Is the Reverse Mortgage as simple as some claim? Or is it a highly complex financial tool, as the Consumer Financial Protection Bureau describes it?

While it may appear that these views are mutually exclusive, they are not. However, the underlying concern is one that congress, regulators, financial planners, lenders, and consumers all need to better understand.

THE REVERSE MORTGAGE CONCEPT

The reverse mortgage concept is simple and can be explained in a sentence or two. In its most basic sense, a reverse mortgage is any loan program that defers the repayment obligation until a later date.

More specifically, it offers a homeowner the ability to use a portion of his/her home’s equity, it creates a lien, and it delays repayment until the home is no longer the primary residence of the last borrower. That is pretty basic and easy to understand. This holds true for all reverse mortgages, including the Federally Insured Home Equity Conversion Mortgage (HECM), single-purpose reverse mortgages offered by local government entities, and proprietary reverse mortgages.

THE HECM PRODUCT

However, the “concept” of a reverse mortgage and the “product” itself are quite different.

The Consumer Financial Protection Bureau (CFPB), which is charged with a degree of oversight of the mortgage world, believes the reverse mortgage is complex. In 2012, the CFPB commented on the complexity of the HECM product in their 231-page Report to Congress stating,

“Reverse mortgages are inherently complicated products that are not easy for the average consumer to understand.”

Looking back, it’s hard to imagine this was said in 2012. At the time, training and education on the product was relatively easy. All that was needed was to simply educate mortgage originators and clients on the program guidelines, the non-recourse feature, principal limit factors, product options, payout options, and costs.

REGULATORY CHANGES

Only 15 months after the CFPB report was published, the program saw massive regulatory changes. These changes from 2013-2015 were intended to protect the HECM program, protect the consumer, and ensure the product was used as a sustainable solution for homeowners. Nevertheless, in a short period of time, the complexity of the reverse mortgage product doubled.

Does that mean the product is complicated? Not necessarily. The issue is not one of complexity, but rather a lack of familiarity. The HECM product is misunderstood simply because the terminology and concepts are somewhat unfamiliar.

As a result, industry training is quite different now, including the addition of the following concepts: initial disbursement limits, non-borrowing spouse, and financial assessment.

IS THE REVERSE WORLD MORE COMPLICATED THAN THE FORWARD?

I received what many believed was the best forward mortgage training available when I entered the industry. Completing it took me away from home for several weeks. Having a comprehensive understanding of the forward side DOES takes time. In fact, forward originators must now comply with TRID requirements which is not mandated for the reverse side… yet.

But, while various forward product options each have their own credit requirements and debt-to-income ratios, most consumers already understand the dominant product – the 30-year fixed conventional loan. By contrast, the dominant reverse product (The HECM) and the terminology that accompanies it are relatively unknown.

Once again, the primary issue for mortgage originators, financial service professionals, and consumers alike is becoming familiar with the HECM product.

Note: To be a licensed mortgage loan originator, the standardized testing (SAFE Exam) generally includes only one question on the topic of reverse mortgages.

DO NEW REVERSE MORTGAGE STRATEGIES INCREASE THE COMPLEXITY?

Yes. Wendy Peel, VP of Sales and Marketing at ReverseVision, notes that “much of the complexity lies within the varied strategic uses of the new reverse mortgage product.” Prior to 2013, reverse mortgage sales had little to do with financial planning and more to do with how much money the borrower could receive. In 2013, the program began limiting many borrowers to an initial disbursement of 60% for the first year. This, combined with an increased focus on sustainability, shifted the product back towards the financial planning uses for which it was originally intended.

Mathematically, research shows us the financial planning advantages are significant. Unfortunately, many loan originators, consumers, and most financial planners are still uncertain how to use reverse mortgages to open up retirement cash flow options and strategically manage portfolio draws in retirement.

IS IT WORTH EXPLORING?

Yes. Don’t let the unknown discourage you. The primary reason I wrote the book, Understanding Reverse, was to answer the most common questions, summarize the program guidelines, and document the regulatory sources. In fact, one of my greatest pleasures is receiving emails and letters from loan originators and consumers who thank me for clarification gleaned from the book.

The HECM product is the most under-utilized financial tool available to enhance the lives of older homeowners. We can easily solve the perceived complexity problem with proper education, not just offered to the loan originators, but also to financial service professionals, realtors, the media, and the clients themselves.

Yes, the concept is beautifully simple. Yet, the product appears complex because of a lack of familiarity with regulatory changes and appropriate financial planning uses. As we continue to develop new ways to explain this great program to a broader audience, I know we can build a better understanding of reverse mortgages.

I’d love more discussion on this topic. So, please let me know your thoughts? If you wish to attend my national broadcast on the Financial Assessment changes on October 3^rd, please register by clicking this link:

Financial Assessment Review and Updated Compensating Factors

Dan Hultquist is the Director of Learning and Development at ReverseVision and authored the top-selling book on this topic, Understanding Reverse – 2016.

With the regulatory overhaul over the last three years, and with more to come, the reverse mortgage program has gained positive attention in the national media and financial planning community. But, the basic concepts that every older homeowner should know have remained unchanged for the most of three decades. So, since other blog posts, including my own, discuss changes, this may be a good time to take a breather and review the core of the reverse mortgage program and what it offers.

The following is a summary of the top 10 most important concepts on my list:

1. What is a reverse mortgage?

The most common product, known as a Home Equity Conversion Mortgage (HECM), is a federally insured loan product that allows homeowners 62 years and older to access a portion of their equity now in cash or monthly payments, or later from an established line-of-credit.

2. What are the primary advantages?

Many clients like the freedom of having no required monthly principal or interest mortgage payments. However, they often miss the advantages gained by making periodic prepayments. Of course prepayments will reduce the loan balance. But when using the adjustable rate HECM, those payments will also boost the government-insured line of credit that is already growing.

3. Who use Reverse Mortgages?

Older homeowners seeking reverse mortgages are a mix of those with a need for cash, those who wish to enhance their retirement lifestyle, and those with financial planning motives. However, since 2008, the reverse mortgage has also had the ability to assist those that wish to purchase a home.

4. What are the borrower responsibilities?

It is the borrower’s responsibility to occupy and maintain the home. However, he/she is also required to pay the property charges including property taxes and homeowners insurance when due, unless the lender sets aside funds for those purposes.

5. What is the most common misconception?

Clearly, the greatest misunderstanding is that the “bank gets your home.” This is not true, and the homeowner retains title and ownership of the home over the life of the loan, and the heirs have multiple options upon the death of the last borrower.

6. What do the proceeds potentially impact?

Proceeds are NOT taxed as income. While the HECM may be used to enhance basic Social Security and Medicare, the proceeds don’t adversely affect those government benefits. However, Supplemental Security Income or Medicaid are means-tested programs that may be impacted if caution is not taken.

7. What is the “Principal Limit?”

The Principal Limit represents the maximum funds that can be offered at the time of closing. This amount is tied to the relevant ages, interest rates, and the home’s value, but may be restricted in some cases during the first year.

8. What is the non-recourse feature?

The homeowners and their estates will never owe more than the value of their homes. This is a great consumer protection for the homeowners as well as their heirs, as there is no personal liability for a deficiency created by falling home prices or a loan balance that exceeds the value of the home.

9. Why is counseling required?

HUD felt it was important for the homeowner to be counseled by someone other than the loan originator. Therefore, a reverse mortgage applicant will need to select a HUD-Approved counseling agency and obtain a counseling certificate.

10. What are the Financial Planning strategies?

Many are using the HECM to delay Social Security filing. Others will draw tax free distributions from their home equity, allowing them to manage their adjusted gross incomes. This may reduce their tax liability as well as Medicare premiums. Still others will draw retirement cash flow from home equity during down markets to preserve their traditional retirement funds.

For more information on the reverse mortgage product and its recent changes, please purchase Understanding Reverse – 2016. For updates on the newest round of changes, stay tuned by subscribing to this blog.

Dan

“Accessing a large sum of cash from home equity and placing it in a bank account might be a problem for certain benefits that are “means-tested.”

– Understanding Reverse

Will getting a reverse mortgage impact my government benefits and/or my income taxes? These are major concerns that come up frequently when speaking to homeowners, especially during the month of April. And, for disclosure purposes, my first response is always:

“Keep in mind, reverse mortgage professionals are not a tax planners or financial planners, and rules regarding these items are always subject to change.”

Nevertheless, I offer general guidelines in my book, and in presentations to consumers, regarding both government benefits and taxation.

WILL A REVERSE MORTGAGE ADVERSELY AFFECT MY GOVERNMENT BENEFITS?

Maybe. As stated above, accessing a large sum of cash might pose a problem for some “means-tested” benefits. A means-test is a way of determining whether someone has the “means” to do without the assistance. Therefore, it will all depend on the answers to these two questions:

1. Is the government benefit affected by means-testing?
2. Is the amount drawn in excess of the benefit’s limits?

SOCIAL SECURITY AND MEDICARE

Basic Social Security benefits are not currently means-tested, and only a portion of Medicare is adjusted based on a homeowner’s income (MAGI or Modified Adjusted Gross Income). Therefore, we can safely say that Social Security and Medicare are NOT adversely affected by Reverse Mortgage proceeds.

SUPPLEMENTAL SECURITY AND MEDICAID

However, Supplemental Security (SSI) and Medicaid have income and/or asset requirements. It will be important to know what amount, held in a bank account, could prevent one from receiving those forms of assistance. As a result, it may be best to leave all available reverse mortgage funds in a line-of-credit, and only access those funds for specific expenses (e.g. roof repair, stair lift, bathroom remodel, etc.). Furthermore, it is always a best practice for the homeowner to consult with a benefits administrator financial advisor to make sure they are not disqualifying themselves.

CAN A REVERSE MORTGAGE IMPROVE MY GOVERNMENT BENEFITS?

Yes it can! Draws from Home Equity are not taxed as income. Therefore, showing a lower Adjusted Gross Income can reduce premiums surcharges for that portion of Medicare that is means-tested on income.

In addition, even small draws from a reverse mortgage may eliminate the need to file for Social Security benefits too early. Delaying social Security may have significant advantages until age 70, and even a one year delay can improve a homeowner’s retirement cash flow.

WILL A REVERSE MORTGAGE ADVERSELY AFFECT MY TAXES?

This is another major concern that comes up frequently when speaking to homeowners.  Draws from home equity are not considered a taxable event (Federal or State Income Tax) and therefore do not adversely impact income tax liability.

However, if funds are drawn and placed into a bank account, they become an asset where interest may be earned. Any interest received from a new, or higher, bank account may be taxable moving forward.

On the flip side, when a homeowner draws part of their monthly cash needs from home equity instead of a taxable retirement income source, they may have the opportunity to reduce their marginal tax rate, which, in turn, can reduce their overall tax liability.

In addition, there may be cases where accrued interest, paid on a reverse mortgage loan balance, may be deductible just as with traditional, forward, mortgages. Keep in mind, reverse mortgages do not require monthly principal and interest payments. So, interest will generally accrue, but is not “paid”, and there can be no potential deductions unless a borrower actually makes prepayments.

Dan Hultquist

To learn more about how reverse mortgages, and how they can be used in financial planning, subscribe to this blog in the right-hand margin and get a copy of the top-selling book on the topic – Understanding Reverse.

Delayed gratification is the principle that resisting a SMALLER reward today may lead to a LARGER reward later. Yet how many people are really willing to wait for something better?

Consider the famous Stanford Marshmallow Experiments conducted in the early 1970s. Children were offered one marshmallow immediately, but two marshmallows if they waited only 15 minutes to consume it. According to Wikipedia, “In follow-up studies, the researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index (BMI), and other life measures.”

The children ONLY had to wait 15 minutes for their reward to double. How much harder is it for many homeowners to wait approximately 10 years for their available reverse mortgage funds to double? But, research shows it is indeed worth the wait.

Line of Credit Growth

The growth associated with the federally insured reverse mortgage is one of the hidden gems of the Home Equity Conversion Mortgage (HECM) program. For those homeowners who obtain a reverse mortgage as soon as they are eligible (62), and leave the funds in the line of credit (LOC), their delayed gratification comes in the form of guaranteed growth.

Reverse Mortgage LOC Growth

The LOC grows at current interest rates, which means many homeowners should want their interest rates to rise. It is also very secure, as the Federal government guarantees that those funds will be available to homeowners as long as they occupy their homes and abide by program guidelines. The LOC will never be frozen, reduced, or even eliminated if home values decline. In other words, you can trust the one who distributes the marshmallows.

Social Security Delays

Delaying Social Security has a similar benefit. Imagine an 8% increase in monthly benefit each year delayed until age 70. Yet, according to data from the Social Security Administration only 1.1% of men and 1.7% of women are willing or able to wait until age 70 to draw file for their benefits.

If reverse mortgages are so great, why is nationwide use of the program down?

Again, it is built for delayed gratification. The reverse mortgage is a great planning tool, but it is no longer designed for reckless massive cash draws upfront. For example, until September of 2009, homeowners could access a percentage of their homes value that was roughly equivalent to their age. A homeowner, age 62, would qualify for 62.5% of his/her home value, and a 95 year old would qualify for 90%. How can any homeowner resist that kind of immediate gratification? Reverse mortgage advertising was unnecessary because homeowners willingly drew large sums, knowing they could never owe more than the home’s value.

In 2013, however, the updated “New Reverse Mortgage” installed restrictions on how much can be drawn upfront. A homeowner may have an initial principal limit of $200,000, but unless he/she is paying off a large loan balance, that homeowner will likely have access to only $120,000 (60%) in the first year. The additional $80,000 (40%) is generally kept in the growing line of credit. These regulatory changes became a form of forced delayed gratification.

The reverse mortgage has been refined over the years, and is very attractive for many types of retirement planning needs. Nevertheless, it is now unattractive as a massive cash-out refinance tool, as the product was once used.

Several years of research has shown that mathematically, it does not make sense to wait to obtain a reverse mortgage. It does, however, make sense to get one as early as possible, and not draw from the available funds until later… if you can resist.

Those children who resisted the marshmallows in 1972 will be eligible for a Home Equity Conversion in approximately 13 years. If I were a betting man, I would wager that they will have significant home equity, are more likely to delay social security, and will enjoy watching their reverse mortgage line of credit grow every month.

If you want to learn more about the strategic use of home equity in retirement, please subscribe to my blog and purchase my book, Understanding Reverse.

Dan Hultquist

A HECM, or Home Equity Conversion Mortgage, is the technical term for the federally-insured reverse mortgage. Therefore a HECM to HECM refinance (also known as a H2H Refi), occurs when the borrower is paying off an existing HECM with a new HECM.

These reverse mortgages are a little different from traditional HECMs that pay off existing forward liens. In fact, the National Reverse Mortgage Lenders Association (NRMLA) just issued updated guidelines to prevent “loan flipping” or “churning”, a practice where a loan originator repeatedly refinances an existing HECM borrower with no bona fide advantage to the borrower.

Why would someone refinance their HECM anyway?

The HECMs with Adjustable Rate Mortgages (HECM ARMs) have a built-in disincentive to refinance – the borrower’s net principal limit (how much they can borrow) continues to grow over time. This means that homeowners who have not borrowed all of their available funds have a growing line-of-credit that often makes refinancing unnecessary.

However, there are many reasons why a current reverse mortgage client may want to refinance into a new one. Here are just a few:

• A homeowner who is recently married may want his/her new spouse added to title and be listed on the note. With a H2H Refi, the new spouse would have additional protection that the reverse mortgage offers.
• Property values may have increased, offering the homeowner additional funds.
• A H2H Refi may be needed if the homeowner wishes to change loan programs (Fixed Rate or ARM), or if they wish to reduce their interest rate.

One additional reason for a H2H Refi is that prior to 2008, many homes were capped by FHA county lending limits that reduced the amount of funds available for higher-priced homes.   In 2008, the Housing and Economic Recovery Act (HERA) established a higher national lending limit ($417,000), and then it raised again in 2009 ($625,500). For this reason, homeowners with higher-valued homes who obtained their HECMs more than 6 years ago, might find the program even more attractive today.

What is the IMIP Credit?

One nice advantage is that the borrower may get credit for the amount of Initial Mortgage Insurance Premium (IMIP) they paid on their last transaction. This happens regardless of how long it has been since their previous closing.

What are the updated guidelines?

The following are recent guidelines/restrictions that are designed to prevent “loan flipping” or “churning” of reverse mortgages:

1. The 18 Month SEASONING REQUIREMENT is easy… the new FHA case number shall be no sooner than 18 months from the date of the prior closing.

Even after 18 months, there must be a “bona fide advantage” to the consumer. This means that the refinance will need to originate from a written request to add a family member to the loan, OR the following 2 tests must be passed:

2. The CLOSING COST TEST is a little more complex. The increase in principal limit must be at least 5X the costs of the transaction.

For example, a loan with $5,000 in closing costs must produce an increase in principal limit of at least $25,000.

3. THE LOAN PROCEEDS TEST is the newest guideline. The available benefit amount from the refinance must be at least 5% of the borrower’s principal limit.

For example, a borrower with a $200,000 NEW Principal Limit must have at least $10,000 in funds generated by the refinance. These available funds, also known as “Net Principal Limit”, may be drawn at closing, held in a Line-of-Credit, or distributed over time in the form of monthly payments.

How do I proceed with a H2H Refi?

The borrower will need to obtain a “HECM Servicer Refi Worksheet.” This document from their current servicer will show their original Maximum Claim Amount (MCA), how much they paid in Initial Mortgage Insurance (IMIP), and the date of their last transaction. Keep in mind, prior to 2009 there were county lending limits in place. Therefore, their appraised value may have been much higher than their MCA.

For assistance with refinancing an existing HECM reach out to me, and I should be able help or find a qualified reverse mortgage professional that can assist you in your state.

Dan Hultquist

The book, Understanding Reverse, was designed to answer the top questions I received as a loan originator and educator. Now that I often find myself speaking to financial planners and realtors, however, I receive questions like:

• “How can home equity be used strategically to fund retirement?
• “How can a home be purchased with a reverse mortgage?

In addition, regulatory changes have altered the conversations. People want to know about non-borrowing spouses, financial assessment guidelines, and life expectancy set asides for property charges. But, the most common question I receive is still:

“Is the Reverse Mortgage REALLY a good deal?”

With a slight tilt of their heads, they skeptically ask this question. The question itself stems from confusion about how the product works and long-standing misconceptions. So, to clear up some of the confusion, I’ll mention the common misconceptions I have addressed in my other blogs and articles:

• No, the bank does not get your home when you get a reverse mortgage.
• No, the reverse mortgage is not just for the desperate and needy.
• No, you can’t owe more than the value of your home.
• No, it is not a government benefit. Funds you borrow become a mortgage lien.

BUT IS IT A GOOD DEAL?

That depends on how you use it. Is a gym membership a good deal? I don’t know. Nobody knows what the future holds. But generally speaking, if you use a gym membership properly, your strength and conditioning will improve. You then have to ask yourself how important this is to you.

One way to tell if a reverse mortgage is a good deal, is to ask those who know the product best if they would get one. It was for this purpose that I wrote the 2014 article titled, “I WANT a Reverse Mortgage When I Turn 62.”

YOU ARE NOT REQUIRED TO BORROW

What most people don’t understand about the prudent use of reverse mortgages is that the homeowners aren’t required to borrow all of their available funds. Unused funds are available in the form of a growing Line-of-Credit (LOC).

In fact, this compounding LOC is one of its greatest financial planning advantages! For this reason, we expect 62 year old homeowners to hold these loans for longer terms. The growing LOC may also be converted to monthly payments later in retirement, which can be used to pay for long-term care if needed.

For example, a financial planning client recently borrowed nothing at closing. The loan balance after closing the loan was the minimum, $100. In his case, the annual cost for this borrower is only $4.00 per year. Then why did he get the reverse mortgage? Because he now has a secure $250,000 LOC that is growing at current interest rates. The LOC will be there in the borrower’s later years, and will grow faster as rates go up.

YOU HAVE THE OPTION TO MAKE PAYMENTS

Many reverse mortgage borrowers “set-it, and forget it.” They assume that the primary benefit is that they no longer need to pay monthly principal and interest payments.

Yes. Monthly principal and interest payments are NOT required. However, this mindset is not always the best financial planning strategy. Making no payments may help from a cash flow standpoint, but the reverse mortgage has a built-in incentive to make periodic prepayments if possible. Here is what happens if you do make payments:

1. The loan balance will drop (just LIKE a forward mortgage).
2. The LOC will increase (UNLIKE a forward mortgage) with each payment.

For example, I recently advised a client who just turned 62 and is struggling to make his monthly forward mortgage that may be paid off in three years. Using conservative estimates for interest rate changes, I demonstrated that he could:

1. Make a slightly reduced payment on a reverse mortgage, and
2. Pay down the mortgage in the same time period (3 years), and
3. Have the option to skip any payments if needed, and
4. Double his LOC in three years because of the LOC growth.

As long as he doesn’t pay below the minimum required loan balance ($100), his LOC keeps growing long into his retirement years! At that point, the LOC will cost him a few dollars per year in interest, but will create a massive emergency fund that is not dependent on the value of the home.

Yes. The reverse mortgage CAN be a REALLY good deal. But it will require the assistance of an informed reverse mortgage professional and ideally, a good Financial Advisor.

I am helping to spearhead an effort to educate the industry and the public on a better understanding of reverse mortgages. That will include the strategic uses of reverse mortgages during retirement. With the help of the National Reverse Mortgage Lender’s Association (NRMLA) and a committee of like-minded experts, we hope the perception of this wonderful product will improve.

If you want to learn more about the strategic use of home equity in retirement, please subscribe to my blog and purchase my book, Understanding Reverse.

Dan Hultquist

The press has been favorable to recent reverse mortgage reforms, yet there is still no shortage of articles that offer warnings. I believe those warnings are misplaced, and that other, more legitimate, concerns about reverse mortgages need addressed. The issues we read about are either misunderstood, or have already been addressed by industry reforms.

The media has focused on two primary issues – reverse mortgage costs, and widows losing their homes. Yet, when meeting with professionals who understand the strategic uses of home equity, I find that we share a different set of concerns. But let’s address the media’s concerns before we cover the real issues.

COSTS are not the ISSUE

A media personality once argued that “a borrower could pay as much as $10,000 in fees to get $100,000 in cash. That’s a 10% hit right off the bat.” Yes, that is expensive when the reverse mortgage is only viewed as a request for cash. However, cost becomes a minor issue when the future benefits are properly explained.

Imagine what that journalist would think if I told her “it might make sense to pay the reverse mortgage fees, but NEVER draw another penny.” It sounds ridiculous, until you view the security gained by the transaction. You could pay many times that amount in long-term care insurance that wouldn’t be needed if the reverse mortgage were structured properly.

Is a reverse mortgage expensive if it allows your financial planner to extend your retirement funds several years?

Is a reverse mortgage expensive if your tax planner can manage your adjusted gross income and save you even more in federal income taxes?

It’s getting harder to make a case that reverse mortgages are expensive. The costs are commensurate with traditional mortgage fees, and when used properly, the financial planning advantages are huge. The interest rates are favorable, reducing the long-term costs, and the non-recourse feature protects the homeowner from ever owing more than the value of the home.

WIDOWS are also not the ISSUE

The reverse mortgage program is now very favorable to non-borrowing spouses who wish to remain in the home after the last borrower dies. Yet, even before recent reforms, this issue was misunderstood. There is a big difference between “occupying” a home and “owning” a home. When someone is facing “foreclosure”, it is important to know whether they are actually on title. In the media-highlighted cases, the widows were not actually owners of their homes. Therefore, the phrase “widows faced foreclosure on their homes” is misleading.

However, additional consumer protections for non-borrowing spouses became effective August 2014, allowing eligible non-owner widows and widowers to remain in their homes following the death of their spouse. The guidelines were revised again this year to give lenders additional options for handling non-borrowing spouses. As a result, it has become unlikely that these occupants would be displaced.

REAL CONCERNS

The concerns financial planners and loan originators have about reverse mortgages are not about the product itself. The concerns are about the people who have access to the funds – the homeowner and their “trusted” advisors.

1. Financial planning concern

Respectable loan originators and financial planners want the homeowner’s funds to last. Homeowners generally have access to 60% of their principal limit within the first year, minus closing costs and lien payoffs. This is called their “initial disbursement limit.” After the first year, homeowners may then access the additional 40% plus growth.

The limits placed on first year disbursements have helped this issue. However, there is a growing bucket of money to draw from, and many homeowners are consuming the funds too quickly. The homeowner must set boundaries if the reverse mortgage is to be used for emergencies, insurance, and/or future retirement income.

2. Elder financial abuse concern

As reverse mortgage professionals, we convert home equity into accessible funds. However, we have little control over “trusted” advisors who are not so trustworthy. Their influence over the homeowner can quickly turn into elder financial abuse.

According to the National Committee for the Prevention of Elder Abuse (NCPEA), the perpetrators of elder financial abuse are often “family members, including sons, daughters, grandchildren, or spouses.” Some of them have “substance abuse, gambling, or financial problems.”

Heirs also frequently feel a sense of entitlement – that their parents “owe” them an inheritance. They rationalize that it’s not “stealing” funds when they feel the funds are rightfully theirs.

Yes, there are costs. And reforms to the program were needed, adding security for non-borrowing spouses. However, the sad truth is that reverse mortgage funds are not always used properly. That is the real concern.

If a homeowner has a monthly cash flow issue, then establishing monthly payouts from the reverse mortgage can cover monthly cash short-falls. If a homeowner is using a growing line of credit for financial planning purposes, then consulting a financial advisor that has a fiduciary responsibility to act in the best interest of the homeowner would help.

When the real issues are fully understood and communicated, the reverse mortgage will be what it was designed to be – a prudent and sustainable solution for older homeowners to remain in their homes.

If you want to learn more about the strategic use of home equity in retirement, subscribe to my blog and purchase my book, Understanding Reverse.

Dan Hultquist

Earlier in the year, I was asked to write an article for a large national publication. My primary message was that the reverse mortgage is NOT the financial product you thought you knew. With recent regulatory changes and a renewed focus on financial planning, the FHA-insured mortgage is now being used by the affluent as a form of retirement planning, longevity insurance, tax planning, and long-term care funding.

While flattered that a monthly magazine wanted to publish what I had to say, it was clear the editor didn’t understand my message. By the time it ended up in mailboxes, the headline was changed, the content was edited, and the selected image gave the reader the wrong impression that it was simply an ATM machine – the magazine literally inserted a giant ATM machine in the shape of a house!

WHAT IS THE COMMON PERCEPTION?

Unfortunately, the reverse mortgage is still seen by most as an act of desperation for borrowers in need of cash. Television, radio, internet, and magazine coverage has generally reinforced this narrow view of home equity conversion.

Consequently, this is how reverse mortgages have historically been perceived:

“I need some cash. I found a tool that will pay off my mortgage. It may even give me more cash than I need. Now I don’t have to pay monthly principal and interest mortgage payments ever again. Sure, my loan balance will rise. But FHA guarantees that I’ll never owe more than the value of my home.”

While every assumption listed above is technically correct, this type of homeowner is becoming a smaller portion of the reverse mortgage pie.

WHAT IS THE CORRECT PERCEPTION?

People have always criticized the hammer for being a poor screwdriver. Likewise, the reverse mortgage suffers from a misunderstanding of its proper function. The new reverse mortgage is slowly being recognized as a powerful financial planning solution. But it has always been a fourth pillar of retirement income that included social security, pensions/annuities, retirement savings, and home equity.

The primary financial planning advantage is the available line-of-credit that grows and can be accessed at a later date. It may be converted to tax-free monthly income whenever needed. It can be used to delay social security, manage taxable income, and more. And because of the compounding growth, it makes sense to opt in as early as possible.

Consequently, the following is how reverse mortgages SHOULD be perceived:

“I need greater assurance that my funds will last through retirement. I have found a tool that offers a secure line-of-credit (LOC) that will be available if I need it. The available LOC grows over time, so it makes sense to obtain one at age 62. As rates go up, my available funds grow even faster. I have the option to make prepayments that reduce my loan balance and increase my line of credit. The longer I live, the more funds I have available, which may allow my home to pay for my long-term care needs.”

There were many economic factors that led to older homeowners using a reverse mortgage as an ATM machine. However, the program should be a sustainable solution for older homeowners, and a tool that those age 62 or older should consider using in their retirement portfolios.

Unfortunately, the magazine destroyed my intended message, and served to reinforce the wrong perception of how this tool should be used. But if you want to learn more about the strategic use of home equity in retirement, subscribe to my blog and purchase my book, Understanding Reverse. You will find it is likely not the reverse mortgage you thought you knew.

Dan Hultquist

My blogs have been, and always will be, politically neutral. And when changes to government regulations affect what I do, I simply do my best to explain how those changes impact homeowners and my role as a reverse mortgage professional. So, let me be the first to explain how the Supreme Court ruling on marriage may impact reverse mortgages.

I’ll preface by explaining that federally-insured reverse mortgages, often called Home Equity Conversion Mortgages (HECMs), have ALWAYS allowed multiple unrelated occupants to take advantage of, and receive, reverse mortgage proceeds. That has not changed. However, if an older homeowner is now getting married as a result of the court’s decision, then he/she may now have additional advantages and options with a reverse mortgage.

NON-BORROWING SPOUSE PROTECTION

If one spouse has not yet met the qualifying age (62) for a reverse mortgage, that spouse may now have additional protection as a “homeowner” under the non-borrowing spouse guidelines. This protection for spouses began in August of 2014 when guidelines changed, allowing a spouse of a HECM borrower to continue living in the home following the death of the spouse listed on the mortgage. In essence, the loan is not due and payable, and repayment may be deferred. The couple will need to show that they are married at the time of application, continue to be married over the life of the loan, and that both spouses occupy the home.

Until now, non-borrowing spouse protection was limited to a “spouse” as defined by the laws of the state where they reside or the state of their celebration.

HECM TO HECM REFINANCE

If a homeowner already has a reverse mortgage, and is adding someone to title, they can take advantage of the HECM to HECM refinance option. This is where a new reverse mortgage is obtained to pay off an older reverse mortgage. This can be done to increase proceeds, to improve the terms of a mortgage, or in this case, to add a new person to title. As long as one original reverse mortgage borrower is still on title, a spouse can be added with reduced closing costs.

This option already existed for unrelated occupants, but if two individuals are getting married as a result of the recent changes, it is preferable to have BOTH spouses listed on title and on the reverse mortgage. The primary advantage is that either spouse will have access to reverse mortgage funds if the other dies. In addition, reverse mortgages are generally not “due and payable” until the last reverse mortgage borrower dies or permanently vacates the home.

EXPANDED TAX AND TITLE OPTIONS

Reverse mortgage borrowers are sometimes eligible for a mortgage interest deduction on their taxes, if the loan is partially (or fully) paid pack. Same-sex couples have historically had to split up their mortgage interest deduction onto two tax returns. Unfortunately, itemized deductions that get split are often not large enough to exceed the standard deduction. So, for those homeowners where a tax deduction is an option, marriage now allows same-sex couples to file taxes jointly and take the full deduction.

Same-sex marriage will also allow a couple more flexibility in the way they hold title to their home. For example, “tenancy by the entirety” which is available to married couples in some states, is a stronger form of joint ownership. When a spouse dies, property ownership automatically moves to the surviving spouse without having to go through probate. However, it also has added protections against creditors that other forms of ownership do not have.

Keep in mind, this post was not intended to provide tax advice or legal advice. So, please consult a professional for clarification on those issues. However, if you are looking for updated guidance on reverse mortgages, please subscribe to this blog and purchase the book, Understanding Reverse.

Dan Hultquist

As it turns out, Ben Franklin didn’t really discover electricity. While many still believe he did, it’s simply not true. Just like this common fallacy, the complex reverse mortgage program is highly misunderstood. This was the primary reason I wrote the book, Understanding Reverse. It’s also why many reverse mortgage providers feature top reverse mortgage myths on their websites.

If I were to walk downtown and ask strangers why they wouldn’t consider a reverse mortgage at age 62, the most common response would be that “the bank would get their home.” So let’s address that misconception first.

MYTH: The bank gets your home after you die
TRUTH: The Federally-Insured reverse mortgage program has been around for 27 years, and homeowners never relinquish title or ownership of their homes at closing or after they die. The homeowner holds title throughout the life of the loan, and can sell it at any time with no pre-payment penalty.

So, why does this continue to be a top misconception? Historically, homeowners have used reverse mortgages to draw large amounts of home equity upfront. If there is no equity left after the last homeowner’s death, the heirs have no financial incentive in selling it. They will often sign the deed over to the lender at that time.

Is the product too complex? Do poor explanations of the product leave homeowners to make simplistic assumptions on their own? Has the improper use of reverse mortgages in the past tainted the perception of the program? These are all possible reasons for continued misperceptions.

It didn’t help when the popular sitcom, Modern Family, aired an episode where one older homeowner explains to another that with the reverse mortgage “essentially, the bank buys your home.” No! That is only reinforcing the most common misconception.

All we can do at this point is continue to promote an accurate understanding. So, the following is a list of other common myths that seem to persist:

MYTH: You can owe more than the value of the home
TRUTH: Many people ASSUME the estate will be “underwater” when they sell it, or when they die. Fortunately, reverse mortgages include a “non-recourse feature” ensuring that the homeowner will never owe more than the value of the home at the time it is sold.

MYTH: The heirs get stuck with a bill
TRUTH: In fact, the heirs are protected by the non-recourse feature, just like the homeowner. Of course they can sell the home or refinance in their own name. But, the home is ultimately responsible to pay back the loan balance, and any residual equity would be theirs as an inheritance.

MYTH: You might outlive a reverse mortgage
TRUTH: Even though the note lists the maturity date as the youngest borrower’s 150^th birthday, if someone were to actually live that long I believe FHA would still service the loan at that point. I don’t think we need to lose any sleep over that one.

MYTH: Reverse mortgages are expensive
TRUTH: They can be expensive if used as a short-term cash-out refinance. When used properly, however, for a homeowner who wants to stay in their home, they can be very inexpensive.

MYTH: They are just for the desperate and needy
TRUTH: Sure, reverse mortgages can often help those who are house rich and cash poor. However, there are multiple financial planning options for the affluent.

MYTH: They increase your risk for foreclosure
TRUTH: Reverse mortgages do not require monthly principal and interest payments. Therefore, the primary risk for default is failure to pay property taxes. The reverse mortgage, if used properly, should reduce the likelihood of that occurring.

I was surprised to also learn that Thomas Edison didn’t invent the lightbulb – another popular misconception. While Franklin and Edison contributed significantly to the world of science, maybe the truth behind their accomplishments was just too complex for us to learn in elementary school. And as a result, that caused us to have a poor understanding of the facts.

If you want to know the facts about reverse mortgages, please subscribe to this blog and purchase the book, Understanding Reverse.

Dan Hultquist

Consider a doctor explaining that “A blood vessel wall was damaged, causing a series of reactions to take place which stimulated platelets, resulting in coagulation in your body. You have thrombophlebitis in your lower leg, a condition we call deep vein thrombosis.”

The doctor may be technically correct. But it may be more appropriate to say, “You have a small blood clot, and we’ll give you medicine to dissolve it.”

When you get a traditional loan, the loan officer doesn’t explain all the technical intricacies of residential mortgage underwriting. You simply want to know the rate, the terms, and when you can close.

With reverse mortgages, however, there are additional complex regulations and guidelines that must be covered, including Financial Assessment. Just like the medical profession, there is a big difference between reciting complex industry terminology and a simple explanation of the facts. As someone who generally offers the technical diagnosis, let me try to simplify this time.

Financial Assessment is intended to make sure the reverse mortgage is a sustainable solution for you. The tests aren’t aimed at disqualifying you from a reverse mortgage. They are designed to ensure that, after closing a reverse mortgage, you are likely to have the financial ability to stay in your home.

Financial Assessment Test #1

Lenders are now required to look at your credit history and your property charge payment history. Underwriters call it a “WILLINGNESS” test, but it has little to do with your “desire” to pay bills. Poor payment history simply indicates the need to set aside some funds to make sure critical property charges are paid in the future.

Financial Assessment Test #2

Lenders are also required to look at your monthly residual income. Underwriters call it a “CAPACITY” test. It is designed to ensure that the reverse mortgage product will likely leave you and other household members with the ability to pay your bills now and in the future.

Setting Aside Funds

Each reverse mortgage has a calculated amount called a “Principal Limit”. This is the maximum amount the lender is able to offer a homeowner at the time of closing. The results of Test #1 and Test #2 are used to determine whether a portion of these funds should be set-aside to pay property charges like property taxes and property insurance. The technical name for this is “Life Expectancy Set-Aside” or LESA.

These LESA funds represent a portion of your equity to which you will not have direct access over the life of the loan. However, any unused LESA funds are still part of your equity.

Fortunately, you are not charged interest on the amount that is set aside. When the lender pays your property tax bill, however, your loan balance will rise by that amount.

After spending an hour with a potential client last week, I realized that I didn’t once use technical jargon to describe financial assessment. I was tempted to say something like “based on three 30-day late installment payments in the prior 24 months and a monthly residual income shortfall for a two member household in your geographic region, we need to fully-fund a Life Expectancy Set-aside that will reduce your available net principal limit.”

I would have been technically correct. But when she disclosed information that confirmed that a set-aside would likely be required. I simply said, “Would it give you peace of mind knowing that a portion of your home equity will be set-aside so that the lender can pay your property tax and homeowners insurance each year?”

She and I both agreed it would.

Dan Hultquist

The money experts on TV and radio have never fully understood Home Equity Conversion Mortgages (HECMs) and the proper use of these reverse mortgages. From Dave Ramsey to Suze Orman, they have not taken the time to listen to researchers within their own financial planning community who regularly publish papers on the advantages of this financial tool. While Clark Howard has recently reconsidered his position on them, he and others still don’t tout the financial planning advantages this program offers to older homeowners.

Meanwhile, the homeowners themselves have been very happy with their reverse mortgages. The client satisfaction ratings are much higher than with the alternatives. Maybe we have not explained the basics properly to the financial media. So, let’s clarify a few items that are commonly misunderstood:

1. You keep title and ownership of your home

That’s true. The bank does not take your home now or when you die. However, this is still the most common misconception. This may have been true for some reverse mortgages prior to 1989, but the government-insured reverse mortgage has never allowed the lender to hold title. Homeowners retain ownership of their homes throughout the life of the loan, and can choose to sell the home at any time without prepayment penalty.

However, it is possible for ANYONE who owns a home to lose it. If you stop paying your property taxes, you risk losing your home. That is true whether you have a reverse mortgage, forward mortgage, or no mortgage at all. The reverse mortgage should actually REDUCE the fear that this will happen, as periodic draws from home equity should INCREASE a homeowner’s ability to pay property charges.

2. You will not owe more than the value of your home

One of the first items addressed in nearly every basic training on reverse mortgages is that the FHA insures against this happening. The FHA guarantees that homeowners and their heirs will NEVER be responsible for reverse mortgage debt that exceeds the value of their homes. This is called the “non-recourse” clause, and is a primary consumer protection for homeowners and their heirs.

3. Reverse mortgages are not expensive when used properly

There are fees just like any financial transaction, and reverse mortgage fees are not only federally regulated, they are also common to mortgage transactions in general. In fact, there may be cases where the lender will pay some of those costs. If using the reverse mortgage for short-term cash, it may indeed be expensive. But that is not the intended purpose. When used over a longer term, to continue occupying the home, the upfront fees are minor when compared to the long-term benefits of a line of credit that grows tax free that may be converted later into tax-free cash.

4. Reverse mortgages are more than a way to access cash

There is still a perception that this is a “LAST RESORT” loan. This is not the case at all. We can show that using a reverse mortgage as part of your retirement plan can extend your assets beyond what traditional retirement plans offer. Although some seniors may have a greater need than others, many simply prefer to be free of monthly mortgage payments.  Without a monthly mortgage payment, many homeowners find they can retire, maintain their existing quality of life, and enjoy their retiring years.

The reverse mortgage is also being used to purchase a home. Whether you need to relocate to be closer to family, downsize to a more manageable home, or upsize to a retirement dream home, the reverse mortgage can help keep more money in your pocket.

If you want to know more than the money experts do about the strategic uses for reverse mortgages, please subscribe to this blog and purchase my book, Understanding Reverse.

Dan Hultquist

“Financial planners, advisors, CPA’s, estate planners, and other finance professionals are realizing that obtaining a Reverse Mortgage EARLY opens up potential income later in retirement. The basic premise is that the growing line of credit (LOC) is not taxed on its growth, and is a secure collection of funds that can act as a second source of retirement reserves when needed.”

– Understanding Reverse

By now, everyone knows that homeowners, age 62 and older, can access home equity at low interest rates through the government insured reverse mortgage program. Most don’t realize, however, that a dire need for cash shouldn’t be the primary purpose of the home equity conversion.

When you hear that wealthy doctors, lawyers, and even executives in the mortgage industry are getting reverse mortgages for themselves and their family members, you can be pretty sure they aren’t trying to prevent foreclosure. They choose the reverse mortgage because there are inherent advantages for retirement planning. Unfortunately, most finance professionals don’t understand how working with a reverse mortgage professional can help their clients achieve greater financial stability during their retirement years.

Research in the Journal of Financial Planning suggests that financial planners should recommend reverse mortgages for many clients, including ones who do not have an immediate need for them. Why? In part, because many baby boomer homeowners have disproportionate amounts of their retirement savings held in real estate. 10,000 boomers are turning 62 every day, and unlike the generation before them, their retirement savings are in their homes, not in defined benefit plans like pensions. Drawing part of their monthly retirement income, tax-free, from their home equity nest eggs will help their other, more traditional, retirement funds last much longer.

LOC Growth – The basis of reverse mortgage financial planning

The primary financial planning advantage is the line-of-credit (LOC). The LOC experiences compounded growth, and many homeowners will opt-in to reverse mortgages as early as possible (age 62), and wait to draw their increased funds until later as a form of tax-free retirement income. Homeowners only accrue interest on the amounts they borrow. So, this option allows them to have emergency funds that grow (again tax-free) at current interest rates. The funds are then easily converted to monthly income when traditional retirement savings are depleted. The following highlights some features of the LOC:

• The LOC grows tax-free at current rates
• The LOC can be converted to cash at any time
• The LOC draws are not considered income, and therefore are tax free
• The LOC is secure, as it is not frozen or reduced if property values drop
• The LOC can be an effective emergency fund
• The LOC can be used as a form of insurance
• The LOC diversifies your home equity investment
• The LOC increases when making prepayments

The increased use of reverse mortgages for financial planning purposes is further explained by looking at the other traditional income sources during retirement. Social Security is not sufficient to provide the income necessary to sustain an individual during retirement years. Employers have moved away from defined-benefit pension plans, and instead have opted for employer-sponsored tax-advantaged accounts. Traditional retirement savings are subject to volatile market conditions, and employment during the retirement years is often not practical, or even possible.

Indeed, financial planners, advisors, CPA’s, estate planners, and other finance professionals are now realizing that obtaining a reverse mortgage EARLY, with a line of credit option, opens up potential income later in retirement.

For more information on the strategic uses for reverse mortgages, please subscribe to this blog and purchase my book, Understanding Reverse.

Dan Hultquist