Monthly Archives: April 2017

Financial Planners “Remiss” to Not Suggest Reverse Mortgages

April 18th, 2017  | by Alex Spanko (as edited here)  | HECM, News, Reverse Mortgage

CNBC included reverse mortgages in a list of “innovative approaches” to protecting retirees’ portfolios in down times, citing a financial advisor who said he and his colleagues would be “remiss” if they didn’t suggest Home Equity Conversion Mortgages as a potential option.

Rob O’Dell, a certified financial planner in the Naples, Fla. office of the Coyle Financial Counsel wealth management firm, told the network’s website that the reverse mortgage industry has “cleaned up this space to benefit the end consumer.”

“The HECM positions the portfolio for longevity, O’Dell said, by having the client tap the line of credit instead of assets when the market is down,” the post notes, echoing an increasingly popular angle for promoting the reverse mortgage. “In this way, assets are preserved and have the opportunity to keep growing through the years.”

The post warns consumers that HECMs still require HUD insurance premiums and lead to the accrual of debt, but generally positions the product as a tax-free way to diversify consumers’ retirement plans.

“The HECM allows the borrowers to be in control of their loan and payment terms, not the lenders,” O’Dell told CNBC.

Strategic Uses of Reverse Mortgages for Affluent

While the refrain that reverse mortgages aren’t just last resorts for cash-strapped older homeowners may be canonical within the industry, many higher-income retirees may not be familiar with the Home Equity Conversion Mortgage and its potential uses.

Writing on his retirement-planning blog, financial planner and HECM advocate Tom Davison provides an all-in-one resource for explaining the product to more affluent potential borrowers.

“Reverse mortgages have evolved over the years, including significant improvements after 2008’s housing crisis, resulting in enhanced consumer protections, refined federal oversight, reduced costs, and better balance amount the interests of clients, lenders, and the Federal Housing Administration’s insurance backing,” Davison writes by way of introduction.

Davison’s post features a handy table that shows the “highest and best use” of the product for a variety of potential scenarios. For instance, a homeowner looking to buy a vacation home would be best off with a lump sum HECM, Davison writes, while those seeking a safety net for health care emergencies or down markets would be best off with a HECM line of credit. But for higher-income individuals, Davison — based on his experience managing investment portfolios between about $500,000 to $4 million — lays out two “most common” uses of a HECM: improving an existing retirement plan to facilitate increased spending, or adding a rainy-day safety net to an already robust portfolio.

Perhaps the most valuable passage in Davison’s extensive post concerns the HECM line of credit option and its growth over time.

“A line of credit is the most flexible way to access cash and takes advantage of a unique and powerful feature: the borrowing limit grows every month,” Davison writes, adding that the fact the limit can’t be reduced or cancelled — as long as the borrower maintains his or her tax and insurance obligations — represents a major benefit over a traditional home equity line of credit.

Using a graph to illustrate his point, Davison gives the example of a hypothetical $300,000 home, plotting the home-value appreciation against the compounding growth in the line of credit.

“The obvious result is more cash is available later — and in an amount that’s likely to grow substantially more than inflation,” Davison writes. “It may grow faster than most fixed income investments, especially those with guarantees like the FHA backing.”

Davison also points out research showing that using the reverse mortgage line of credit can increase a borrower’s entire estate size, calculated as the investment portfolio plus “housing wealth” minus the loan balance.

“Perhaps the rule of thumb is: when spending is pushed to the max, estate sizes suffer, but when housing wealth is used judiciously, both sustainable spending and estate size can improve,” Davison writes.

Read Davison’s full piece at his blog, ToolsForRetirementPlanning.com.

Researcher: No “Rational Reason” to Avoid HECM

As the American population ages, experts have increasingly pointed to home equity as a key source of retirement income — even as many older homeowners remain hesitant to tap into it for reasons that continue to confound both academics and players in the mortgage industry.

Steven Sass, a research economist at Boston College’s Center for Retirement Research, has studied the behavioral roadblocks to home equity extraction, and concluded in a recent Boston College brief that the main culprits are lack of understanding and fear, as RMD recently reported.

“There’s not really a rational reason to avoid a reverse mortgage,” Sass told RMD in a recent phone interview. “It might be a fairly sophisticated analysis, but it makes sense for a lot of people.”

Sass pointed a finger at some familiar targets, including the deep-seated aversion to going into further debt among older folks, as well as the sense of accomplishment and satisfaction that can come from owning a home free and clear. But he also mentioned distrust of financial institutions in general, as well as a general inability to imagine a need for future cash early in retirement — a key reason many retirees don’t think to open a reverse mortgage line of credit soon after turning 62.

“If you have a sufficient income to cover your expenses, is there any great need to go out and secure this line of credit or get the money?” Sass asked rhetorically. “So I think people might need some impetus to use a reverse mortgage.”

That impetus could be the only way to convince older homeowners that a Home Equity Conversion Mortgage is a good idea, and Sass said the breaking point might start coming earlier an earlier. Social Security benefits could retract in the future, he said, and more and more boomers are entering their retirement years without sufficient cash or investment savings.

“The elderly will be increasingly dependent on savings to support their standard of living, maintain their consumption needs,” Sass said, noting that many of them won’t have employer-paid pensions or extensive Social Security benefits. “As households increasingly need to use their financial assets, at that point, home equity might be viewed as another store of savings and more households will consider using home equity in lieu of, or in combination with, financial outlets.”

While many seniors typically consider traditional “forward” home equity lines of credit as well as reverse mortgages, Sass said they shouldn’t necessarily be used to tap into home equity for retirement.

“A traditional HELOC is just a credit card, cash-flow kind of thing,” Sass said. “It’s not really good for eating your home equity.”

Sass said seniors could use HELOCs to cover specific smaller expenses that might come up during the retirement years — for instance, if a boiler breaks — but because they must be repaid within a set period of time, they’re a less attractive option for people who intend to stay in their homes for an extended period of time.

“It’s a different beast,” Sass said of the HELOC. “To really access your home equity, the two primary ways are to downsides or to take out a reverse mortgage.”

 

CBS MoneyWatch Calls Reverse Mortgages “Smart” for Seniors

March 30th, 2017

Citing the growing cabal of pro-reverse mortgage academics and the story of one Mississippi homeowner, CBS News’ MoneyWatch called Home Equity Conversion Mortgages “a smart way for seniors to tap home equity” in an article published yesterday.

MoneyWatch writer Kathy Kristof tells the story of Richard Blackmon, a 70-year-old Magnolia State retiree who initially thought that a reverse mortgagee was a scam after seeing an advertisement for the product. But faced with growing debts and unwilling to leave the “three-acre compound” where he lives, he learned more about the program and took the leap.

“Honestly, about this time last year, I was contemplating having to file for bankruptcy,” Blackmon told CBS. “I can’t rave enough about this program.”

Kristof’s piece nods to the HECM’s shadier past, but emphasizes that the reverse mortgage’s bad reputation stemmed from “some unscrupulous advisors” acting before the Great Recession. She also cites some familiar academic faces in the HECM world, Wade Pfau and Steven Sass, as well as American Advisors Group executive vice president of retail sales Paul Fiore, who told CBS about his father’s experience with a reverse mortgage loan.

Like many other popular sources, Kristof explains the growing use of reverse mortgages as pillars of a larger retirement plan, a fail-safe in case other investments experience a downturn at an inopportune time. But unlike mainstream news outlets, she frames reverse mortgages as a low-cost option in certain circumstances.

“The fees depend on your home’s value and the amount of equity you need to tap,” she writes. “However, they can be as little as 0.5 percent of the home’s value. Thus a reverse loan on a $250,000 home might cost $1,250.”

She touts the growing line of credit option, terming it a “smart” option and encouraging readers with considerable amounts of home equity to take out the loans as early as possible.

“So those who use the loans as a line of credit, borrowing sparingly — or not at all — in the early years pay virtually nothing,” Kristof writes. “Meanwhile, the amount available to borrow rises each year according to a formula. So the longer you have a reverse mortgage outstanding and unused, the more equity you’ll be able to tap.”

Naturally, Kristof counsels that the loans are not for everyone, specifically calling out borrowers under 62 — who, of course, can’t take out a government-backed HECM loan — as well as “rich” people who have no need to tap into home equity and people who intend to leave their homes within the coming few years.

Still, Kristof’s piece provides a simple, straightforward explanation of the HECM and its potential benefits from a trusted news source, along with a human success story to put a face on its positive uses.

“This was a win-win situation for me,” Blackmon told CBS. “I only wish I’d known about these loans sooner.”

Gofinancial gives you the opportunity to learn about the HECMs now. And, there’s a chat line to ask questions. See “HOME” in navigation bar to investigate.

6.75+ Trillion dollars in DEAD Equity; HECM is safe for seniors

Create INCOME = somethin’ out of nothin’

40 Million Seniors, age 62+, with over “6.75 Trillion dollars in DEAD Equity” qualify for HUD’s FHA Insured & Regulated HECM program today. Yet, only 2% understand the benefit for them and how it works because of the misconceptions created by the early days of the Reverse Mortgage test, pilot, draft or beta program.

Yesteryear is over. For over 25 years now, the Government has regulated the HECM to make them safe for seniors. By year 2020, over 50 million seniors will qualify. Our mission is to have the opportunity to educate them about the HECM with an open mind. There are No two scenarios alike.

You owe it to yourself and family to explore every possible HECM option available to discover a possible “Fit and Timing” regarding your retirement which provides Peace of Mind to offset inflation.

With a HECM, the Portion of the Credit Line that is not used actually Grows at nearly 7% today, can Never be “Frozen” by a lender and there is No Monthly Payment Required. Make Deposits or Take Withdrawls on the Fly with No Tax or Penalties. You CANNOT do that with a HELOC.

You can decide with No Pressure or Obligation. No Senior should have a house payment on a fixed income today. Why make payments if you don’t have to? With the HECM, you can ELIMINATE monthly house payments and you retain full home ownership rights. No lender is added to title. FHA does not want your house, they already have enough empty houses.

Your only obligation is what you already do now, live there 6 months or more out of the year, maintain home, pay your property taxes & hazard insurance.

See “information” tab for details.

25 plus ways to use a HECM; Use home equity bank to purchase solar panels; save up to 85%

Keeping tabs on HECM

Explore Your Reverse Mortgage Options

By Jack Gutentag, the “Mortgage Professor”.

February 3, 2017

Sheila P. took out a HECM reverse mortgage in 2010 when she desperately needed additional income, even though her home in Nevada had fallen sharply in value during the previous 4 years. Home prices in Nevada rebounded sharply, however, and in 2016, her home had almost doubled in value. Sheila responded by refinancing her HECM, which increased her monthly payment substantially.

Most HECM borrowers are aware of the refinance option because they had the same option on their standard mortgage. HECM borrowers have other options, however, which are unique to HECMs and may not be known or fully understood. If they took a monthly payment, as Sheila did and find later that their needs would be better served by a larger or smaller payment for a different period, or by a credit line on which they could draw as needed, they can modify the transaction without charge. If they had originally taken a credit line and decide later that they prefer a steady monthly payment, they can make that switch as well.

Mortgage Management Is a Challenge on Reverse Mortgages

For a consumer, getting a mortgage poses one set of challenges, managing the mortgage after they get it poses a completely different set. The firms that service mortgages work for the lender and their major objective is to make sure that borrowers meet their payment and other obligations to the lender. Issues important mainly to the borrower usually are left for the borrower to work out.

On standard mortgages, such managerial challenges are not that difficult. In dealing with the challenge of paying down the loan balance early, for example, borrowers have access to a variety of internet-based tools. On my site alone, there are 6 calculators and 4 spreadsheets directed toward this problem.

On HECM reverse mortgages, on the other hand, it is a very different story. Except for borrowers who have drawn the maximum cash permitted on a fixed-rate HECM, the managerial challenges are greater. This is because the reverse mortgage has no terminal date — it can go on as long as the borrower lives in the house – and the borrower always has an option to change the deal in ways indicated above.

The Servicer’s Role Is Limited

I recently decided to see how the firms that service HECM reverse mortgages keep their clients informed. I did not get to look at all the servicing statements out there, but those I saw were very similar and I am sure they are typical. They do a good job of informing borrowers about the status of their HECMs at month end, including the loan balance, unused credit line, and interest rate, but they don’t project the transaction into the future. In particular, they provide no indication of how much home equity borrowers may leave in their estates. In addition, they do not indicate the borrower’s options to change the monthly payment or the unused credit line, or whether a refinance might offer better options.

A New Tool

So my colleague Allan Redstone and I decided to fill this gap with a spreadsheet. To my knowledge, it is the only tool of its type out there. It  is on my web site for anyone to use at Spreadsheets.

The spreadsheet has three components. The first can be viewed as an extension of the servicing statement, projecting the loan balance, unused credit line and homeowner equity into the future. The user can also play “what if”, changing the future interest rate and property appreciation rate that are used in the calculations.

The second component shows the borrower’s options to modify the transaction, by changing the payment or the payment term, drawing cash or repaying previous draws, or a combination. As with component one, the spreadsheet shows the implications of such program modifications for future values of the loan balance, unused credit line and homeowner equity.

The third component of the spreadsheet deals with the question of whether the program modifications the borrower entered in the second component could be obtained more advantageously by refinancing into a new Kosher HECM. The borrower is a little older, which helps, and it is possible that the property appreciation rate during those years has exceeded the 4% rate that is used by the HECM program in calculating draw amounts; that would also work in favor of a refinance. Increases in interest rates, on the other hand, would work against a refinance.

The spreadsheet uses two live interest rates posted by the lenders who deliver rate data to my web site. One is the lowest rate ignoring the origination fee, the second is the rate corresponding to the lowest origination fee. This provides two independent measures of whether or not refinancing would be in the borrower’s interest.

The spreadsheet is a management tool for those who already have a HECM, which is not a large group – about a million. The spreadsheet, however, also aims at the potential market, which is enormous. Knowing that it will be easy to keep tabs on future options may encourage seniors who are on the fence to take the reverse mortgage plunge.