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

Since 2013, the federally-insured reverse mortgage program has gone through so many dramatic changes that it’s no longer the reverse mortgage everyone thought it was. Some of the changes added consumer protections, while others radically altered the way reverse mortgages are obtained.

Unfortunately, many perfect candidates will continue to believe that the reverse mortgage is ONLY for the desperate homeowner with plenty of equity and no cash. I don’t fault them for this – the most common reverse mortgage, the Home Equity Conversion Mortgage (HECM), has been marketed that way. However, recent modifications by the Federal Housing Administration (FHA) have highlighted the financial planning advantages for the affluent. So, let me describe the three categories of homeowners who now come to me for reverse mortgages.

1. Reverse Mortgage for immediate NEED

Generally, these traditional HECM borrowers are house rich and cash poor. And they need money now. In many cases, we can help them. A good example might be a homeowner who needs in-home care. Monthly payments generated by home equity conversion can help when they, or their heirs, are unable or unwilling to pay for these expenses.

Many people assume that the need for money is the ONLY reason to get a reverse mortgage. Yet, this traditional type of homeowner is a smaller piece of the pie now.

2. Reverse Mortgage to enhance LIFESTYLE

Because reverse mortgages do not require monthly principal and interest mortgage payments, obtaining one can help with cash flow. Yet, there are many other lifestyle advantages. Tenure payments are a form of monthly draw. Tenure means permanent, and these monthly payments will continue as long as the homeowner occupies the home. This is a great way to improve the quality of life of someone on a fixed income.

Others enhance their lifestyles by accessing home equity to pay for home upgrades, travel, or new vehicles.

3. Reverse Mortgage as part of a comprehensive financial PLAN

Financial planners are now recommending reverse mortgages for clients who do not have an immediate need for them. Why? In part, because many homeowners have disproportionate amounts of their retirement savings held in real estate. Drawing part of their monthly income (tax-free) from their home equity nest eggs will help their traditional retirement funds last much longer.

The primary financial planning advantage, however, is the line-of-credit (LOC). This option allows homeowners to have an emergency fund that grows (again tax-free) at current interest rates. The funds are easily converted to monthly income later in retirement. Because the LOC experiences compounding growth, many homeowners will opt-in as early as possible, and draw their increased funds at a later date as a form of tax-free retirement income.

The HECM is still used by homeowners in need. However, research in the Journal of Financial Planning advocates that homeowners, age 62 or older, use this same program as part of a comprehensive retirement plan. Take a closer look. It’s likely not the reverse mortgage you thought you knew.

Dan Hultquist

Most successful blogs are infused with a little humor. Parenting blogs are funny. Kids say the darndest things. Other blogs are designed to enrage you. Sometimes I don’t know if I should laugh or cry at the political ones. However, other blogs are designed to educate, inform, and explain. Mine would fall into that category. If you read my book, or read my blog on a weekly basis, you know that any sense of humor I might possess is lost in my writing.

Those who have heard me speak will know that I will occasionally try to add humor to my presentations. There was one (a broker, a borrower, and a compliance officer walk into a bar) that was pretty funny to those in my field.  And then another (a borrower and a loan officer met with a palm reader to determine product suitability) that got a few laughs.

I’ve learned, however, that home equity conversion is really not that funny. Here are a few reasons why:

What we do is misunderstood

My daughter has a great sense of humor and likes to mimic me in a deep voice, saying “I give you money, you give me house.” Of course she knows better, and just to be clear, I give people a LOT of money, and they get to KEEP title to their home. It is a common misconception, however, that somehow the bank gets the home now, or when the homeowners die. This is not the case, and of course, it’s no laughing matter.

What we do is somewhat complicated

After having spent several years counseling, originating, and training, I spent much of 2014 reviewing the Code of Federal Regulations, multiple HUD handbooks, and every FHA letter. This was done not only to make sure I understand one of the most highly-regulated financial tools well enough to write a book called “Understanding Reverse,” but also to better assist loan officers and older homeowners with a better understanding of the product. Once again, no chuckles.

What we do is serious

Some older homeowners are faced with losing their homes. This can be tragic, and as a counselor I’ve cried with many of them. I have been able to prevent this by using reverse mortgages to pay off delinquent forward mortgages, tax liens, delinquent property taxes, and judgments that affect title to their homes. I recently closed a loan that paid all four of these items in time to avert a pending foreclosure. Because of negotiated payoffs, the homeowner now has an additional $100k in equity and no monthly payment. Without it, they would have lost their home. That’s serious.

To reverse mortgage professionals, the premise of a broker and a borrower walking into a bar with a compliance officer is funny enough without a punchline, and has probably never happened before. For those of you who want to know about the palm reader? She saw a love line, a long life line, and a large line of credit in the borrower’s future. However, she informed the loan officer, with outstretched palms, that because of federal regulations she was also required to look at the ARMs.

See… Not that funny 🙂

Dan Hultquist

Building a personal collection of rare items can be quite entertaining. Some of the most commonly collected items are pocket knives, comic books, sports cards, and postage stamps. While I have a small, but growing collection of coins, I may have the most obscure collection of all – reverse mortgage questions.

I do collect them, and occasionally I receive questions that are not addressed in my book, Understanding Reverse, because I would not consider them to be “top questions” material. The following is a recent addition to my collection that is important to know during tax season:

Why would a borrower get an IRS Form 1098 on a Reverse Mortgage? Does this mean they owe taxes?

This does create some confusion for reverse mortgage borrowers every January, and it needs to be addressed. Most reverse mortgage borrowers, however, won’t get a 1098 simply because most of them don’t make payments. Some will. In fact, we described some advantages in a previous post – Wait, Make Payments?

While I am not a tax professional, I can state that IRS Form 1098 is a form that lists items that were paid by the borrower. This is for tax and accounting purposes, and does not increase their tax liability. The Form 1098 is used to report potential deductions, and therefore may REDUCE their tax liability. For our purposes though, it means that the borrower made prepayments during the previous year that were applied to either their accrued mortgage insurance or their accrued mortgage interest.

The IRS deduction for Mortgage INSURANCE (itemized on line 4) was renewed by congress for tax year 2014. However, this deduction is very limited (see IRS Publication 936 [2014]). Therefore, the borrower may not be able to write-off that amount. Mortgage INTEREST (itemized on line 1), however, is more likely to be deducted. Of course it will depend on other factors that you should discuss with your tax professional. Nevertheless, the loan servicer is required to notify the borrower with a 1098 when payments exceed $600.

So, in summary, a reverse mortgage borrower may get a 1098 in January after making prepayments in the previous year and should consult their tax preparer. The borrower may, or may not, have a deductible item on the form, but it does not indicate the need to pay more taxes.

I have been collecting reverse mortgage questions for several years, and I’m aware that many in my collection hold limited value. Nevertheless, the answers to the most common questions asked about reverse mortgages were the basis for writing the book, Understanding Reverse, which has been helpful to many industry professionals and older homeowners.

If you would like to add to my collection, and possibly have your question anonymously addressed in my blog, please don’t hesitate to click the “CONTACT US” tab in the upper right corner.

Dan Hultquist

“The mortgagee must evaluate the mortgagor’s willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements.”

– Mortgagee Letter 2014-21

If you have not already heard, the federally insured reverse mortgage program is going through another major change effective March 2, 2015 called Financial Assessment. For the first time, reverse mortgage lenders will be required to assess each borrower’s credit history and monthly residual income. This is a dramatic change for an industry where the focus has been primarily on the value of the home.

Why Financial Assessment?

The first question many will ask is, “why do these things matter when originating a loan that doesn’t require monthly repayment obligations?” After all, the value of the home and the age of the borrower are the primary factors in qualifying. So, why are residual income and credit now included in the underwriting of these loans?

The answer is that these loans should not be viewed as an emergency, short-term access-to-cash, program. Home equity conversion should accomplish more than that. It should always leave the borrower with the ability to pay their property charges and monthly bills. Therefore, we need to document that ability with this assessment. The reverse mortgage MUST be a sustainable solution for the homeowner.

According to Mortgagee Letter 2014-21, “The mortgagee (that is us, the lender) must evaluate the mortgagor’s (that is the borrower’s) willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements.”

The critical borrower obligations and mortgage requirements are as follows:

• Upkeep of the home in good condition
• Payment of property taxes
• Payment of homeowners insurance
• Payment of other property charges (flood insurance, HOA dues, condo dues, etc.)

These are FHA requirements, and we need to document every borrower’s ability to meet these obligations. It is important to note, however, that Financial Assessment is NOT necessarily a “yes or no” qualification of the borrower. The results of Financial Assessment are generally used to determine whether a life expectancy set-aside is needed or not.

What is a Life Expectancy Set-Aside (LESA)?

When the underwriter determines that one or more of the financial assessment tests have failed, a Life Expectancy Set-Aside (or LESA) will be required. These are funds that are removed from the borrower’s principal limit and set-aside for the purpose of paying property charges over a calculated time period. The two types of LESAs that may be required are described here:

FULLY-FUNDED LESA – The lender uses funds set-aside from the borrower’s principal limit to pay three critical property charges; property taxes, homeowners insurance, and flood insurance (if needed). The lender pays these charges directly when the bills are due, in the same way a traditional escrow account functions.

PARTIALLY-FUNDED LESA – The lender uses funds set-aside from the borrower’s principal limit to supplement the borrower’s income. This is done to fund a homeowner’s gap in residual income. The lender releases necessary funds to the borrower semi-annually. The borrower, however, will be responsible to pay their own property charges.

For more information on consumer protections and other changes designed to strengthen Home Equity Conversion Mortgages, make sure you purchase the book, Understanding Reverse, and subscribe to my blog in the right-hand margin.

Dan Hultquist

“Being able to recognize the alternate uses of home equity in retirement requires one to take a long-term financial-planning view. Remember, the program was not initially designed as a short-term, quick fix. It was designed for two purposes – a monthly stream of income or a line of credit for future use.”     

– Understanding Reverse

What an odd question to ask. I believe in miracles, but I don’t necessarily believe in karma. I believe in an NCAA football playoff system, but I don’t believe the NCAA acts in the best interest of student athletes. I believe Roger Federer is the greatest tennis player of all time. But asking if I believe in Reverse Mortgages is like asking an English teacher if he/she believes in grammar. They both exist, but they are not properly understood by most people, and therefore misused.

This question, however, has been posed to me many times recently.  I generally don’t mind, because it offers me the opportunity to respond. I wrote the book Understanding Reverse to help educate people and to change perceptions. But I find that the question behind the question is often, “Do you believe Reverse Mortgages are good financial tools?” And the questioner has already formed an opinion.

The best way to respond is to ask what they currently know about Reverse Mortgages. That way I can assess their knowledge. I also find that most people can be classified into three different perspectives: the “Misinformed”, the “Last Resorters”, or the “Strategists”. Let me describe each:

Level #1: The “Misinformed”

A friend recently posted on social media, “Only a fool would get a Reverse Mortgage. It’s a scam.” That is terribly offensive to Reverse Mortgage Professionals commit themselves to act in the best interest of older homeowners. These comments, however, also reflect a level-1 understanding of the product. Their perception, or misperception, is generally skewed by the following THREE COMMON MISCONCEPTIONS:

• The bank gets the home now, or when I die
• I may end up owing more than the value of my home
• My estate will get stuck with a bill for loan balance deficiencies

Of course, we know that the homeowner holds title to the home for the life of the loan, and that the heirs generally have at least four options when the loan matures. In addition, the non-recourse feature states that the homeowner and their heirs will not owe more than the value of the home. They are not stuck with a bill. The FHA insures Reverse Mortgages and offers many generous consumer protections.

Level #2: The “Last Resorters”

A friend of mine was happy to report to me that their financial planner was open to Reverse Mortgages. The planner conceded that “there are times when a Reverse Mortgage may be an appropriate solution.” According to him, the ideal candidate is a homeowner who is house rich, cash poor, with no heirs, and is using it as a “last resort” to stay in their home. My response was “Congratulations. You have a financial planner who is willing to allow a desperate homeowner access to their own money”. That is a very short-sighted view of Home Equity Conversion, and unfortunately, that financial planner is missing the most critical financial planning aspects of the program.

Unfortunately “Last Resorters” have a limited understanding of the product and are influenced by the following THREE ERRONEOUS ASSUMPTIONS:

• Reverse Mortgages are very expensive
• Interest rates are very high
• Reverse Mortgages inherently cause home equity to decrease

Of course we know that the product can be very INEXPENSIVE for homeowners who stay in their homes for longer periods. Interest rates have been extremely LOW on Reverse Mortgages for quite some time. Finally, since initial disbursement limits were implemented, the majority of amortization schedules that I view show the homeowner’s equity INCREASING for many years. This is because interest accrual is projected to be small compared to home value appreciation.

Level #3: The “Strategists”

Individuals with a level-3 understanding of Reverse Mortgages are rare, but are becoming more common with the help of financial planning researchers and their published papers in the Journal of Financial Planning.

“Strategists” believe that the strategic use of home equity in retirement should be considered by all older homeowners as a form of insurance and/or retirement planning. They believe it strongly enough that they obtain Reverse Mortgages for themselves, and recommend them for their friends and their family members as early as they can.

Those with this higher-level understanding of Reverse Mortgages are influenced by the following SIX RELATIVELY UNKNOWN TRUTHS:

• The compounding line-of-credit growth is a powerful retirement planning tool
• Rising interest rates offer future advantages for homeowners using the product wisely
• Making payments toward Reverse Mortgage balances may have positive financial planning implications
• Reverse Mortgages can be used to delay Social Security, thereby increasing your monthly retirement benefit
• Reverse Mortgages can act as a hedge against property value declines
• The “Standby Reverse Mortgage” can extend a retirees assets, making them less likely to run out of money

Yes. I do believe the proper use of Reverse Mortgages should be considered as a part of every older homeowner’s retirement plan. To better understand the strategic uses for reverse mortgages, please subscribe to my blog in the right hand margin.

Dan Hultquist

“Historically, the principal limit has been a measure of what HUD says a borrower with certain factors is able to borrow at closing. After the September 2013 changes to the program, however, that definition is not quite accurate. Homeowners may be restricted in the amounts they can borrow up-front. Fortunately, with the adjustable rate products, the remaining net principal limit will be accessible after that first year.”

Understanding Reverse

One of the most common questions I get from borrowers is “What is the most I can borrow?” While borrowing it all up-front may not be the optimal strategy, it is important to know the amount of funds homeowners have available to them. It is also significant to note that this number increases with time. Therefore, technically what they really want to know is, “What is my initial principal limit?”

Initial principal limits vary from homeowner to homeowner and are based on AGE, RATES, and the HOME’S VALUE. Reverse Mortgage calculators will generate principal limits that are consistent from lender to lender. But let’s discuss how they are determined:

1. Begin with the Relevant AGE

Older borrowers generally qualify for higher principal limits. While all borrowers must be 62 or older, non-borrowing spouses may be much younger. Therefore, HUD publishes tables that reference every age from 18 to 99. Keep in mind the relevant age will be the youngest borrower, co-borrower, or non-borrowing spouse. I often refer to this as the “Age of Youngest Participant.”

2. Identify the Relevant RATE

For fixed-rate reverse mortgages, we will use the interest rate. With adjustable rate loans, however, FHA requires us to project what the rate for a particular reverse mortgage may be in the future. This number has been between 4% and 6% for quite some time, and is referred to as the “Expected Interest Rate.”

Using these two items (age and rate), we can look up the homeowner’s Principal Limit Factor (PLF) from HUD’s factor table.

In the chart below, you will see a small sample of selected ages and selected expected rates and the corresponding PLF% from the 2014 table.

3. Multiply the Homeowner’s PLF by the Home’s Value

When the PLF is multiplied by the home value we get the initial principal limit in dollars. Bear in mind that higher home values will be capped at $625,500 (for calendar year 2015) for the purpose of this calculation.

Let’s look at an example.  Linda is 74 years old, and she is younger than her spouse. Therefore, she is the youngest participant. She has an expected rate of 5.00%. Using these two pieces of information, we can look up a PLF of 60.6%.

60.6% of Linda’s home value of $200,000 will give her an initial principal limit of $121,200. This principal limit will increase for Linda every month that she remains in the home, regardless of future home values. She could borrow it if needed, or let it continue to grow. Eventually, her available funds my even grow to exceed the value of her home.

For those homeowners that use the product for financial planning purposes, this increasing principal limit can offer a secure collection of funds to be accessed later in retirement if needed. The compounding is working in the homeowner’s favor, and is a good reason to consider getting a reverse mortgage early in retirement.

To learn more about reverse mortgage guidelines and the advantages they offer older homeowners who use them properly, please purchase a copy of my book, Understanding Reverse.

“Whether households have sufficient savings from which to ensure adequate income throughout retirement is a concern of households and, therefore, policymakers. Although most households are eligible to receive Social Security benefits in retirement, over the past 30 years, the types of non-Social Security sources of retirement income have been changing.”        – John J. Topoleski, Analyst in Income Security, Congressional Research Service – July 23, 2013

Retirees are worried about it. Children of retirees are worried about it. Financial Planners are worried about it. Heck, CONGRESS is worried about it! Will we have income during our retirement to last through unexpected circumstances and increased longevity?

It might help to know what options are available. Most people are familiar these five traditional methods of providing for monthly expenses during retirement:

• Social Security Income (and sometimes Supplemental Security Income)
• Pension Income
• Retirement Savings Plans
• Medicare (and sometimes Medicaid)
• Part-time Employment

Each these five methods, however, have issues that explain why baby boomers look for other options. Social Security is not sufficient to provide the income necessary to sustain an individual during their 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.

However, baby boomers have a disproportionate amount of their retirement savings in their homes. For most homeowners, in fact, the principal residence is the largest asset they possess. Therefore, draws from home equity during retirement have become more prevalent.

How does someone crack the home equity nest egg?

The equity that is created by home ownership is something of value that can be accessed for additional income during retirement. The home can indeed be used as a retirement nest egg, but it is difficult to crack for various reasons. Ken Scholen, whose research helped create the home equity conversion mortgage, wrote on this topic back in 1995:

“Some people have used their homes as retirement nest eggs. But to do so, they have to do things that most of us would rather not do – sell our homes and move elsewhere, or take out a loan against our homes and start making monthly payments.”

– Your New Retirement Nest Egg

His writing was an inspiration to me as I wrote my book, because his message is more applicable now than ever. Baby boomers do NOT want to leave their homes in order to access the equity they have built. Ken went on to say:

“For most of us, home equity is not a source of retirement income at all. We spend decades building up equity in our homes. But we never cash in on our most important investment. We never get to use the equity we’ve worked so hard for.”

We know that Reverse Mortgages were established to solve this problem. We can convert home equity into a line-of-credit or monthly cash payments. This can supplement other forms of retirement income. While it may be beneficial to wait and opt-in to Social Security later, the same is not true for Home Equity Conversion. It actually makes sense to obtain one early in retirement, make payments to reduce the loan balance, and watch the line-of-credit grow as another form of future retirement income.

– Dan Hultquist

To learn more about how reverse mortgages can be used in financial planning, subscribe to this website in the right-hand margin.

Last week, I wrote a piece that violated my personal blogging guidelines – it exceeded 700 words. Worse yet, I couldn’t wrap up the topic in one blog, and had to split it in two.

I fully recognize that Dave Ramsey has credibility on a national scale. But don’t take his word as gospel on the subject of reverse mortgages. For that matter, don’t take MY word on it without having done your own research. Fortunately, financial planners, retirement specialists, and academia have all done plenty of writing on the topic. The Journal of Financial Planning is loaded with data indicating that reverse mortgages offer significant financial planning advantages that homeowners should consider. In fact, reputable publications agree. The Wall Street Journal recently published an excellent article written by Professor Wade D. Pfau, which eloquently explains the non-recourse feature and line of credit growth.

“…recent research has demonstrated how financially responsible individuals can improve their retirement sustainability with a reverse mortgage.”

“These reverse mortgages are also non-recourse, which means that one never owes more than the value of their home. This can be useful in the event of declining housing prices, and for someone living sufficiently long, there is real possibility that the line-of-credit will actually grow to be more than the value of the home.”         

– Professor Wade D. Pfau (blogs.wsj.com) – The Case for Reverse Mortgages

So, as a continuation of last week’s blog, let’s discuss and clarify some basic concepts Dave Ramsey still doesn’t understand.

Misunderstanding #4 – “Crazy Fees: Fees on a reverse mortgage are expensive and can cost you 10% or more of the loan amount.” – Quote from Ramsey website

MOSTLY FALSE

Yes. There are fees just like any financial transaction, and reverse mortgage fees are not only federally regulated, they are also common to mortgage transactions. Dave’s “endorsed local providers” charge fees too, but whether they are expensive (or crazy) will depend on how the products are used and the alternatives. If Dave advocates selling the home instead, I can assure you the fees will be far greater. I’ve seen reverse mortgages in recent years where the lender pays all, or most, of the closing costs. But comparing the fees to the loan amount also shows his misunderstanding. A homeowner may have a few thousand in fees, yet not draw any home equity. In that case, the fees could be $5,000, and the loan amount would be $5,000. The fees would therefore be 100% of the loan amount. That doesn’t sound attractive until you recognize that the available and secure line-of-credit (LOC) may be $200,000 or more. That drops the fees to only 2.5% of the current outstanding benefit. This LOC also grows tax free, and can be converted later into tax-free retirement income.

Misunderstanding #5 – “You don’t make monthly payments, but if you sell the house or move out for more than a year, the loan is due and the income stops.” – Quote from Ramsey website

PARTLY TRUE, but misleading

Monthly principal and interest payments are surely not required. But Ramsey followers should instinctively ENCOURAGE homeowners to make payments, regardless of the financial tool. This will reduce their loan balance and increase their home equity. It will also boost their line of credit which, if needed, can be converted into retirement income later.

The last part of this quote is just silly – of course the loan is due when you sell the home. ANY lien against the home is paid off during closing when a homeowner sells their home.

Misunderstanding #6 – “The interest rates that they’re calculated at are horrendously bad.” – Quote from Ramsey website

WRONG!

Well, I guess it is possible that Dave may have inside sources that allow his followers access to 0% rates, but I promise it will not be a non-recourse loan requiring no monthly payments. The last time I checked, a 2.25% lender margin (2.411% starting rate after adding today’s 1-month LIBOR) is very attractive. On top of that, it is a non-recourse loan.

For homeowners that are using the reverse mortgage for financial planning purposes, however, there is a significant advantage in higher interest rates. 2.411% may be nice for someone carrying a large mortgage balance, but HIGHER interest rates can help other homeowners, as the available line of credit will grow that much faster.

The Truth

The truth is: Younger homeowners SHOULD view mortgages as debt. They should make every effort to pay off, or pay down, mortgage balances in order to build a real estate investment for the future. Nevertheless, the home equity created by this investment should be viewed as a nest egg that may be accessed during retirement. The federal government has allowed older homeowners to draw from this nest egg, tax free, and continue to stay in their home without a monthly payment. Doing so requires a lender, a lien against the home, and a federal agency to insure the loan.

For the masses of homeowners who have the majority of their wealth tied up in their homes, let’s make sure their options are clearly explained. No more misinformation. While there are reasons to avoid a reverse mortgage, Dave Ramsey has not identified them yet.

Subscribe to this blog to learn more, and for Part I of this blog, Click the link below:

Dave Ramsey’s Misunderstanding of Reverse Mortgages is Hurting Seniors (Part I)

Best-selling author, and nationally syndicated radio personality, Dave Ramsey, has helped millions of individuals find financial peace with his sound budgeting advice. While this is worthy of applause, the mainstream financial planning community regularly disagrees with his guidance. The Motley Fool even describes his retirement planning advice as “dangerous.”

It saddens me that while reverse mortgage professionals across America are passionately helping older homeowners with debt consolidation and prudent financial planning, Mr. Ramsey holds them back. One of the most misinformed “planners” in the country has one of the loudest voices. So, I feel compelled to call him out. What I find however, is that I am not alone. Many others have investigated, and written their concerns about this growing problem.

“He’s huge… which makes him being wrong about something important a real problem, because he can spread incorrect information like a virus, infecting millions of people, and causing significant harm as a result.” – Martin Andelman (Mandelman Matters) Why Can’t Dave Ramsey Get his Facts Straight on Reverse Mortgages?

“He writes books; He knows about money – He must be right, I should follow his advice AND teach others to follow his advice… This is a dangerous premise and one that is somewhat unpopular for me to write about.” – Harlan Accola (Wisconsin Christian News) The Fallacies of Christian Financial Advice

Initially, I thought the problem was simply a fundamental difference in the way we view home financing. Maybe his personal problems with debt that forced him into bankruptcy caused a heightened sense of hatred toward banks and lenders. But, it appears that he simply has not done his research. Some of what he says may have been true in the 60’s and 70’s before federal regulation of the industry. But claiming these things are true today, is no different than saying “Dave Ramsey has a debt problem, and is facing bankruptcy.” It is no longer true and irresponsible to say.

I have been through “Financial Peace University” and really enjoyed it, but Dave has had over 25 years (since reverse mortgages became federally-regulated) to get his facts right. So, let’s discuss and clarify some of the concepts the he doesn’t explain correctly.

Misunderstanding #1 – “because interest accrues over the life of the loan, your debt can ultimately exceed the value of your home.” – Quote from Ramsey website

WRONG!

One of the first items addressed in nearly every basic training on reverse mortgages is that FHA insures against this ever happening. The FHA GUARANTEES that homeowners and their heirs will NEVER owe more than the value of their home. This is called a “non-recourse” clause, and is not only a primary consumer advantage, it is something that every reverse mortgage applicant is required to be counseled about.

Misunderstanding #2 – “You are also required to take a loan for the maximum amount you qualify for.” – Quote from Ramsey website

FALSE!

Not only false, the Federal Government PROHIBITS borrowers from taking all the proceeds up front unless needed to pay off large mortgage balances or other mandatory obligations that must be satisfied at closing. Yes, fixed rate products only allow a one-time distribution, but homeowners have ALWAYS had options where full distribution was not required. Even with the fixed rate, homeowners had the option of paying down loan balances at any time with funds they didn’t need.

Misunderstanding #3 – “If your loan exceeds the value of your home, you or your heirs will have to make up the difference if the home isn’t sold when the loan is due.” – Quote from Ramsey website

UNTRUE!

Once again, he has not read the federal regulations and consumer protections that are fundamental to this program. The non-recourse feature prevents any recourse to the homeowner or their heirs. In addition, the home is rarely sold when the loan is due. The heirs are given ample time to sell it and receive their inheritance if the homeowner has passed away with home equity. If no equity exists, the heirs may obtain the home at a discount (95% of appraised value). Yet, even if the home doesn’t sell, there is no recourse. The heirs do NOT have to “make up the difference.”

The Truth

The truth is: There are really good reasons NOT to get a reverse mortgage. I will write on that topic shortly, but Dave Ramsey’s blanket statements condemning the product are hurting older homeowners.

The truth is: Seniors HAVE lost their homes after getting a reverse mortgage. Yes, it is possible for ANYONE that owns a home to lose it. If you stop paying your property taxes, you may risk losing your home. That is true whether you have a reverse mortgage, forward mortgage, or no mortgage at all. Instead of scaring seniors, the reverse mortgage should actually REDUCE the fear that this will happen. Periodic draws from their home equity should actually INCREASE their ability to pay their property charges.

The truth is: reverse mortgages can be very effective at debt reduction, which is a passion that I share with Mr. Ramsey. Imagine paying off tens or hundreds of thousands of debt with reverse mortgage proceeds that allow homeowners the ability to pay off the new loan balance much faster, at interest rates in the 2%-4% range.

Subscribe to this blog to make sure you don’t miss part II next week.