Tag Archives: HECM


Even State Legislatures Look to HECM as Recommendation…

shutterstock_Money under lock & key 49213123State Campaign Points to Importance of Reverse Mortgages in Long Term Care


March 17th, 2014  |  by Elizabeth Ecker Published in News, Retirement, Reverse Mortgage

A state and federal initiative launched in 2012 has resulted in a report to lawmakers on long term care financing including the use of reverse mortgages to help Americans fund longevity.

The Own Your Future initiative in Minnesota was launched in 2012 to make recommendations to state and federal lawmakers on paying for long term care. Between 2005 and 2009, 26 states each sponsored Own Your Future campaigns to educate their residents about long term care challenges and make them aware of options and planning methods.

In Minnesota, the campaign was expanded to include an ongoing public awareness campaign throughout the state; efforts to make more affordable and suitable long-term care products available to Minnesota’s middle-income households; and evaluation of possible changes to Medical Assistance (MA) to better align with and encourage private payment for long-term care.

Among the recommendations developed by the state initiative: the use of reverse mortgages. An advisory panel has accepted the recommendations of the subcommittee with a separate set of recommendations having been sent to Congress.

“The Lieutenant Governor [Prettner Solon] has assured us that now that the report is out, it’s not a report that sits on the shelf. Action will be taken,” says Beth Paterson, a Minnesota originator who was appointed by the state’s governor to serve as the reverse mortgage representative on the advisory panel.

The report covers 11 recommendations, narrowed down from 16 that were considered, toward solving long term care funding problems for older Americans.

“The current long-term care financing marketplace consists of insurance products, home equity options  such as reverse mortgages, and health and retirement savings plans,’ the report states. “None of these products has seen widespread use recently due to a number of factors, including the perception of their stability, their safety and their benefit levels.”

Specific to the reverse mortgage market, the report indicates, are public perception challenges that are making it even more difficult for reverse mortgages to gain a place in the long-term care conversation.

“The market for reverse mortgages (RMs) is likewise in a difficult position,” the report writes.”Recently, state and federal  agencies have changed regulations governing the program to address consumer issues with the program, but the perception persists that RMs, as currently constituted, do not have adequate consumer protections.”

Advocates have developed action items for helping the perception around and access to reverse mortgages among Minnesotans.

Written by Elizabeth Ecker


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Financial Times: Reverse Mortgages Can Be Lifesavers

March 5th, 2014  |  by Jason Oliva Published in News, Retirement, Reverse Mortgage

The financial planning community is warming up to reverse mortgages, with some advisors finding them to be “lifesavers” for some clients in tight circumstances, a Financial Times article suggests.

As reverse mortgages overcome historically negative perceptions with the help of recent program changes and new consumer protections, Home Equity Conversion Mortgages (HECMs) have also begun to gain more recognition from financial advisors in mainstream retirement planning.

Dana Anspach of Scottsdale, Arizona-based Sensible Money told Financial Times she recently recommended a reverse mortgage to a widow in her 80s whose home was paid off and was supplementing her Social Security with a home equity line of credit.

“Anspach used a reverse mortgage to pay off the HELOC, wiping out $400 a month in interest payments and providing additional monthly income of $200,” the article notes.

Other advisors are recognizing that the tax-free proceeds from reverse mortgages can allow clients to postpone Social Security usage as part of a “post-retirement tax saving strategy,” which can keep clients from withdrawing too much from IRA or 401(k) accounts.

“The bottom line is that reverse mortgages are not longer only for retirees in dire straits. Advisors ‘should be looking at every aspect of income, including home equity,’” said CEO of Blue Ocean Global Wealth Marguerita Cheng in the article.

Read the Financial Times article

Written by Jason Oliva


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A great reverse mortgage idea: Take a credit line now

Money in home 1August 22nd, 2013  |  by Elizabeth Ecker Published in Reverse Mortgage

I’ve got a financial proposal that is probably going to surprise you. Take out a reverse mortgage at age 62, even though you don’t need the money. In fact, take it especially if you don’t need the money. There will never be a better time. Terms will change in October, but the light is still green for people who want to use the strategy described here.

Reverse mortgages are called Home Equity Conversion Loans (HECMs). They’re designed to provide you with cash at a later age, to help pay your bills if your other savings run out. Normally, the smart play is to wait until your mid-70s or early 80s to take the loan. For some readers, this remains the right choice, as I’ll explain below.

But there’s a valuable new opportunity at hand, for borrowers who don’t need extra money now. You borrow as early as age 62 and take the mortgage in the form of a credit line instead of all-cash. You can borrow against the credit line at any time, but you don’t have to take the money now. More important, this credit line grows every year – greatly increasing your borrowing power in the future.

Before I go any further, let me give you some HECM facts:

At present, the credit line comes with one of two adjustable-rate loans – the HECM Standard, which provides a larger loan, and the HECM Saver.

With HECMS, you don’t have to make monthly payments, as you do with a regular loan. The mortgage doesn’t come due until you leave your home permanently. When the house is finally sold, the proceeds go first to repay what you borrowed, plus the accumulated interest. If there’s money left over, it goes to you or your heirs. If the house sells for less than the loan amount, the Federal Housing Administration, which insures HECMs, covers the lender’s loss.

Why take a HECM now? Because mortgage interest rates are so remarkably low. The lower the rates, the more you can borrow against your home equity. If interest rates rise, five or 10 years from now, you won’t be able to borrow nearly as much.

As an example, take a mortgage-free house worth $300,000. At this writing, a 62-year-old could get a $152,658 credit line on a HECM Standard, at an interest rate of 4.07 percent (including the mortgage insurance premium). If rates rise by 3 percentage points, you could borrow only $77,659. With a Saver ARM, which charges lower fees, you could borrow $131,029 today but only $47,329 if rates rise go 3 points higher..

But – and this is a big but – borrowers should not take out the full amount in cash. You’d be leaving nothing to help pay your bills in your older age. If you’re a spender, don’t take a HECM until your mid-70s or 80s.

If you won’t spend all the money now, a HECM credit line gives you tremendous financial flexibility. You owe interest only on the amount you actually borrow. For example, if you use $10,000 to take a trip, interest is charged on that modest amount, not on the entire credit line.

The magic in a HECM credit line is that your borrowing power isn’t fixed, says Jack Guttentag, founder of, a comprehensive mortgage information site. Your available credit rises every year, by roughly the mortgage interest rate.

For example, take that Saver $131,029 credit line. If mortgage rates plus insurance stay at today’s 4.07 percent , your borrowing power will rise to $196,710 10 years from now (assuming you’ve taken no money out). On the Standard, you could get as much as $229,182. The higher rates go, the more you can borrow.

As for the HECM’s upfront fees, I consider them worth it. They let you nail down a large pool of future borrowing power, at a time when inflation will have driven your expenses up. Our sample HECM Saver would cost about $5,771 and the HECM Standard, about $11,741. The fees can be rolled into the loan.

For a quick look at how much you might be able to borrow with a HECM, check the calculator at

So what’s happening in October? The government will merge the Standard and Saver into a single program, says Peter Bell, head of the National Reverse Mortgage Lenders Association. Limits will be placed on the amount of cash a borrower can take out in the first year. But you’ll still be able to take the maximum in a credit line. The fee might be a tad higher but all the benefits will still be there.


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As Housing Market Thaws, Seniors Once Again Willing to Move

bigstock-Sold-Home-For-Sale-Sign-Home-1893969A surge in consumer confidence, rising home prices and sales, and faster selling times for properties on the market are all positive signs for the senior housing industry. It’s enough to make some market analysts believe seniors have finally reached the seventh stage of recovering from housing market-related grief: acceptance and hope.

“About two years ago the market was in shock, going through the stages of grief, aligned with the housing market,” says Michael Starke, owner and managing director of senior market feasibility firm PMD Advisory Services, LLC. “They were in [the] denial, bargaining [stages]. But now the majority have moved into a period of acceptance. There is a lot more willingness on the part of the senior to start looking at moving. They’re more confident about the ability to sell their home.”

Part of that includes adjusted expectations as to what their homes are worth, he adds, and based on more than 100 focus groups PMD Advisory has conducted on about 1,500 seniors around the country, many now feel they can sell and get a fair deal—even if it’s less than what they might have gotten four to five years ago.

“It’s a trend I’m excited about,” Starke said. “Seniors seem to be in a place of acceptance about their economic situation and their home values. The activity level is starting to move, and that’s a really good sign.”

Existing home sales rose in April to the highest level since November 2009, according to the National Association of Realtors, up 9.7% from the previous year.

Properties are also selling more quickly, on the market for a median 46 days in April compared to 62 days just one month prior—the fewest days since the NAR started monitoring it in May 2011.

The slow but steady recovery of the housing market is good news for the senior living industry, and Chris McGraw, senior research analyst at the National Investment Center (NIC) for the Seniors Housing & Care Industry, noted that existing home sales are a better indicator for the independent living market than are home prices.

“At one point in time, the relationship [between housing prices and occupancy] was very strong during 2006 and 2009 when pretty much all economic data was plummeting,” said McGraw. ”Since 2009, the relationship hasn’t been quite as strong, because when you’re looking at occupancy, there are a whole lot of factors going into play.”


Chart credit: NIC—NIC MAP & Case-Shiller Home Price Indices 

Since bottoming out at 86.8% in the third quarter of 2009, independent living reached 89.3% as of the end of the first quarter of 2013, according to NIC data. Meanwhile, home prices increased 12.1% in April 2013 compared to the previous year—the most in more than seven years, according to CoreLogic.

However, independent living census is still below pre-recession peaks of 92.5%, reached in the fourth quarter of 2005 and again in the first quarter of 2007, and while there appears to be a correlation between occupancy and home prices on the recovery side, there’s more to the picture.

“Housing does play a piece, but it’s not the sole driver,” McGraw says of independent living occupancy.

The supply of new units is one piece of the puzzle, according to him, along with the performance of the stock market and its impact on seniors’ retirement portfolios, employment rates, consumer confidence, and the economy in general.

New construction for senior living stalled almost completely in the wake of the recession, but with a robust U.S. stock market spurred by low interest rates, capital is less constrained, say developers.

Another positive: consumer confidence reached a six-year high in May of 84.5 on the Thomson-Reuters/University of Michigan consumer sentiment index.

“The surge in consumer confidence is exactly the type of economic jumpstart the Federal Reserve intended to result from its aggressive policies,” said Richard Curtin, chief economist at Surveys of Consumers at Thomson-Reuters/University of Michigan, in a statement.

But there are caveats, including unemployment rates hovering at 7.6% through May 2013 and a recent report from the St. Louis Federal Reserve finding that household wealth still lags behind pre-recession levels when factoring in inflation.

“It will take actual and repeated income increases,” Curtain said, “rather than simply a renewed optimistic outlook for consumers to permanently revise their income expectations upward.”


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Reverse Mortgage Myths | Written by Pete Engelken | Mar 2012

A record nHouse-safe.jpgumber of people are entering retirement as the baby boomer generation approaches 65 years old. Between 2010 and 2030, the retiree population is expected to increase by 75 percent (from 40.2 million to 71.4 million).1  While this generation of retirees is healthier, more active and living longer than ever, many retirees are seriously unprepared economically for the financial requirements of retirement.

Over the past 20 years, we have seen a fundamental shift in how Americans prepare for retirement. In the past, the retirement income formula included three pillars: (1) Social Security, (2) employer provided and –defined benefit pension plans and (3) personal savings. Today, all three of these pillars are under stress. Our Social Security program is over-burdened and in desperate need of change to ensure its future health. Employers, once the guarantors of secure retirement for loyal employees, now have shifted retirement savings risk to individuals by replacing the previously defined benefit plan with newly defined contribution plans such as the 401(k). And responsible American savers have been hit with one of the worst investment decades since the Great Depression. To further complicate matters, many retirees of this generation are faced with costly maintenance and health care responsibilities for their own aging parents, who are also living longer.

Across all income levels, retirees are at risk of no longer being able to sustain their pre-retirement lifestyles. Based on the National Retirement Risk Index (NRRI), the majority of retirees surveyed face retirement risk. Five out of 10 high-income retirees are at risk of financial stress, while this number jumps to seven out of 10 for low-income households.2

Although these statistics sound bleak, the good news is that many options and viable solutions do exist to help people improve their chances of successfully achieving their retirement income goals and financial security. To help successfully navigate the retirement planning waters in this environment, one needs a comprehensive retirement plan that considers all available asset classes and resources, including among other possibilities, cash, fixed income, equities, guaranteed income and personal home equity. In fact, accessing home equity through a qualified reverse mortgage should be considered by retirees and financial planners in the overall retirement equation. Based on a 2010 Boston College study, when a reverse mortgage is considered in the equation, retirement risk may be reduced across all income segments.3

This is great news for Americans 62 years and older who collectively have more than $3 trillion of their wealth accumulated in the form of home equity.4 Home equity is too large an asset class for seniors and retirement planners to ignore when devising an individualized retirement strategy. When appropriate, there are two primary ways to unlock accumulated home equity in a personal residence: (1) sell the home or (2) borrow against the stored wealth. The first option, selling a home, may not be a preferred strategy for many seniors who often have deep emotional and physiological attachments to their homes and communities. In fact, 88 percent of seniors5 say they want to “age in place” and continue to live in their homes for as long as they can. A reverse mortgage can be a viable and affordable financial option for these retirees, who can gain access to additional cash flow while they continue to live and enjoy their home.

Over the years, I have come to know many financial planning professionals who do consider home equity as part of the retirement planning process when developing financial strategies with their clients, including clients of moderate to high incomes. These planners really understand the reverse mortgage product and its potential benefits and consider it a valuable alternative or supplement to other income sources in a sustainable retirement plan. However, a surprising number of financial and retirement advisors do not consider the potential benefits of a reverse mortgage and do not educate their clients on reverse mortgages because of basic misperceptions, confusion or general lack of product knowledge. So, what are financial advisors’ top misconceptions about using reverse mortgages?

1. A reverse mortgage should be introduced as a last resort.
I’ve had many conversations with financial planners who say they have clients who will get a reverse mortgage… in a few years. These advisors and their clients think about accessing home equity only after other assets are reduced. However, many of us in the reverse mortgage industry suggest that by waiting until such a late date to consider the use of a reverse mortgage, the planner may be missing some smart and creative planning opportunities that could help maximize the value of the client’s other retirement income resources, including Social Security benefits, retirement savings assets and pension plan distributions. In addition, home equity distributions may have advantageous tax consequences, which could result in numerous income tax planning benefits depending on the client’s individual situation. I will address a few of these potential planning opportunities later in the article. Further and perhaps more importantly, there is potential risk in waiting too long to consider the home equity option. Over time, the home equity cushion in a retiree’s home could decrease, as we have seen with recent depreciating home values.

Another risk is that the current government-sponsored and proprietary reverse mortgage programs may not always be available, and interest rates could begin increasing once again. Conversely, if better opportunities come along in the future, refinancing a reverse mortgage is an easy and affordable option.

2. It’s too expensive to do a reverse mortgage.
Too expensive compared to what? For this statement to make sense, we would need to compare a reverse mortgage to a similar alternative or substitute product. Yet I’m not aware of any other financial product that contains all the features, benefits, flexible payment options and consumer protections that the HECM reverse mortgage offers. This product was specifically designed to provide safe access to a percentage of a senior’s home equity by converting it into retirement income, with a government guarantee that the loan will be nonrecourse and that neither consumers nor their heirs will ever be personally liable for the debt regardless of whether the loan balance exceeds the home value when the loan becomes due and the home is sold. One of the most undervalued elements of the HECM program is the possibility for the consumer to request a line of credit or request equal periodic disbursements throughout the life of the loan. This is a very powerful feature, and one that provides flexibility and numerous financial planning opportunities. Many financial planners are unaware of the newest and lowest cost product in the HECM family, the HECM Saver, which nearly eliminates the initial closing costs and the initial mortgage insurance premium!

3. It’s better to sell and rent or downsize than to take out a reverse mortgage.
Not necessarily. Assuming that the client is not attached to his or her home, it’s nonetheless important to consider that selling and moving carries non trivial hard costs and opportunity costs. Selling and moving transaction costs can easily be $35,000 for a $500,000 sale assuming, 6 percent realtor commissions for the sale transaction and another 1 percent for moving expenses. As a renter, there is also a good chance that multiple moves will be required over time. If the senior elects to rent, he or she will have sold a valuable asset with the potential for appreciation in exchange for the inherent inflation risk associated with rental costs. If the client buys another home, there will be additional transaction costs incurred in the purchase, which takes another bite out of the home equity. After considering all the transaction and relocations costs, the net benefit to the consumer through a reverse mortgage could exceed the net benefits of other real estate transactions. With a reverse mortgage, homeowners (and heirs) retain any remaining home equity, after the loan is paid in full, at the time of sale. Moreover, the heirs have the option of either keeping the home or selling the home. Home retention and access to equity could also result in significant tax benefits to the homeowner. Interested seniors should consult with their tax advisors as the potential tax advantages exceed the scope of this article.

4. A home equity loan is better for my clients than a reverse mortgage.
Not necessarily. Traditional home equity loans and HELOCs typically require strict credit and income levels for approval by the lender, and they come with required monthly mortgage payments. Those monthly payments create a financial headwind if the client’s primary objective is to generate more cash flow. Furthermore, in the current economic environment, it is much more difficult for consumers to gain credit access to home equity loans, particularly for seniors facing reduced or limited incomes. In addition, most reverse mortgages have a nonrecourse clause, designed to prevent the client or his or her estate from owing more than the value of the home when the loan becomes due and the home is sold.6 There are no prepayment penalties with an FHA HECM reverse mortgage.

5. It’s legally challenging to offer reverse mortgages.
With the legislative and regulatory changes during the past few years, mortgage lenders and financial planners are more cautious than ever before in considering the cross-sale of financial services products and reverse mortgages, to ensure that reverse mortgage originators and financial planning professionals are not violating state and or federal laws.With properly designed safeguards and firewalls, reverse mortgage professionals can easily work with professional financial advisors to devise sound retirement and estate plans. It is important that both parties understand the state and federal laws and regulations, and that the lender is knowledgeable in this area and has established processes, procedures and compliance guardrails. Seniors, mortgage originators and advisors should avoid working with any financial planner who seeks compensation related to originating a reverse mortgage. With six out of 10 retirees dependent on financial advisors for retirement planning advice,7 it is critical as an industry that we effectively engage and educate planners on the potential benefits of reverse mortgage solutions for their clients.

For example, reverse mortgages may be used to help avoid retirement planning mistakes involving (1) inappropriate and inefficient utilization of Social Security benefits and (2) excessive distributions from retirement savings causing unnecessary and rapid draw-down. Using a Reverse Mortgage to Help Defer Ta king Social Security Today, record numbers of people are electing to take Social Security income distributions at age 62, which is the earliest age possible. Many financial planners suggest that healthy seniors delay as long as possible before starting their Social Security benefits, up to age 70. For example, a person who would receive Social Security benefits of $1,000/month at a full retirement age of 66 would get only $750/month if he or she claimed benefits at age 62. If instead, Social Security benefits were deferred until age 70, the same person would receive$1,320/month.8 This, however, is easier said than done. People are electing to receive their benefits early because they need the income to sustain their quality of life. That’s where a reverse mortgage can help. A senior can tap into home equity through a reverse mortgage to create an “income bridge” so that he or she may defer taking Social Security benefits until age 70. At age 70, the client can stop taking monthly distributions from a reverse mortgage and start taking Social Security benefits, which will then have nearly doubled for the rest of his or her life. Because any existing mortgage payments are also eliminated when taking out a reverse mortgage, there can be additional cash flow benefits for seniors.

Using a Reverse Mortgage to Stretch Retirement Savings Accounts
Many retirees have a very difficult time keeping their distributions from retirement savings accounts at a sufficiently low level to ensure their savings last throughout their lifetimes. Unexpected life events or health issues often come up, and low interest rates and poor equity market performance have resulted in low investment returns over the past several years.

One strategy for seniors and planners to consider is reducing the distribution from retirement savings each month and replacing it with a reverse mortgage home equity distribution from the HECM line of credit. By simply reducing the performance dependency of a single asset class, and adding a distribution from an additional asset class, the longevity of the retirement savings account can increase. This may help reduce the risk to the client of prematurely running out of money and depleting the retirement funds.

Avoid Reverse Dollar Cost Averaging
A reverse mortgage may also help seniors improve their overall portfolio returns over time. Many of us have heard about the benefits of dollar cost averaging while saving for retirement. The concept is based on a simple principle: If you invest a set amount in regular intervals throughout your working life, you’ll invest more of your funds at a lower average cost as the market moves up and down. In retirement, when taking systematic distributions from a retirement account, dollar cost averaging works in reverse, meaning you may withdraw more funds at lower values by selling more at lower prices. Assuming retirement savings are invested in the equity markets, one way to help avoid this phenomenon is to strategically use a reverse mortgage to take home equity distributions in lieu of retirement distributions during years following very low or negative returns in the equity markets. This gives your retirement savings a chance to rebound in future years when equity market gains return.

Reverse mortgage originators are well positioned to work in local communities and partner with financial planners to provide education on the benefits of a reverse mortgage. Remember that as a reverse mortgage origination professional, you are the expert on these products, and financial planners will need your assistance in determining whether a reverse mortgage fits into an individualized client financial objective or retirement plan. We are seeing more and more clients being referred by financial planning professionals, and this trend will likely continue as more baby boomers enter their retirement years. Please remember to seek detailed advice from a tax professional or accountant as necessary.

Keep in mind that you want to work with reputable, fee-based financial planners and work with a reverse mortgage lender who has well-designed policies, procedures and the regulatory guardrails to help protect the client, the professional financial advisor and the reverse mortgage originator.

1. Retirement Population Statistics: US Census Bureau, US Interim Projections, March 2004 Table A.
2. NRRI Fact Sheet No1, March 2010. Center for Retirement Research at Boston College.
3. Home Equity Statistics: National Reverse Mortgage Lenders Association (NMLRA/Risk Span RMMI Q1, 2011).
4. Statistics on Aging in Place: AARP Home and Community Preference Survey, November, 2010.
5. Federal Trade Commission. Reverse Mortgages: Get the Facts Before Cashing in on Your Home’s Equity.
6. INFRE, Society of Actuaries, LIMRA Report. 2011. The Financial Recovery for Retirees Continues.
7. SSA Publication No. 05-10147, ICN 480136, July 2008.


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Financial Planning and the HECM

“The Reverse Review” | Written by Jessica Linn Guerin

life-settlement-awareness-moneyThe Home Equity Conversion Mortgage has been around since 1989, but its original application was intended to be somewhat one-dimensional: a singular financial product designed to help seniors age in place. But now, as the product has evolved to include options like the Saver, new ideas are surfacing about how a retiree can tap into home equity as part of a strategic financial plan.

Just this year, prominent economic researchers published two independent studies, both examining in impressive detail various ways in which home equity could be used. Data was collected, simulations were run and the analyzed results all pointed to one simple fact: The HECM product could be leveraged to help certain retirees attain a livable flow of income.

For most financial planners, many of whom have long been wary about the product, this concept is a novel one. Traditionally, the planning community has viewed the HECM as a last-resort option for desperate retirees. It was considered an expensive option and not a feasible one for more affluent clientele. Now, these studies, published by the respected Journal of Financial Planning, are touting new and strategic ways to use home equity. They both suggest that planners reconsider a HECM for their clients, as retirees could benefit from employing the product to access tax-free income in a down market when cash flow is weak. The research piqued the interested of the press as The Wall Street Journal, CBS News and others picked up on the buzz.

The reverse mortgage industry was notably enthused (Finally! Financial planners are taking note!), but now many are left wondering what, exactly, they can do with this information. What are these studies really suggesting, and how can professionals in the reverse space use this information to enhance their business?

The Saver
The single most important factor in this new acceptance from the financial planning community is the HECM Saver. Introduced by the FHA in October 2010, the Saver was designed to address concerns about the HECM’s high upfront closing costs.

Homeowners utilizing the Saver option can’t borrow as much money as they could with the Standard (10 to 18 percent less, in fact), but in turn, they encounter significantly lower upfront closing costs. With the Saver, homeowners only need to pay an upfront premium of 0.01 percent of their property’s value, compared with the Standard’s required 2 percent.

By lowering the cost associated with a reverse mortgage, the introduction of the Saver eliminated the point of contention that prevented many financial planners from considering the product in the past. It also made the strategic uses discussed in recent research a viable option.

The Sacks Brothers
In February 2012, the Journal of Financial Planning published a groundbreaking article by brothers Barry and Stephen Sacks that examined how a reverse mortgage could be utilized to free up liquidity when the market is down.

The Sackses were inspired by the fact that, although more than 50 percent of retirees get a portion of their income from Social Security, a sizable number rely on securities portfolios to generate most of their income, usually in the form of a 401(k) or IRA.

“I was interested in the quantitative aspects of how to use these 401(k)s to achieve optimal results,” said Barry, a San Francisco-based real estate tax attorney with a Ph.D. in physics. “The object of the game was to make a securities portfolio last longer.”

Barry said he originally played around with different annuity models before “a light bulb went off in my head—there’s this home equity option!” The results of his initial numerical simulations were “so striking” that Barry enlisted his brother Stephen, a Ph.D. and professor emeritus in economics at the University of Connecticut, and together they conducted a lengthy study to examine how a reverse mortgage credit line could be leveraged to maintain what they call “cash flow survival.” The goal was to utilize the liquidity afforded by a reverse mortgage to avoid withdrawing from a stock portfolio when the market is down, keeping the portfolio intact and thereby increasing its potential to grow.

The Sacks study examined three strategies: a conventional, passive strategy that taps into the equity only when all other resources were exhausted; an active strategy in which the credit line is drawn upon after other investments have underperformed; and another active strategy in which the credit line is drawn upon first before other investments are tapped.

The results indicated that a portfolio’s survivability substantially increased when the active strategies were employed. The models revealed that in a 30-year period, a retiree’s residual net worth was about twice as likely to be greater when the active strategies were used. The results led the Sackses to conclude that in certain situations, a senior homeowner is best served by taking out a reverse mortgage early on in retirement and keeping the line of credit to draw upon when a portfolio lags.

Evensky & Salter
Not long after the Sacks article was released, retirement expert Harold Evensky and Dr. John Salter of Texas Tech went public with their own, yearlong study on the topic. First published in Financial Advisor magazine and recently picked up by the Journal of Financial Planning, the study also examined how seniors can tap into home equity to increase the survivability of their portfolios.

According to Evensky, a nationally recognized expert on the topic, the goal was to tackle the issue of wealth distribution in retirement. “It’s a major issue in planning today,” Evensky said. “How do you manage with constant withdrawals in a volatile universe?”

According to Evensky, he and Salter solved the puzzle. The answer? The HECM Saver.

Although Evensky admitted that he was originally reluctant to consider the HECM (“Like most practitioners, I considered them only appropriate as a last-ditch effort”), his opinions of the product changed when he learned about the low costs associated with the Saver. “The cost of setting it up is really quite modest,” Evensky said.

He and Salter used the Saver in simulations to analyze how a reverse mortgage line of credit could be leveraged to prevent an investor from liquidating a portfolio at the wrong time, when the markets are down and the investment would be a loss. “When you distribute money when a portfolio is down,” added Salter, “you’re stealing from the future.”

And so the duo determined that with the line-of-credit option, one could employ an “insurance-type strategy” in which the equity is tapped to provide supplementary income only when needed. When the markets bounce back and the portfolio recovers, the reverse mortgage is paid off. But in some cases, it won’t even be needed. “Our research suggests that a large percentage of investors would never even tap into it,” Evensky said, adding that if they do, the simulations indicate that most investors will have the ability to repay the loan fairly quickly.

“We asked ourselves, ‘Does this make our clients more likely to meet their retirement goals?’ And the answer turned out to be yes,” Salter said. “Through all the combinations, the strategy was successful. We simulated thousands and thousands of different possible scenarios.”

The researchers determined that using a HECM was an extremely viable financial strategy, and they recommend practitioners establish the Saver for qualified clients as a standby reserve. “It’s a very powerful risk management tool,” said Evensky. “It is key to managing market volatility.”

Boston College’s Retirement Research
An April study released by Boston College’s Center for Retirement Research further solidified the idea that financial advisors need to embrace the HECM. The study analyzed the percentage of income an individual needs to replace once he retires. The results, which included data on savings and investment strategies, suggested that 74 percent of retirees would fall short of their income needs at 62—an alarming statistic, to say the least.

The study set out to analyze ways in which this bleak situation could be improved. First, it examined the possibilities of asset allocation, looking at what would happen if an individual invested 100 percent of his portfolio in “riskless” stocks, earning 65 percent a year after inflation. There is, of course, no such thing as riskless stocks, but the idea was to present a best-case scenario. Even with this perfect investment, the study concluded that 44 percent of retirees would still fall short of income. The point is that asset allocation by itself—even at its most perfect—isn’t enough to turn things around.

The study determined that the traditional focus on asset allocation is misplaced. “Financial planners often tout asset allocation to boost retirement preparedness,” the brief states. “Even for households with substantial financial assets, asset allocation is less important than one would expect.”

Instead, the study concluded, people are left with few options if they want to maintain a livable income in retirement: work longer, cut spending and consider a reverse mortgage. That’s right—the study concluded that tapping into home equity was a powerful tool in assisting a retiree in achieving his income goal. It found that a reverse mortgage delays the age in which a retiree would run out of funds more than any other mechanism. “Given the relative unimportance of asset allocations,” its conclusion read, “financial advisors will be of greater help to their clients if they focus on a broad array of tools—including working longer, cutting spending and taking out a reverse mortgage.”

The Financial Planning Community Reacts
The recent buzz surrounding the use of HECMs has captured the attention of CFPs, leading many to reassess their opinions about the product.

Michael Kitces, a highly accredited financial planner and renowned industry expert, said he has seen a recent change in attitude among his colleagues.

“A few dynamics have been shifting lately,” Kitces said. “Part of that is the low-interest-rate environment and part of it is a general growing awareness of reverse mortgage programs and how they work, and the creation of the Saver. The lower cost has done a lot to improve the product in the minds of planners.”

He said the recent studies have helped break down the planning community’s notion that utilizing a reverse mortgage will detract from an individual’s net worth. He acknowledged that for more affluent individuals—who constitute the majority of a planner’s clientele—a reverse mortgage can work in all the ways outlined in the research. “If you want to make it work, you have to start early,” he said. “You borrow to slow the degradation of a portfolio and glide into the leverage of the reverse mortgage.”

Kitces said that despite the research, the number of planners out there implementing HECMs is still miniscule. “I’m trying to push the conversation out there,” said Kitces, who writes a blog for financial planners called Nerd’s Eye View and regularly travels the country speaking to various financial associations and CFP groups. In his highly circulated Kitces Report, he has discussed the complexities of reverse mortgages in depth.

Although Kitces said he’s noticed an uptick in conversation recently regarding the HECM, he doesn’t predict an immediate change in thinking. “It’s a trend that will catch on, but it will be very slow,” he said. “I don’t think you’ll see a tidal-wave shift anytime soon.”

Like Kitces, Rob Hoxton, a CFP and president of HFI Wealth Management in West Virginia, said newly proposed uses for the HECM have intriguing possibilities, but investors might be slow to come around to the idea.

He admits that part of the battle is altering a client’s mindset. “So many folks have worked their whole lives to pay their house off, and we’re talking to them about re-mortgaging it,” he said. “That requires a shift in the way they think. You have to help them understand that unless the home is a legacy asset, one that has a strong emotional tie they want to pass on to the next generation, they should leverage that asset. It’s a paradigm shift, really.”

Hoxton said less than 10 percent of his clients have actually utilized a HECM, but acknowledges that a large percentage would likely benefit from it.

“My guess is that demand for this type of product will increase, and then it may create a more competitive environment with greater transparency and lower fees,” he said. “The concept is a fantastic one.”

Melissa Sotudeh, a CFP with Warner Financial, said she has also noticed an increase in conversation surrounding the HECM.

“It’s coming up more often,” Sotudeh said. “People are taking a second look at the product, and part of that is because we are becoming more aware of the different uses. Like the HECM for Purchase—I had no idea that was possible, but when it came on my radar, I thought, ‘Wow, that could really work well.’”

Sotudeh thinks most planners would be eager to learn more about the product. “I tend to read anything that comes on my radar about reverse mortgages to make sure that I understand them completely,” she said. “From our perspective, as fiduciaries, the more we know about what’s available, the better we can do. If we understand the products out there, it adds value to the advice we give.”

Barry Sacks also said that more and more CFPs are taking a second look at HECMs, and like Kitces and Hoxton, he predicts that acceptance will come slowly. “Financial planners have begun to show interest, but they’re a harder bunch to get through to,” Barry said. “They still have a residual negative view about reverse mortgages, which in my opinion is unwarranted.”

But Barry said he does believe that eventually they will get on board. “I think it will be slow and fitful,” he said, “but in five or 10 years, they will likely come around.”

Harold Evensky agreed. “They absolutely will,” he said. “For one, the research is very credible. It’s an immensely high-quality academic research paper. I would tell them to look at the research. I don’t think they’ll be able to disagree with the research.”

But Evensky did predict that some advisors will have an initial knee-jerk reaction, automatically dismissing the product before really listening to its possibilities. “Practitioners are reluctant to tell people to take on debt,” he said. “They just need to understand. It’s not a last resort—it’s a strategy! The expectation is that the investor would not maintain the debt.”

Although he said the product is bound to pick up steam, he admitted that the going might be tough. “It will be an uphill education process,” he said. “No question about it.”

John Salter, who admitted that his own view of the product has changed “180 degrees” since last year, also said that educating the advisors would be challenging, but also essential.

“We need to continue the march to educate financial planners, get them to open up their ears and listen,” Salter said. “Help us educate them on the product and keep the conversation going, that’s the biggest thing.”

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Posted by on June 13, 2013 in Uncategorized


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“HECM Saver”: New option lowers Reverse Mortgage costs AGAIN!!

If you have been toying with the idea of taking out a reverse mortgage, note that the market today is significantly different from what it was just a couple of months ago.

Monthly insurance premiums on new loans went up last week, making an expensive product even more so. But the Department of Housing and Urban Development has offset that rise by introducing another reverse mortgage — the Home Equity Conversion Mortgage Saver — which slashes the upfront cost.

“It’s a mixed bag,” says David Certner, legislative policy director for AARP, of the reverse mortgage market.

A reverse mortgage is suited for older homeowners who have lots of equity built up in their home, but little cash and no other ways to increase their income. The amount you can borrow is tied to your age — you must be at least 62 — the value of your home and the interest rate. And you can get the money in a lump sum, monthly payment, line of credit or any combination of these.

Unlike a traditional mortgage, you don’t make monthly repayments with a reverse mortgage. Instead, the principal, interest and fees add up month to month. The loan is repaid when you sell the house, move out or die.

High fees have been a major drawback of reverse mortgages. With these loans, you have many of the same expenses you do with any mortgage, such as an appraisal. On top of that, the origination fee on a reverse mortgage can be up to $6,000.

You also must pay a monthly mortgage insurance premium for reverse mortgages that are federally insured, which is almost all them. This insurance protects lenders in case a house ends up being worth less than the amount borrowed and covers borrowers in case a lender fails.

That monthly insurance premium last week for new loans went from an annual rate of 0.5 percent on balance to 1.25 percent. This was raised to protect the government — and ultimately taxpayers — from having to make big payouts to lenders because of falling house prices, Certner says.

The new HECM Saver reverse mortgage offers some relief, though, by substantially cutting one of the upfront fees.

With the standard reverse mortgage, borrowers must pay an upfront insurance premium worth 2 percent of the value of the property, up to a certain limit. That’s $4,000 on a $200,000 house.

The Saver loan’s upfront premium is 0.01 percent, or $20 on that same home.

With current losses in senior equity retirement accounts (IRA’s, 401k’s) since 2007, this latest revision by HUD should be greatly received by many seniors and their financial advisers,  as a solution to supplementing depleted retirement funds at greatly reduced costs.

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Posted by on October 19, 2010 in Uncategorized


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