LIBOR 10 Year Swap

Now that the treasury based HECM Reverse Mortgage is being eliminated by Fannie Mae we are left with the LIBOR product.  The interest rate on the LIBOR is currently  calculated with a margin between 2.75 and 3.25.  However, the principal loan amount (which determines the gross loan amount available along with appraised value and age of the borrower) is calculated using the LIBOR 10 year Swap.  Would anyone like to give an explanation of what a 10 year swap is that a borrower would understand? 

Its gambling, pure and simple.  It is what got us into this mess.  Like the Savings and Loan business, it will have to be replaced with something.  Securitization, and all that goes along with it is junk.  Pure and simple.   Nothing is on the horizon to replace the mess, short of the US government becoming the lender of last resort, which is something we should all dread.  Securitization is an industry that needs to die, just like the marketplace says it should.  Unfortunately, it is the taxpayer that is footing the bill, and will continue to do so.  I hear crap like XYZ bank is too big to fail, when in point of fact monstrosities like that are too big to be allowed to continue; witness CCR and WAMU.  Securitization is a model whose time has come and gone.

With regards a Reverse Mortgage the correct terminology (you referred to loan amount as "loan amount") is Maximum Claim Amount when referring to a loan amount.  Using "Maximum Claim Amount" is more understandable, to me, when educating a potential client on the workings of a Reverse Mortgage. 

A SWAP is used by a bank or other financial institution for hedging market interest rate risk. Just know that SWAPs are an important risk hedging tool, if not the most important, for banks. Bank risk is captured in the Libor rate – the rate paid by banks on unsecured deposits to other banks. So in other words, the swap spread is meant to adequately compensate against the risk of bank default. The Libor rate is the floating rate paid against the fixed in the swap transaction, and moves with the perception of bank risk.

There is a whole lot more which can be written about a SWAP.  A borrower would most likely get "paralysis by analysis" if you were to try to explain to them what a SWAP is.  The best thing to let them know is to get their Reverse going and they'll have 10 years to figure out what a SWAP is.