation is quite a bit more involved than that.  Apparently, there are a few LOS and underwriting systems out there that do not do this correctly!  For that reason, we will not go into the specifics of the correct calculation.  Rest assured, we have it correct here in all of our software.  So, if you're questioning your results, contact us and we will share with you why we are right and why your other system is falling short or should we say long of the correct result!

It seems to us that the time is ripe for reverse mortgages.  Why?  Because it allows your customers to benefit from their most valuable asset.  It also helps them avoid liquidating other under-valued assets to supplement dwindling income due to the current financial crisis.  When you look at most of your retirement-aged customers, what one asset do they have that their heirs probably don't want to have to deal with in the future?  Most likely their home.  At the same time, assuming that stocks and other financial assets will recover lost value over time, it makes sense to hold those assets rather than liquidate them at these depressed prices in order to supplement income.  Additionally, stocks, securities and other financial assets are easier for heirs to deal with when the time comes.

There is general confusion and hesitation when it comes to reverse mortgages.  Many of the people that would benefit from this instrument do not understand the benefits nor the mechanics.  Many believe that it is possible for them to lose their home before they want to leave it.  Or they believe that they are not getting fair value from it.  Also, given the bad press that the mortgage industry has suffered through the past number of months, they are suspicious of anything that is unfamiliar to them.  Well, it is time for you to sit down with those potential clients and explain the benefits of this truly creative and valuable financial instrument.  You may just find that you have a number of originations just waiting to happen.

From time to time, we find customers that for one reason or another do not want to implement a component into their system but would still like to leverage the prowess of the ZMath Engine.  Well, for people like that we've got a new method of access; a RESTful web service.  What is a RESTful web service?  (I too had to ask when our programmers suggested it as a new access method.)  REST stands for representation state transfer.  In essence, what we have is the complete, fully operational ZMath Engine accessible via our domain through an XML (extensible markup language) feed.

To access this version of the engine, you request it from our order page by clicking on ZMathEngineXML.  You estimate the number of transactions you would require per month and we return to you a Software Use Agreement.  Once we receive the accepted form in return, we supply an XML schema along with your user name and password.  You then set up your application to go to the URL for ZMathEngineXML and feed the XML stream.  The ZMath Engine picks up that stream, runs your transaction and returns an XML stream that contains all of your results.  Viola!  You've accessed the ZMath Engine component with very little commitment from you.  The beauty of this is that many progamming shops can access the engine in literally minutes once the schema is delivered.

 This service isn't designed to address everyone's needs.  Many installations will still opt to take possession of a component and host it locally.  However, for those that are trying to quickly, with very little hassle (i.e. contract negotiation, technical spec'ing, etc.), very little commitment and very little programming work access the power of the ZMath Engine, the RESTful web service, ZMathEngineXML, is the ideal solution.

If you have any questions about this exciting new development, please feel free to contact us.

Okay, you've set your defaults and you've selected your loan type.  Now what?  Well, unless everything is set exactly the way you want it and you know that for sure, we suggest that you look at the Options and Variations screen.  You can do this one of two ways.  First, if you check the box at the bottom of the Loan Type screen and click Submit, you will be taken to the Options and Variations screen before you're taken to the entry screen.  If you do not check the box, you can access the Options and Variations screen by click on that tab from the data entry screen.

Once you're in the Options and Variations screen, you can choose to change a few of your defaults, if necessary, on a loan by loan basis.  Or, you can use this screen to add features to your loan.  Let's look at what defaults we can change first.

1.  Interest Type--You can change from simple to Add-on or discount, if applicable.  This is highly unlikely but is there in case you need it.

2.  Basis--You can change the accrual basis.  This is probably the most used of all of these.

3.  Odd Interest Adj--This would be the second most popular default change.

4.  Prepaid basis

 Now let's look at the loan features that we can change.  I will list all of them here.  Each loan type is set up to prohibit selection of any options that do not apply to that particular loan type.  So, if you do not see one listed in your screen, that means that that option is not available for your loan.

1.  Balloon--Select this if your loan has a balloon payment.

2.  Construction--Select this if your loan has a construction phase.  This can be construction only or construction permanent financing.  All calculations will be done as documented by Appendix D of Regulation Z.

3.  Insurance--Select the appropriate insurance type if your loan has insurance.  We offer standard credit life/accident and health (i.e. disability) insurance, private mortgage insurance, FHA MIP and VA insurances.

4.  Accelerated--Select this if your loan is going to be structured as an accelerated biweekly or weekly payment loan.  An accelerated biweekly (or weekly) loan is a loan where the standard monthly payment is divided by two (or four for weekly) and the resulting payment is collected every two (or four for weekly) weeks.  A new term is calculated based on the new payment amount.

5.  Buydown--If your loan has an interest rate buydown feature, select this.

6.  Skipped Payments--If you loan has payments that are skipped each year, select this option.

7.  Differing Freq.--This is an highly unusual option but it allows the interest and principal of the loan to be paid on differing frequencies or on different dates.  This is usually used in commercial lending.  For example, interest may be due monthly but principal is due quarterly.

 Once you have selected the options and variations that apply to your loan (yes, you may choose more than one at a time), click on OK and you will be taken to the data entry screen.  If applicable, more panes (i.e. data entry areas) will be displayed to take the information for each of the options you've chosen.  In future postings I will discuss the data entry process and look at each of the options.