Monthly Archives: June 2016

“One specific asset that needs to be tapped, is the house.”, says Merton

Robert C. Merton has been called a groundbreaking economist, an options guru and one of the finest minds in finance. For those in tune to the finance world, Merton is as high-profile as it gets.

A sought-after speaker on the investor circuit, Merton caught the attention of the crowd at an asset management conference in St. Louis last fall when he commented on the value of reverse mortgages. “Americans have wrongly steered clear of reverse mortgages,” he said. “This is going to become one of the key means of funding retirement in the future.”

Merton’s advocacy of reverse mortgages coincides with support from other leading academics and financial experts. It just might signal the beginnings of a shift in public opinion. Certainly, support from someone as influential as Robert Merton is a tremendous boost for reverse mortgages, one that might help elevate the product in the financial community, in the press and in the public eye.

Who is Robert Merton?

Robert Cox Merton is a longtime student of economics. He holds a B.S. in engineering mathematics from Columbia University, an M.S. in applied mathematics from the California Institute of Technology and a Ph.D. in economics from MIT, in addition to honorary degrees from 13 universities. (Merton’s father, a prominent sociologist, was also a noted academic, known for pioneering the focus group and coining the terms “role model” and “self-fulfilling prophecy.”)

In 1997, Merton was awarded the Nobel Prize in Economics for his work in developing a new method to determine the value of derivatives. His options-pricing method, the Black-Scholes model, has been labeled one of the most revolutionary concepts in modern finance.

Nowadays, Merton sits on the faculty at MIT’s Sloan School of Management, serves as a professor emeritus at Harvard University, and is a resident scientist at global asset management firm Dimensional Fund Advisors. His current research includes a focus on lifecycle investing and retirement funding solutions, a topic that has led him to assess the benefits of home equity conversion. His work takes him around the world, where he speaks before groups of riveted followers and sometimes extols the reasons why reverse mortgages have such value.

The Global Retirement Crisis

According to Merton, home equity conversion stands to play a key role in solving the retirement crisis—a problem that plagues countries around the world, not just the U.S.

The global financial crisis that exploded in 2007/2008 depleted savings for many and volatile markets prevented a significant rebound. Add to this a dramatic increase in the 65-plus population and increasing life expectancies around the world, and it’s clear that the world economy is experiencing pressure like never before. Faced with an aging population, government benefits and pension plans in many countries are stifled as resources once earmarked for retirement funds are being funneled toward health care and other services to accommodate aging.

“The world is getting older,” Merton says. “With our baby boomers in the U.S., we are an older society. China is aging even faster than the U.S., and Korea faster than China. Increasing demographics is putting pressure on funding.”

This means that the traditional three-legged stool of retirement funding—government benefits, employer pensions and personal savings—is getting awfully wobbly. It appears that now, the responsibility to fund retirement has mostly shifted to the individual.

Rethinking Retirement

But the picture is not entirely bleak, as Merton points out. “There is good news, and I underscore, it is very good news: Future generations are going to live longer. This is great. But, as with many good things, there comes another challenge, which is simply how to fund those extra years.”

If you live 10 years longer than your parents, but still want to retire around 65 as they did, you now have to save enough to support 20 years of retirement, Merton points out. “The only way you can do that is to save 33 percent of your income.”

If saving more during your working years proves impossible, the alternative is to alter your lifestyle in retirement. 8 “If you want to work the same number of years your parents did, fine, but you’ll have to accept a lower standard of living,” he says. “If you want to have the same standard of living as your parents, you can have 12 years of retirement—they only had 10—but you have to work 48 years, not 40.”

Basically, Merton says it boils down to this: “You either have to work longer or accept a lower standard of living. What you can’t do is work the same number of years as your parents, live longer and enjoy the same standard of living. That’s not feasible.”

Finding a Solution

For those who can’t work longer or save more, Merton draws attention to another solution.

“There is one more thing we can do to try to address the challenge, and that is to take the assets people have and get more benefits from those assets. Now, I don’t mean get higher returns; we’re already trying to get the highest returns on our investments that we can for the level of risk, we can’t just dial up the return… So how do we get more from the assets? Well, we use them differently and we develop tools that are efficient for doing that.”

One specific asset that needs to be tapped, says Merton, is the house.

“There’s no magic potion here. For working middle-class people, the biggest asset they have is not their retirement pension, it’s their house. And it’s typically the only major asset they have, but it is big. I’m talking about the house they want to live in in retirement.”

Merton says we need to start thinking about the house differently, viewing it as an asset rather than treating it as part of our legacy.

“The house is like an annuity: It provides the housing you need for as many years as you need it,” he says, adding that the idea of leaving the house as a bequest is flawed. “In our society, and even in Asian societies that are transforming from agrarian to industrial, the children don’t move into the house. No matter how precious the house is, how sacred, in any culture, in the end when you don’t need it anymore, it’s going to get sold, and that makes it a financial asset. So it’s an annuity while the retiree needs it, and then it becomes just a financial asset.”

Overcoming Obstacles

While Merton praises the concept of a reverse mortgage, he takes issue with the name itself, which he says has hindered the product’s acceptance.

“I hate the name. First of all, it’s misleading because saying it’s a mortgage makes it sound like it’s a loan. But with reverse mortgages, you don’t pay anything as long as you stay in the house. So it’s a very different animal. It also sounds like you’re leveraging your house.”

Merton points out that other countries with similar equity conversion programs have much better names. “In England they call it equity release, that’s a little more neutral. I like the Korean name; they call it a home pension. It’s more descriptive. The house itself provides you a pension, and the home pension allows you to take some of the value from the house to provide you additional pension. It doesn’t say anything about a mortgage or imply that you may owe money.”

Merton admits that confusion about the product is problematic, and says the HECM program as it currently stands may need some tweaking to help the product reach its full potential.

“We also have to educate people as to the proper use of them and in general make them much more efficient,” he says.

“You hear some people say reverse mortgages are bad, but I think what they may mean is the way that they are currently being produced and sold, and the cost associated with them, is not a good example of the product,” he says. “I think that’s what they mean, but people hear it as, ‘Reverse mortgages are not a good idea and we should ban them.’ I say that a reverse mortgage is a good idea, but maybe we need to fix the design a bit. Let’s fix it if we need to, but don’t get rid of it.”

Merton says making product improvements, which have already taken place with recent changes from HUD, is a large but feasible undertaking.

“It’s going to require a lot of hard work and innovation, which we know how to do. It’s a simple engineering problem,” he says, adding that he doesn’t believe a government-sponsored program is the right way to go.

“There’s going to be a need to find wide-based funding sources, and I don’t believe government is the answer. HECMs are about the only reverse mortgages out there, and it’s a government plan, but government balance sheets just aren’t big enough,” he says. “We have to find very efficient ways to provide the funds for the reverse mortgages, but we can do it.”

Global Acceptance

Merton predicts that home equity conversion—whether it’s called a home pension, an equity release or a reverse mortgage—is going to be a crucial part of solving the retirement income problem.

“I believe it is going to be essential for a good retirement around the world. In Asia, they are paying a lot of attention to it, they are working on it. There is a lot of interest in developing it in many countries. Even in Colombia and Latin America, where they don’t have a reverse mortgage, they are very interested in finding out about it.”

“Sooner or later, to have a decent retirement, a number of people are going to have to tap into this. It’s not a matter of choice. This is going to be an essential part of the foundation for funding retirement around the world.”

*For those freaked out over my use of the word “confiscation” in the headline, consider that there are already government studies on the trillions of dollars tied up in senior home equity and how it may be used for retirement in lieu of reduced social security benefits the government may plan to run out of. The rest is for your imagination if you are concerned about what the government will do with increasing debt and reduced social security funds in the years ahead.

Also, consider how the retirement industry is counting on your equity to cover the “gap” they perceive between retirement costs and resources: “There is a really, really large gap between retirement assets and retirement liabilities,” says Chris Meyers, a professor at Columbia Business School and the CEO Longbridge Financial. pointing to data that suggests an $11 trillion gap between the available assets and overall needs. Down the road, he says, home equity might be able to offer as much as $6 trillion to fill the gap.

It is not a big reach, given the government’s little by little dissipation of your social security benefits for them to confiscate your home equity in lieu of paying you the social security you counted on and believe is  yours. There is already evidence that governments around the world are contemplating what happens when they run out of money. There is reason to believe they have a focus on your home equity to get them past the devastation of your social security benefits. Is it already happening? CONSIDERING A HECM NOW is  wise move. Call me with your questions: Warren Strycker 928-345-1200.

CONSIDER other information about HECM on these pages: https://gofinancial.net/category/hecm/

HECM spectrum“We endorse HECM, the reverse mortgage, for senior age future”, said Warren Strycker this week as it takes the stage in financing retirement. Other efforts to dominate retirement trust have failed to do that, leaving seniors short of cash in their closing chapters forced to resorting to another forward mortgage with payments they can’t afford”, he added. We believe the HECM is a trusted tool as seniors are rewarded for their focus on home equity. This tool will revolutionize the mortgage industry as the reward for good mortgage planning.”

For more information about this website, call 928 345-1200 and ask for Warren Strycker. Email: warren.strycker#patriotlendingusa.com, This is a HECM informational website and does not solicit or intend to represent any lender or loan officer in providing solutions for retirement products or services. 928 345-1200. Strycker is a loan officer and can help you out.

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Robert C Merton explains how Reverse Mortgage is wise for families

HECMs help planners deploy strategies to ensure clients won’t outlive their money

By Mary Beth Franklin

Carolyn Dayton: Wondered if she could take money out of her house, rather than her IRA.

Carolyn Dayton had achieved a major goal of many retirees. She owned her home free and clear with no monthly mortgage to erode her retirement income.

But after retiring from her job as a computer business consultant more than a year ago, Ms. Dayton, 67, watched nervously as the investments in her individual retirement account rose and fell amid a volatile market. Meanwhile, the value of her three-bedroom, two-bathroom home in the San Francisco Bay area steadily increased.

“My investments haven’t been doing great, but I have a whole pile of money tied up in my house,” said Ms. Dayton, who paid $600,000 for her home 12 years ago. Today it is worth $900,000. “Rather than take money out of my IRA when it is low, I thought I could take money out of my house when it is high. You know, buy low and sell high.”

Without realizing it, Ms. Dayton had stumbled onto one of the most innovative — and controversial — ideas in financial planning today: How to incorporate home equity into a retirement income strategy.

Dayton3(Related read: 9 surprising ways to use a reverse mortgage)

“Having a buffer asset can help manage sequence of returns better and make a retirement income plan more efficient,” said renowned retirement researcher Wade Pfau, a professor of retirement income at The American College of Financial Services and a principal at McLean Asset Management. Translation: A reverse mortgage can reduce the risk of clients outliving their savings by allowing them to use loan proceeds during down markets rather than tap a shrinking nest egg.

GREAT VALUE

Mr. Pfau analyzed several recent studies on how to use a reverse mortgage as part of a comprehensive retirement income strategy. His conclusion: There is great value for clients in opening a reverse mortgage line of credit at the earliest possible age, particularly in a low-interest-rate environment like today.

Once established, the available line of credit continues to grow each year, even if the underlying value of the house does not appreciate. In addition to serving as a hedge against portfolio depletion, a standby reverse mortgage line of credit can serve as long-term-care insurance or a deferred annuity, using the home as collateral instead of paying insurance premiums.

Mr. Pfau’s advice to financial advisers: If you had dismissed reverse mortgages in the past as inappropriate for your clients, they’re worth a second look. Otherwise, you may be missing out on a crucial way to improve clients’ retirement security.

“Prior to 2011, reverse mortgages were expensive and really only made sense in the case of financial hardship. Today, the costs can be on par with a traditional home mortgage.”– John Salter, associate professor of financial planning at Texas Tech University.

Reverse mortgages allow older homeowners to convert the equity in their primary residence into a liquid, usable resource. Borrowers must be 62 or older and must either own their home outright or use the proceeds of the reverse mortgage to pay off the balance of their existing mortgage. They retain ownership of the home and must continue to maintain it and pay their property taxes and homeowner’s insurance.

Distributions are tax-free and can be taken as monthly payments for a fixed period of time, as long as the borrower remains in the house, as a line of credit or as a combination of payout options. Interest accrues monthly only on the amount borrowed, not on unused lines of credit. No repayment is required until the last borrower sells the house, moves out permanently or dies. Because it is a nonrecourse loan, the borrower or heirs can never owe more than the home is worth, even if that value is less than the loan balance.

It’s undeniable that the reverse mortgage industry has been plagued with a sleazy image thanks to its outdated celebrity pitchmen, aggressive sales tactics and occasional horror stories of widows being forced out of their homes. But the industry landscape has changed dramatically over the past few years. Reform of the federally insured Home Equity Conversion Mortgage program has increased consumer protections, introduced underwriting to weed out unsuitable candidates and significantly lowered costs.

The Reverse Mortgage Stabilization Act of 2013 now prevents reverse mortgage borrowers from using too much equity too soon and protects spouses who are too young to be co-borrowers on the loan by ensuring they can remain in the house after the older spouse dies. However, they are not able to borrow additional money.

(More from Mary Beth Franklin: A widow’s Social Security dilemma)

Initial setup fees have been dramatically reduced. The upfront mortgage insurance premium has been slashed from 2.5% to 0.5% of the loan amount as long as the borrower taps less than 60% of the available balance in the first year. Mortgage closing costs — for title insurance, appraisal and attorney fees — are about the same as a traditional mortgage or home equity line of credit, and some lenders provide credits to offset upfront expenses, adding it to the cost of the loan. In many cases, the borrower’s out-of-pocket cost to establish a reverse mortgage may be as little as $125 — the price of the mandatory consumer counseling fee.

“Prior to 2011, reverse mortgages were expensive and really only made sense in the case of financial hardship,” said John Salter, a financial planner and associate professor of financial planning at Texas Tech University, who has been researching and writing about the HECM program for years. “Today, the costs can be on par with a traditional home mortgage,” he said. But unlike a traditional mortgage or home equity line of credit, borrowers do not need to meet income qualifications, which can be challenging for retirees, and a reverse mortgage line of credit cannot be frozen, reduced or cancelled as happened to many traditional mortgage borrowers during the housing crisis.

Dayton3A reverse mortgage can reduce the risk of clients outliving their savings by allowing them to use loan proceeds during down markets rather than tap a shrinking nest egg.

HECM borrowing limits are based on available home equity, the age of the youngest borrower, interest rates and lender margin. Depending on their age, homeowners can tap about half of the home’s appraised value up to a maximum home value limit of $625,500. The older the borrower and the lower the interest rate, the higher the available loan amount.

“For anyone 62 or older with no mortgage, it makes sense to establish a reverse mortgage line of credit — especially for $125,” said Mr. Salter, who is a partner at Evensky & Katz/Foldes in Lubbock, Texas. Some of his retired clients who rely on oil and gas royalties used a reverse mortgage to supplement their monthly income when oil prices dropped precipitously.

(Related read: Medicare, reverse mortgages and the complexities of retirement planning)

ADVICE NEEDED

Ms. Dayton, who has been divorced for many years, discussed her idea of taking out a reverse mortgage on her Danville, Calif., home with her adult daughter and Patricia Passon, her financial adviser of more than 30 years.

“I am so happy to have my financial adviser working with me on this,” Ms. Dayton said. “She understands the financial lingo so she could translate all the different offers for me.”

Ms. Passon, principal at Encompass Financial Advisors Inc. in Beaverton, Ore., had little actual experience with reverse mortgages but had read numerous research articles and attended several webinars on the subject. She created a spreadsheet to analyze and compare offers from various reverse mortgage lenders and finally settled on a reputable reverse mortgage firm, a finance company that covered all the upfront costs in exchange for a slightly higher lender margin.

SUPPLEMENT TO SOCIAL SECURITY

Based on the maximum allowable home value of $625,500, Ms. Dayton qualified for a $375,000 line of credit. She draws $1,000 a month in tax-free reverse mortgage payments to supplement her Social Security benefits and nonretirement investments, allowing her IRA to grow untouched for a few years.

“Now I can sleep at night, and I have no concerns about running out of money,” Ms. Dayton said. That leaves her plenty of time and energy to devote to her role of doting grandmother to her three grandchildren.

Unfortunately, not all financial advisers are as able — or willing — as Ms. Passon to discuss reverse mortgage options with their clients.

“Advisers have been slow to grasp how reverse mortgage lending has changed,” said Shelley Giordano, chairwoman of the Funding Longevity Task Force, an industry-backed group of leading retirement income specialists, and author of “What’s the Deal with Reverse Mortgages”(People Tested Media, 2015).

“If the first impulse is to counsel clients to wait until the portfolio is depleted before establishing a HECM line of credit, the adviser is giving outdated advice,” Ms. Giordano said. “And compliance officers who forbid conversations with clients on how a significant asset, the home, can improve retirement outcomes are not meeting an appropriate standard of care,” she added

“I am so happy to have my financial adviser working with me on this, She understands the financial lingo so she could translate all the different offers for me. Now I can sleep at night, and I have no concerns about running out of money,” Ms. Dayton said.

Adviser reticence is likely tied to an investor alert, first published in 2010, from the Financial Industry Regulatory Authority Inc. warning Americans about aggressive marketing campaigns that promoted reverse mortgages as a cost-free way to finance retirement lifestyles or risky investments. The agency toned down its criticism slightly in 2014 when it reissued the alert in the wake of the program reforms. Finra noted that reverse mortgages can help seniors manage their finances if used responsibly.

While employing a reverse mortgage to extend the life of a portfolio is a popular research topic, most homeowners actually use the loans to pay off an existing mortgage, reduce other debt or increase their monthly income.

In the past, it was not common to carry a mortgage into retirement. In 1989, only 11% of homeowners ages 65 to 74 had a mortgage, with an average balance of $29,000, according to LIMRA Secure Retirement Research. But not anymore. By 2013, 43% of these households carried a mortgage, with the average debt totaling $136,000.

EDUCATING CLIENTS

Monthly mortgage payments can severely strain a retirement budget. Just ask Shelly Moss, a rabbi in the Phoenix area. At 66, he would like to retire soon without worrying where the money will come from to pay his wife’s extensive medical bills, which have ravaged their savings. But when his financial adviser, Dennis Channer of Cornerstone Investment Advisors in Boulder, Colo., suggested a reverse mortgage, the rabbi was skeptical.

Mr. Channer said he often includes a reverse mortgage calculation in retirement income plan discussions to educate clients about their options. Those include lowering their taxes by combining tax-free reverse mortgage payouts with smaller distributions from fully taxable retirement plans. That strategy also can help higher-income clients avoid surcharges on their monthly Medicare premiums.

Mr. Moss and his wife, Barbara, set up a reverse mortgage earlier this year and used it to pay off their existing mortgage, slashing $2,000 from their monthly spending.

“It gives us breathing room,” he said.

A recent survey by The American College suggests reverse mortgage education could be vital for a new generation of retirees determined to remain in their homes. The survey of more than 1,000 people between the ages of 55 and 75 with at least $100,000 in investible assets and at least $100,000 in home equity found that 83% wanted to remain in their current home as long as possible. Despite a strong desire to age in place, only 14% of the respondents said they had considered a reverse mortgage, and just 30% earned a passing grade on basic knowledge about the financing tool.

Separately, a new study by Northwestern Mutual found that two-thirds of Americans believe there is a chance they will outlive their savings.

“Advisers and consumers need to start thinking about home equity, including reverse mortgages, as part of the retirement income planning process,” said Jamie Hopkins, co-director of The American College’s New York Life Center for Retirement Income Planning.

Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.

See contact information in navigation bar for details.

 

 

Banking on home equity; Part of Retirement Plan; Eligible again and again.

This story “borrowed” from treasured friend, Larry Waters, loan originator long associated with reverse mortgages and featured in Reverse Mortgage Daily recently.

There is the misconception that a person can only be eligible for one reverse mortgage in a lifetime, but the opposite is actually true.

A lot of people aren’t prepared for retirement and are just getting by right now, but with inflation and health care costs continuing to increase, they will realize the need for another option.

Consider this prospect  in Spokane, Wash., where she was living alone after her adult children moved away. The woman wanted to sell her home to downsize, but it needed some upgrades, mostly aesthetic things.

Initially, she went to a realtor and at the time, he didn’t even know about reverse mortgages, nor did she. The woman then went to the bank to try to get a regular mortgage, but was denied because she didn’t have the income she used to when her husband was alive.

The bank actually brought up the idea to her about a reverse mortgage.

Over the next five years, she obtained three reverse mortgages.

The first loan was to cover all of the renovations on her home so she was able to sell it for top dollar and move to a smaller home. She took out a set amount of loan proceeds initially and then took the rest in a line of credit. She then took the proceeds she made from selling her first home and paid off the loan and bought a second home in cash.

Once in the second home, the client said she wanted to free up some cash and took out a second reverse mortgage through a line of credit. She didn’t need an income stream each month. She was pretty frugal and only used it when she had unexpected expenses.

A few more years down the road, the woman contacted explained that she wanted to move again because she didn’t like her neighbor. There were also new homes being built downtown that were built specifically to accommodate seniors.

Again, she was able to pay off her last reverse mortgage and the result was a third reverse mortgage. This time  the loan was a  HECM for Purchase.

With each reverse mortgage she also was responsible for paying all of the closing costs and other fees.

People need to know that a reverse mortgage isn’t necessarily a one and done deal, A lot of times they think it’s the last thing that they’ll do, but sometimes things change and they want to move. It can work for five or 10 years and then could possibly help them again to downsize or move to another location.

See contact information in navigation bar for details.