Monthly Archives: July 2017

With Similar Retirement Stresses, U.K. Poised for Reverse Mortgage ‘Boom’

July 25th, 2017

Retirement-planning shortfalls, trillions in built-up home equity, and fears over rising long-term health costs are stoking rumors of a reverse mortgage renaissance — only this time, it’s happening across the pond. Circumstances are conspiring to make “equity release mortgages” increasingly attractive to borrowers in the United Kingdom, according to a recent story from the Financial Times.

Though the Home Equity Conversion Mortgage market in the United States remains a small part of the overall domestic lending landscape, it still dwarfs its British counterpart, which the Financial Times pegs at five times smaller than the American marketplace. Still, major players such as Santander have made moves to enter the market, the publication notes, and they could soon expand the overall equity release picture.

Equity boom, pension bust

Writer Patrick Jenkins lays out an eerily familiar scene, noting that U.K. homeowners aged 65 and older control £1.7 trillion in home equity, or about £340,000 per homeowner; for reference, based on Tuesday’s exchange rate, that’s about $2.2 trillion, or $443,000 per house. American homeowners aged 62 or older, meanwhile, have anywhere from $3.6 trillion to $6.3 trillion in available home equity, depending on who you ask.

And though the pension system is notably different in the U.K., British seniors face a similar dilemma as their American counterparts: The World Economic Forum declared Britain’s “pension gap,” or the gulf between what retirees actually have and what they need to maintain 70% of their pre-retirement income, to be one of the worst in the world, totaling £25 trillion, Jenkins writes.

“The government has duly responded. This month, it announced the retirement age would rise to 68 for anyone born after 1970,” Jenkins points out. “A large gap will remain, though — fertile ground for insurers to sell equity release mortgages.”

Jenkins also explains renewed concerns over health care costs for older Britons, another common worry for American seniors. The ruling Conservative Party, which suffered unexpected losses in the nation’s recent snap election, had campaigned on a policy that would require seniors to tap into their personal assets above  £100,000 to cover long-term health care expenses, a figure that would include the value of any owned property.

“Although the party rowed back on the no-cap idea, experts believe individuals will have to take more responsibility for funding their own old age care in the future,” Jenkins writes.

Key differences

Of course, the British products differ greatly from domestic Home Equity Conversion Mortgages. “Typical” equity release mortgages in the U.K. allow borrowers to tap into 25% of their home values, either upfront or in an “income drawdown format.”

Echoing similar problems with the U.S. program, Jenkins notes that the British equity release mortgage industry had grappled with issues in its early days, but has since improved.

 

See the full look into the U.K.’s equity release marketplace at the Financial Times.

See “Information” tab on the home page for access to origination consultant, Warren Strycker, who can explain the program in the United States.

 

Without Fixes, Social Security Benefits Would Drop to 1950s Lows

July 19th, 2017

It’s a refrain that Americans approaching their retirement years have heard for years now: Social Security is poised to run out of reserve cash in 2034, which could potentially trigger a sharp decline in benefits. But a recent research brief implies that a solution could be simpler than many in industry observers imagine — assuming Congress can somehow agree on a compromise.

Writing for the Center for Retirement Research at Boston College, director Alicia H. Munnell summarizes the most recent 2017 Trustees Report, which presents the state of the Old-Age, Survivors, and Disability Insurance (OASDI) trust fund.

“The bottom line remains the same,” Munnell writes, noting that the exhaustion year of 2034 has not changed for several years. “Social Security faces a manageable financing shortfall over the next 75 years, which should be addressed soon to share the burden more equitably across cohorts, restore confidence in the nation’s major retirement program, and give people time to adjust to needed changes.”

Munnell, a Boston College management professor who has advocated for the use of reverse mortgages as a part of some Americans’ overall retirement strategies, makes the somewhat surprising assertion that fixing the problem is easy — and that the “problem” itself wouldn’t be as devastating as it seems at face value.

“The exhaustion of the trust fund does not mean that Social Security is ‘bankrupt,’” Munnell writes. “Payroll tax revenues keep rolling in and can cover about 75 percent of currently legislated benefits over the remainder of the projection period,” which stretches all the way to 2091.

Still, that would mean that recipients’ Social Security income would decline to levels not seen since the Eisenhower administration: Instead of covering 36% of a 65-year-old worker’s pre-retirement earnings, Munnell writes, that number would drop to 27%, its lowest point since the 1950s.

For the tax wonks out there, Munnell then dives into detailed plans to fix the coming crisis, including a Republican-sponsored proposal to cut benefits, and a Democratic-led effort to raise payroll taxes. She concludes that they “bracket the range of options,” presenting two extremes with the answer likely falling somewhere in the middle.

“These are useful bookends, highlighting that policymakers need guidance about how Americans want the burden of fixing Social Security allocated between benefit cuts and tax increases,” Munnell writes. “Finding a mechanism to communicate those preferences to Congress is the big challenge.”

She ends on an optimistic — perhaps overly so, given the current political climate — note.

“Once the preferred allocation is determined, filing in the specifics is relatively easy,” Munnell writes.

Read her full brief here.

Editor’s note: Beware of this logic. Congress would have to agree on something, but it’s pretty clear they are pledged not to.

 

 

Related

Obama’s Budget Plan: Not Looking Any Better for RetireesFebruary 26, 2012In “News”

Average Retirement Age Ticks Up, But Not MuchMarch 4, 2015In “News”

Senators Aiming to Solve Retirement Crisis Hear About Reverse MortgagesMarch 15, 2015In “News”

 

U.S. home prices were 6.6% higher in May 2017

July 5th, 2017

U.S. home prices were 6.6% higher in May 2017 than the same point in 2016, pulling home equity up along with it.

“For current homeowners, the strong run-up in prices has boosted home equity and, in some cases, spending,” said Frank Martell, the president and CEO of real-estate research firm CoreLogic, in its latest report on nationwide home price trends.

The list of states that saw the biggest gains in CoreLogic’s Home Price Index — a proprietary metric that takes into account various single-family home price factors — should be familiar to RMD readers who follow equity trends: Washington State home prices jumped 12.6% year-over-year, followed by Utah with 10.4% and Colorado at 9.7%.

Those states have frequently topped recent lists of states with the greatest home equity gains, and have also generated significant Home Equity Conversion Mortgage growth: As RMD reported yesterday, reverse mortgage endorsements in Colorado between January and April 2017 are running 69% higher than at the same point in 2016, while Washington and Oregon saw jumps of more than 30% each during that span.

Denver also claimed the top spot among metropolitan areas, with 9.2% year-over-year home price growth. Las Vegas, San Diego, Los Angeles, and Boston rounded out the top five.

“The market remained robust with home sales and prices continuing to increase steadily in May,” CoreLogic chief economist Frank Nothaft said in the report. “While the market is consistently generating home-price growth, sales activity is being hindered by a lack of inventory across many markets.”

Though these trends generally spell good news for homeowners and those potentially looking into tapping home equity in retirement, the same forces work against renters and first-time homebuyers, CoreLogic noted: Rents for affordable housing units are rising significantly faster than inflation, and new buyers are facing higher-than-expected sticker prices.

Read CoreLogic’s full report here.

 

What’s not to like? — HECM line of credit “may be a far better choice”

July 12th, 2017

Pitching the benefits of a reverse mortgage over a home equity line of credit has emerged as a major marketing strategy for Home Equity Conversion Mortgage professionals, and now a prominent retirement blogger has added his voice — and some helpful charts — to the mix.

On his Tools for Retirement Planning blog, Tom Davison explores why a HECM line of credit “may be a far better choice for many retirees” than the traditional “forward” line, starting with some familiar facts: the amount of cash available grows over time, regular payments aren’t required, and the lender can’t freeze or cancel the line unless the borrower fails to meet the basic obligations.

While Davison writes that he regularly discussed HELOCs with his clients during his time as a financial advisor — and even maintained one himself as a standby hedge against emergencies — he firmly comes down on the side of the so-called “ReLOC,” which in his telling can stand for either a “reverse” or “retirement” line of credit.

He uses the example of a 63-year-old homeowner who decides to tap into $200,000 of home equity on a $400,000 home. With a “forward” home equity loan, that $200,000 of availability remains steady for the life of the loan, which eventually comes due at the end of a 10-year draw period. Starting at age 73, Davison writes, the borrower must pay $1,212 per month, for a total of $14,544 per year, at an interest rate of 4%.

“With those payments, it would take until the homeowner is 93 years old to pay it off,” Davison notes. “The HELOC repayment works the same way as a traditional mortgage: no draws and can’t skip payments. The HELOC’s flexibility ends when the loan switches from the draw to the repayment period.”

Had the same homeowner selected a HECM line of credit instead, she’d be able to access up to $120,000 during the first year and then the remaining $80,000 starting in the second year of the loan period. But if the borrower does nothing, the major potential advantage begins to appear.

“By the time our homeowner turns 80, if they had not tapped their $200,000 ReLOC, they could withdraw $400,000,” Davison writes. “Or nearly $600,000 at age 90, and $800,000 at age 97.”

He goes on to point out that this growth could end up outpacing a retiree’s investment portfolio depending on the circumstances, and that unlike with a HELOC, repayment isn’t required unless the borrower leaves the house or passes away.

“The homeowner may find making payments very beneficial,” Davison writes, echoing a new “flexible payment” pitch adopted by some reverse mortgage professionals. “A payment both reduces the loan balance and increases the amount that grows and can be borrowed again. More flexibility stems from the fact that the maximum amount owed on the loan is limited to what the house is worth when the homeowners leave it.”

To read Davison’s full post, as well as to check out some visuals illustrating the differences between the two types of loan products, visit Tools for Retirement Planning.

See information on this product in navigation bar in the home page. I urge you to investigate, Warren Strycker, 928 345-1200.

Strategic Uses of Reverse Mortgages for Affluent

Affluent clients of financial planners can use their housing wealth a variety of ways to enhance retirement, including boosting sustainable portfolio withdrawals and delaying social security claiming. As strategic users affluent clients are quite different from many traditional users – often desperate homeowners who grabbed any remaining home equity after exhausting all their other resources. Focusing on affluent clients, this post summarizes key features of reverse mortgages and uses to increase retirement spending and reduce risks in retirement. A growing body of research on reverse mortgages in financial planning goes into depth on many of these topics.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 among the interests of clients, lenders and Federal Housing Administration’s insurance backing. The refined design is a Home Equity Conversion Mortgage (HECM). The Federal Housing Administration (FHA) administers it following rules laid down by the United States Department of Housing and Urban Development (HUD).

FHA HECM Reverse Mortgages and Affluent Clients

The new view of a FHA HECM reverse mortgage for wealth management firms is that the “Highest and Best” use of HECM reverse mortgages is to improve a client’s retirement plan – not rescue it. It is a view I’ve come to share after diving into FHA HECMs and their applications. There are a variety of ways to use them strategically to good advantage, and hopefully very rarely as a client’s last resort. My perspective comes from working with wealth management clients going into retirement with investment portfolios in the $500,000 to $4,000,000 range. Many of these clients could benefit from FHA HECMs.

Most common strategic uses:

  • Improving retirement plans: A client has a workable or nearly workable retirement plan, but desires an improvement. Increased retirement spending is an example of improved plan, as is planning to age in place at home.
  • Increasing contingency: A client has a workable retirement plan but little contingency for the unexpected and undesirable: prolonged poor markets, health-related costs, or the need for home modifications or in-home assistance.

Less common uses for wealth management clients, but valuable if the need arose:

  • Rescuing retirement income: A client’s retirement plan needs a rescue. Something they didn’t plan for happened – perhaps a spouse planned to work longer but couldn’t, or a spouse took a single life pension payout and now wishes they had elected 100% Joint and Survivor payout.
  • Absolute last resort: Clients are in dire circumstances and have no other assets or income left.

FHA HECMs Provide Guaranteed Access to Cash

Fundamentally FHA HECMs provide guaranteed access to cash made available as a loan against their housing wealth. There are three ways to access cash:

  • Line of Credit (LOC)
  • Lump Sum
  • Fixed Monthly Payments

Or they can buy a new home using a HECM to pay for around half of up to a $625,500 home, or a smaller part of an even more expensive home.

Guaranteed Access to a Growing Line of Credit

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. The borrowing limit can’t be reduced or cancelled as long as the homeowner is in their home and meeting basic obligations of paying real estate tax, keeping homeowner’s insurance in force and doing basic maintenance.  That’s different is several ways from a traditional Home Equity Line of Credit (HELOC).

The graph shows a $300,000 home and the borrowing limit of a HECM Line of Credit over 30 years. The vertical bars show the home’s value growing at 3%. The loan’s compounding growth rate applies equally to the overall borrowing limit, the current amount borrowed, and the amount yet to be borrowed.  The compounding rate resets set monthly. It is the sum of the current short-term interest rate (1-month LIBOR) and a fixed component of around 4%.  Details on the compounding rate are at the end of this post.  The compounding rate is shown in the graph at short-term interest rates of near zero, 2.5% and 5%, so the compounding rates shown are 4%, 6.5%, and 9%. The graph’s acceleration as the years go by is due to the compounding effect.

The obvious result is more cash is available later – and in an amount that’s likely to grow substantially more than inflation. It may grow faster than most fixed income investments – especially those with guarantees like the FHA backing. Adding usefulness is tax treatment – any amount borrowed from the LOC is tax-free as it is loan proceeds. On a repayment an income tax deduction may be available. The tax treatment makes the LOC particularly useful for people in the 25% and higher state and Federal tax brackets.

An interesting challenge for the financial advisor and their homeowner clients is to choose what the “highest and best” use (or uses) is for their LOC. One use is to increase spending from investment portfolios. The “Highest and Best Use” section below suggests other uses. (Fungible is a delightful word that doesn’t get used often, as in “cash from a HECM LOC is fungible”: cash can easily be used for one purpose or another.)

loc growth

HECM Line of Credit growth with short-term interest rates near zero, low, and moderate

Access Cash with Monthly Payments or Lump Sum

Other ways homeowners can access cash are by a lump sum distribution or monthly income. Monthly income is a payment guaranteed to last long as the owner occupies their home, or for a period the client chooses.

At any time the homeowner can change the way they access cash. For example they could stop a planned monthly payment and get a lump sum. And they can combine access methods: a lump sum for immediate needs combined with a line of credit for later use. They can choose when, if at all, they pay down the loan balance before they leave the home. The loan becomes due when they leave their home.

Purchase a New Home

A HECM may be used to buy a new primary home. For a home valued up to $625,500, around half the purchase price can come from the HECM. (For a higher priced home, only $625,500 is considered for the HECM). The balance of the purchase price would come from other resources, including proceeds from selling a current home.

Key Facts about FHA HECM Home Equity Conversion Mortgages

  • Homeowners or their heirs have title to the home, not the lender.
  • A HECM is a non-recourse loan. The homeowners or heirs can never owe more than the home is worth. When the homeowners leave the home, if the home’s value were less than the loan’s balance, FHA mortgage insurance steps in. That’s the purpose of the FHA mortgage insurance pool, paid for by a borrower’s upfront fee and part of the monthly charge to the outstanding loan balance.
  • All owners must be at least 62 years of age.
  • HECM applies to the primary home. A minimum of 50% equity is needed.
  • The homeowner has three obligations:  pay real estate tax, keep homeowner’s insurance in place, and do basic maintenance.
  • No interest or principal payments are required, but may be made. The loan becomes due when the home is sold, the borrower changes residence, the last borrower dies or the last borrower is in a continuing care facility for 12 consecutive months with no prospect of returning home.

How Do Reverse Mortgages and Portfolios Work Together to Increase Retirement Spending?

The catalyst for attention to HECMs by the financial planning community was work by Salter, Pfeiffer and Evensky (2012, 2013) after the 2008 market downturn. They combined a HECM LOC with portfolio withdrawals in a strategy they call Standby Reverse Mortgages. In a severe market downturn, clients lived on a HECM LOC instead of withdrawing from their investment portfolio. After the market recovery repaid the HECM so it would be available if another severe downturn happened, or if the portfolio were exhausted. Client’s sustainable withdrawals improved dramatically. Using a HECM LOC as small as 8% of the portfolio ($40,000 LOC and $500,000 portfolio) noticeably increased spending. When the line of credit was larger compared to the portfolio ($200,000 LOC and $500,000 portfolio) sustainable spending increased over 200%!

Sacks and Sacks (2012) and Wagner (2013) tested six other ways to augment portfolios with reverse mortgages, such as living on the reverse mortgage first until it ran out, using it last if the portfolio ran out, using it after weak portfolio gains, or doing fixed monthly payments throughout retirement. All ways they tested improved retirement spending. Two other teams (Sacks and Sacks, and Wagner) investigated many ways of augmenting portfolio withdrawals with reverse mortgage withdrawals. In every case the client’s sustainable spending levels increased substantially!

The reasons FHA HECMs improve retirement spending include:

  • HECM line of credit provides access to a line of credit that is guaranteed to grow
  • A HECM draw is tax-free. A reverse mortgage dollar is “bigger” than a portfolio dollar by its tax burden
  • More assets are available for retirement spending when housing wealth is included
  • Sequence risk in early years is controlled when reverse mortgage funds are available early

The biggest improvements to retirement spending come when the HECM:

  • Is a larger part of cashflow: more precisely the larger it is compared to the portfolio
  • Is used for clients with high tax rates, and higher portfolio tax burdens (e.g., IRAs)
  • Is available earlier instead of later in retirement. Ideally if used early, is repaid to grow for use later.
  • When portfolio returns are lower during the client’s retirement
  • When short-term interest rates are higher, increasing borrowing limit

 Total Net Worth (Estate Value)

For some clients an important consideration may be the impact on their total net worth and not just their spending levels. The traditional desperate user tapped their home equity as their only remaining asset, so naturally depleted their estate. Affluent clients may have the opposite result, depending on how they use their housing wealth. For example, Wagner’s results 15 years into the plan showed estate sizes (portfolio + housing wealth – loan balance) were often 10 to 30% higher depending on which of five reverse mortgage scenarios were used. 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.

 What is A Client’s Highest and Best Use of a FHA HECM?

As cash is flexible, HECMs can be used across a wide spectrum of client wealth and circumstances.

The four categories of HECM applications described above were:

  • Improved Retirement Plan
  • Improved Retirement Contingency
  • Retirement Rescue
  • Last Resort

Examples of specific uses a homeowner may have for a HECM:

highest-and-best-use

Consider this information carefully — then talk to me — Warren Strycker 928 345-1200 — see more under “information” tab on home page.

HUD Secretary Ben Carson Praises Reverse Mortgage Program

Secretary Ben Carson affirmed his commitment to the reverse mortgage program in a Monday speech to a major advocacy group for older Americans, lauding recent program improvements and emphasizing his desire to help homeowners age in place.

“This is a top priority for my department: To give seniors more opportunities, more alternatives, more choices, and, if desired, to help more people age in place,” the Department of Housing and Urban Development secretary said in remarks at LeadingAge Florida’s annual convention in ChampionsGate, Fla.

Carson called financial health one of “three essential initiatives for our nation’s seniors,” and dedicated a large portion of that discussion to the Federal Housing Administration-backed reverse mortgage program.

“As reverse mortgages have become more popular, we have learned more about the needs of seniors,” Carson continued.

He then went on to give a detailed history of the Home Equity Conversion Mortgage program, acknowledging previous issues with the product such as imprudent draw amounts and the lack of non-borrowing spouse protections.

“These problems have lingered and need to be addressed,” Carson said, according to his prepared remarks. “Adjustments needed to be made.”

Carson ran down the recent regulations designed to help make the products safer — including amendments to the non-borrowing spouse rules, Financial Assessment, draw limits, and mandatory housing counseling programs — and promised guidance for lenders and servicers on the recently-issued HECM Final Rule over the coming months.

The remarks represent a rare deep dive into the HECM program before a wide audience by a sitting HUD secretary, and a signal that Carson’s previous commentary on self-reliance translates into a firm commitment to the reverse mortgage program.

“The Founding Fathers wanted you and me to determine our needs and our spending, not some far-off monarchy in Europe or some self-interest in Washington,” Carson said. “And our freedom is a continuous struggle. Every day we fight for freedom, looking for ways to have more choices, to make up our own minds, and to use our resources for our needs, in our own way.”

The secretary’s comments also included praise for housing counseling programs, which HUD recently supported with $50 million in grants.

“Housing counseling helps people buy a home and helps many people stay in their homes,” Carson said. “They will be able to age in place. There will be more financial freedom, more responsible practices, and greater security for seniors.”

Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association, praised the secretary’s comments in a statement released Monday.

“We appreciate Secretary Carson’s articulation of all the important changes to the HECM program and HUD’s efforts to implement them,” Bell said. “NRMLA and our members stand ready to assist the Department in continuing to enhance the utility and viability of the HECM program, which has served over one million senior households since President Reagan signed the program into law.”

And just like many average Americans who have learned about the products through television spots, Carson couldn’t resist the opportunity to shout out the HECM’s most famous supporter.

“Under certain conditions senior homeowners age 62 and over could access a portion of their equity in their homes,” Carson said in explaining the program to his audience. “You’ve seen the TV commercials with Tom Selleck.”

 

 

These are perilous times — are they not?

by Warren Strycker, Gofinancial publisher

  1. Social Security creates doubt, now being referred to as an entitlement???
  2. Congress in disarray — can’t agree on anything? Can’t keep control.
  3. People coming into retirement are short on funds.
  4. Seniors are living longer than ever.
  5. Cost of medical services is rising day by day.
  6. Congressional leaders are looking at “Medicare for All”. Will you be in the “all”?
  7. HUD supports HECM to keep seniors “in place”.
  8. HECM uses home equity to balance senior income and expense.
  9. More seniors in retirement with mortgages — payments getting harder to make.
  10. “Users” are swarming this website to get acquainted with HECM.

“Finish retirement with HECM” or “Resist” — the choice is yours. The discussion trends to HECM.

 

See home page navigation bar for support.

HECM — 53 years of U.S. history — get aboard!

See comments at the end — add some of your own.

HECM = Home Equity Converson Mortgage

The reverse mortgage is one of the most well-developed loan products in the mortgage industry. From its birth in 1961, the reverse mortgage has been through many developmental milestones to make it the safe financial tool it is today. According to The Reverse Review, the product has seen rapid growth, expansion of additional innovative loan products, improvement of practices, increased consumer awareness, and a redefining of the options available to seniors. Take a moment as we look back at the major turning points and milestones in the history of the reverse mortgage.

In 1961, the reverse mortgage is born. The very first reverse mortgage is written to Nellie Young in Portland, Maine by Nelson Haynes of Deering Savings & Loan. Haynes designs this very unique type of loan to help the widowed wife of his high school football coach to stay in her home after losing her husband.

At a congressional hearing in 1969, the concept of a reverse mortgage intrigues the Senate Committee on Aging. When a UCLA professor named Yung Ping Chen states his support for an “actuarial mortgage plan in the form of a housing annuity” that would allow homeowners to stay in their homes while enjoying their saved home equity, the chairman expresses great interest.

During the first congressional hearing concerning reverse mortgages in 1983, the Senate approves a proposal by Senator John Heinz to have reverse mortgages insured by the Federal Housing Administration (FHA). Heinz also suggests that the idea of home equity conversion should be further explored.

In 1984, American Homestead sets the foundation for government-insured reverse mortgages when it unveils the Century Plan, which is the first mortgage that keeps the loan in place until a borrower permanently leaves the residence.

In 1987, Congress passes an FHA insurance bill called the Home Equity Conversion Mortgage Demonstration, which is a reverse mortgage pilot program that insures reverse mortgages.

In 1988, HUD gains the authority to insure reverse mortgages through the FHA when President Ronald Reagan signs the reverse mortgage bill into law. The reverse mortgage government insured loan is established.

In 1989, the first FHA-insured Home Equity Conversion Mortgage (HECM) is issued to Marjorie Mason of Fairway, Kansas by the James B. Nutter Company of Kansas City, Missouri.

In 1990, the HECM program has its 1 year anniversary, with HUD reporting to Congress that the program is steadily growing.

In 1994, Congress begins requiring lenders to disclose to borrowers the total annual loan costs at the start of the application process. This allows borrowers the chance to compare lender prices and shop around.

In 1996, the reverse mortgage program is adjusted to allow for loans on residences that have up to four units as long as the borrower occupies one unit as their primary residence.

In 1997, HECM reverse mortgage lender participation is at its highest number at 195.

1998 marks the year that the HECM is officially permanent! The HUD Appropriations Act makes the program official while Congress allots funds for counseling, outreach, and consumer education. Safeguards (like full disclosure of fees) are implemented to protect borrowers from unnecessary charges.

In 2000, HUD announces an increase in origination fees to either 2% of the Maximum Claim Amount, or $2000. HUD hopes this change will encourage more lenders to participate in reverse mortgages because of the higher revenue.

In 2001, HUD and the American Association of Retired Persons (AARP) team up to begin testing and training approved counselors. They also begin the establishment of consistent HECM counseling policies and procedures.

In 2004, the FHA implements rules of HECM refinancing. HECM refinancing allows existing HECM borrowers the chance to refinance and pay only the upfront Mortgage Insurance Premium and the difference between the original appraised value and the new appraised value/FHA loan limit.

In 2005, the First HECM refinances are made.

In 2006, the national loan limit of $417,000 is established. Also that year, AARP conducts its first national survey of reverse mortgage borrowers which reveal that the primary motivation for getting a reverse mortgage for borrowers is to plan for emergencies and to improve the quality of life.

In 2008, the first baby boomers turn 62, which results in a surge of loans which exceed past records. The SAFE Act is also established that year, which requires states to implement consistent procedures when licensing and registering HECM loan originators. Also, the Housing Economic Recovery Act puts up a few safeguards for consumers such as a limit on origination fees, rules against cross-selling, and guidelines for counseling independence.

In 2009, The HECM for Purchase is introduced. For the first time in reverse mortgage history, borrowers are allowed to purchase a new home without paying monthly mortgage payments. That year, Congress also increases the HECM loan limit to $625,500; meanwhile borrower proceeds are reduced when the FHA lowers principal limits for HECM’s by 10%.

2010 proves to be a busy year for the reverse mortgage. HUD introduces a new reverse mortgage option called the HECM Saver. Characterized by lower upfront Mortgage Insurance Premiums and closing costs, the HECM Saver makes the reverse mortgage more affordable by allowing homeowners to borrow a smaller amount than the standard reverse mortgage.

Also that year, AARP conducts another national survey of reverse mortgage borrowers which reveals borrower’s motivation for getting RM to be has changed from “quality of life improvement” to “debt alleviation”.

In addition, the Federal Housing Administration makes two changes:
– They increase Mortgage Insurance Premium from 0.25% to 1.25% per year
– They lower the interest rate floor from 5.5% to 5%, which is the first time in Reverse Mortgage history.

In 2013, HUD releases new HECM policies that make the product safer, stronger, and less risky for the borrower. These changes include a policy that allows borrowers to tap into only a portion of their equity the first year. They can then tap into the rest of their equity after the first year.

In 2014, HUD began to finalize guidelines for Financial Assessment, which will begin to be implemented in 2015. Financial Assessment will require lenders to analyze potential borrowers’ income sources and credit history to determine whether or not borrowers must have a mandatory set-aside of funds from proceeds to cover necessary expenses such as property taxes and homeowners insurance. These steps are expected to yet again protect consumers and reduce the number of borrowers who might fall into default from failing to comply with loan terms like continuing to pay for taxes and insurance.

In 2017, the loan limit for HECM reverse mortgage loans increased from $625,500 to $636,150. This is the first time the HECM lending limit has been raised since President Barack Obama signed into law the American Recovery and Reinvestment Act in 2009. Announced by the FHA on December 1, 2016, it went into effect on January 1, 2017 and will continue through December 31, 2017. The increase is 150% of the national conforming limit of $424,100 and is due to rising home prices.

In its 53 years from its birth in 1961 to present day, the reverse mortgage has developed significantly, and there’s no end in sight. December 2016 saw the Federal Reserve raise interest rates for the first time since 2009, indicative of a strong economy. While higher rates can decrease the amount available from a reverse mortgage, home values have continued to climb leading to increased home equity for many homeowners. The reverse mortgage has a bright future of continually improving and getting only better with time.

Retirement is Risky Business – Here’s a List

 

Monday, July 3, 2017

Retirement is Risky Business – Here’s a List

After we develop a set of major personal retirement goals for our mission statement as I described in A Mission Statement for Retirement and then review them with an advisor to identify any glaring omissions, there are a large number of financial risks that every plan should contemplate. Many of these won’t come to mind when we consider a list of major retirement goals for our mission statement, but one major goal of the mission could be to mitigate as many applicable common retirement risks as we can identify.

A list of common financial risks in retirement can provide a good starting point, though this list is not exhaustive.

Let’s start with a list of retirement risks the American College developed for the Retirement Income Certified Professional® (RICP®) certification because it is the most extensive I’ve found. A little too extensive for my taste, actually. I’m going to combine risks 3 and 11 because they’re both essentially sequence of returns risk. (See the table at the end of the post for definitions.)

I have also omitted Risk 17 from my list. Timing risk is the risk that you will choose a time to retire just before the next few decades suffer economically. While that is clearly a risk everyone takes, it isn’t one over which we have any control making it relatively useless for planning purposes.

Eighteen Retirement Risks from RICP®
RISK 1: LONGEVITY RISK

RISK 2: INFLATION RISK

RISK 3: EXCESS WITHDRAWAL RISK

RISK 4: HEALTH EXPENSE RISK

RISK 5: LONG-TERM CARE RISK

RISK 6: FRAILTY RISK

RISK 7: FINANCIAL ELDER ABUSE RISK

RISK 8: MARKET RISK

RISK 9: INTEREST RATE RISK

RISK 10: LIQUIDITY RISK

RISK 11: SEQUENCE OF RETURNS RISK

RISK 12: FORCED RETIREMENT RISK

RISK 13: REEMPLOYMENT RISK

RISK 14: EMPLOYER INSOLVENCY RISK

RISK 15: LOSS OF SPOUSE RISK

RISK 16: UNEXPECTED FINANCIAL RESPONSIBILITY

RISK 17: TIMING RISK

RISK 18: PUBLIC POLICY RISK

Adam Cufr, an RICP, created a list of 27 risks that largely builds on the RICP list. Some of these seem redundant to me. Nonetheless, there are some that clearly should have been added to the RICP list in my opinion, including:

Asset allocation risk, though I could also argue this is market risk,

Legacy risk, and

High debt service risk, important because it is a major cause of elder bankruptcy.

I’ll split Legacy Risk into Legacy funding risk, the possibility that a retiree’s desired bequests will not be adequately funded because the household depleted its wealth and Estate Planning risk, the possibility that the retiree’s estate will not be distributed as he or she had intended.

 

For a third source, I like to include a list of cited reasons for elder bankruptcy from research by Deborah Thorne, Ph.D. (I wrote about this in Why Retirees Go Broke.) These include:

Credit Card Interest and Fees, or High debt service risk, as Cufr refers to it.

Illness and Injury, also called Health care expense risk,

Income Problems, such as losing a part-time job in retirement (Reemployment risk in the RICP list),

Aggressive Debt Collection, whereby retirees are unable to negotiate a settlement and feel bankruptcy is the best option. I’ll roll this under High Debt Service risk, and

Housing problems, such as the mortgage payments increased, the respondent wanted to refinance the mortgage to lower the payments but could not, or a lender threatened to foreclose.

 

Retirement is risky business – here’s a list.

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Housing problems is one category I believe is not already on the RICP list and should be, but I cite the Thorne study for two other reasons.

First, if a risk is one of the five major causes cited for bankruptcy then it should be given extra attention in a retirement plan.

Second, the main point of the Thorne study is that bankruptcy is most often the result of a series of interconnected financial problems that cascade into ruin. In other words, it is less likely that a household’s ruin will result from a single risk on this list than to multiple risks. These losses might occur simultaneously and be unrelated, but it is more likely that one will cause another, which may cause even more. Most survey respondents reported more than one cause for their bankruptcy. A few cited all five common reasons.

Source: Thorne, Generations of Struggle.

I’ll add Overspending risk to my list. Overspending risk is different than Excess withdrawal risk, which refers to withdrawing from a savings portfolio faster than the portfolio can recover with market gains. A household can overspend its way into crisis without even owning an investment portfolio. It is also different than High Debt Service risk or Credit Card Interest risk in that overspending is a risk whether or not it is financed spending.

I’ll also add Interconnect-ed loss risk to my list to call attention to the possibility that individual risks are not necessarily independent of one another.

From a planning perspective, this means that we can’t simply consider the possibility that the household will succumb to each risk on the list, but we must consider the possibility of simultaneous losses or even multiple, simultaneous losses that begin with a single loss.

The simultaneous collapse of the housing market and the stock market in 2007-2009 provides a recent example. For some households, foreclosure and market losses might also have led to unemployment and income loss for workers in these fields. The struggling household, in turn, might have increased credit card debt as the last remaining financial option creating a row of dominoes that tumbled into ruin.

Every retirement plan should consider all of the applicable risks on this list and their potential correlations.

The following table is my consolidation and “pruning” of the three lists discussed above. Links to the lists I curated are provided in the reference section below. Some of the explanations were taken from the RICP list (my edits are underlined.)

You can download a Word document containing this list and edit it as you like. Use it as a starting point and add risks that I missed. Risks that are unique to your household might warrant inclusion in the mission statement.

 

Major Cause of Elder Bank-ruptcy Risk Explanation
1 Health Expense Risk For those who had employer health care coverage, retirement may mean paying more for medical insurance (Medicare Parts B and D and Medicare Supplement policies). Even with insurance, some expenses will be paid out of pocket. Also, chronic or acute illnesses may mean more significant and unexpected out-of-pocket expenses.
2 Income Loss Risk Many retirees plan on working in retirement. Income loss risk is the inability to supplement retirement income with employment due to tight job markets, poor health, and/or caregiving responsibilities.
3 High Debt Service Risk The risk of bankruptcy resulting from an inability to service debt, especially consumer debt. May result from spending beyond budget.
4 Housing Problem Risk Risks to housing including mortgage payments increase, inability to refinance the mortgage to lower the payments, unpayable increase in property taxes or a lender threatening to foreclose. Includes reverse mortgage risk.
5 Interconnected Loss Risk The risk that a loss due to one risk might cause losses due to other risks.
6 Longevity Risk No one can predict how long he will live. This complicates planning since a retiree has to secure an adequate stream of income for an unpredictable length of time.
7 Inflation Risk When working, inflation is often offset by an increased salary. In retirement, inflation reduces the purchasing power of income as goods and services increase in price, impeding the client’s ability to maintain the desired standard of living.
8 Excess Withdrawal Risk When taking withdrawals from a portfolio during retirement to fund income needs, there is a risk that the rate of withdrawals will deplete the portfolio before the end of retirement.
9 Long-Term Care Risk Chronic diseases, orthopedic problems, and Alzheimer’s can restrict a person from performing the activities of daily living, which will require financial resources for custodial and medical care. Includes Lack of Available Facilities or Caregivers risk, Change in Housing Needs risk and Uninsurable Medical Conditions risk.
10 Frailty Risk Frailty risk is the risk that as a result of deteriorating mental or physical health, a retiree may not be able to execute sound judgment in managing her financial affairs and/or may become unable to care for her home.
11 Financial Elder Abuse Risk The possibility that a family member or caretaker might steal assets.
12 Financial Advice Risk The possibility that an advisor might recommend unwise strategies or investments or embezzle assets.
13 Fraud Risk The risk of losing one’s assets as the result of fraud or identity theft.
14 Market Risk The risk of financial loss resulting from movements in market prices.
15 Interest Rate Risk Technically, this is the risk that arises for bond owners from fluctuating interest rates. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market.
16 Liquidity Risk The risk that the retiree’s assets cannot be converted to cash quickly and inexpensively enough to meet short-term expenses or debt.
17 Sequence Of Returns Risk Investment returns are variable and unpredictable. The order of returns has an impact on the how long a portfolio will last if the portfolio is in the distribution stage and if a fixed amount is being withdrawn from the portfolio. Negative returns in the first few years of retirement can significantly add to the possibility of portfolio ruin.
18 Forced Retirement Risk There is always the possibility that work will end prematurely because of poor health, disability, job loss, or to care for a spouse or family member. This event can quickly derail a retirement plan.
19 Employer Insolvency Risk Employer-provided retirement benefits are an important part of retirement security for many. If the employer has financial problems, employees may lose their jobs and in some cases their benefits.
20 Change of Marital Status Risk The loss, divorce or separation of/with a spouse is a major personal loss, but without planning can also result in a decline in economic security.
21 Unexpected Financial Responsibility Risk Many retirees have additional unanticipated expenses during the course of retirement, in many cases due to family relationships and obligations.
22 Overspending Risk The risk that a household will spend beyond its means and prematurely deplete savings or an investment portfolio.
23 Public Policy Risk An unanticipated change in government policy with regard to tax law and government programs such as Medicare and/or Social Security can have a negative impact on retirement security.
24 Legacy Funding Risk The risk that planned bequests are not funded.
25 Estate Planning Risk The risk that one’s estate will not be distributed as he or she had desired.
26 Asset Allocation Risk The risk that one’s asset allocation does not achieve expected results or is inadequately diversified.

 

REFERENCES

Retirement Risk Solutions, Dave Littell, RICP® Program Director, American College.

27 Retirement Risks: Which Is (Arguably) Most Damaging?, Adam Cufr, Fourth Dimension Financial Group, LLC.

The (Interconnected) Reasons Elder Americans File Consumer Bankruptcy, Deborah Thorne Ph.D.

Generations of Struggle. Deborah Thorne (Ohio University), Elizabeth Warren (Harvard Law School), Teresa A. Sullivan (University of Michigan).

Common Risks That Can Ruin Your Retirement, Ken Hawkins.

 

“We are consultants first”, Warren Strycker — see “information” in navigation tab. ADVICE: “Don’t start a mortgage you can’t finish”.