Reverse mortgages can help some clean up after Wall Street “Katrina”.
Written by rmcinturff on Tuesday, March 17th, 2009 in HECM, HECM for purchase, New Lending Limit, Reverse Mortgage Articles, Reverse Mortgage Opinions.
We sat down recently with a group of financial planners to help them better understand how reverse mortgages could provide the supplement of cash flow their clients are clamoring for. They all admitted they had not looked toward the reverse mortgage as a viable financial vehicle until recently as some of their clients presented the notion that they would be willing to give up future equity to their heirs in lieu of access to cash today. That was the biggest eye opener to them as they admitted financial planners have 3 main goals in mind, to protect their clients assets, to grow their clients base and to create wealth for their client’s children. In fact, some admitted that part of their plan has always been to pay off the mortgage as fast as possible to cut down on the need for access to cash flow in their retirement years. “Making a mortgage payment on fixed income is not our idea of suitable planning” said one of the senior planners.
The third goal of creating wealth for the children had always locked them into the notion of leaving the real estate alone. “We seldom considered the home other than to sell it to create cash in extreme situations where a spouse needed long term care but had insufficient insurance to cover the duration of their hospital stay and subsequent rehabilitation” voiced the main partner. “That created another problem altogether as the remaining spouse was often forced to move to assisted living or to another family member’s home and the idea of not having anywhere to go often lead to family distress”, he added.
According to the Federal Reverse Statistical Release entitled dated March 12, 2009, Americans held $10.453 Trillion in mortgage debt in 2008. Estimated household net worth stood at $51.5 Trillion showing mortgage debt makes up one fifth of all household debt in the United States. But what’s really telling is that the amount of home equity held by households in the US fell to just 47%. In the hey day of 2004 when housing prices had sky rocketed, the amount of home equity stood at 56.7%%. The combination of a 10% reduction in home equity along with a $2.3 Trillion loss in retirement savings plans equals a “Katrina like” effect on the country and since the older a person is, the more likely they are to have saved more, so this “Katrina” is hitting our Seniors the hardest and they need help cleaning up.
The attitudes of homeowners will have to shift to be accepting of this option of the reverse mortgage. Its not a new option, reverse mortgages have been available since 1990 as a HUD based product but it existed before that as a bank created program and that history still carries weight today as some believe this is the program where the “bank takes the home”. That was the case before HUD intervened on the newest incarnation- the HECM or Home Equity Conversion Mortgage. This newest version (almost 20 years old now) protects the homeowner from the bank someday taking the home from them regardless of remaining principle or equity. The 2% mortgage insurance premium (MIP) taken at settlement as well as the ongoing .50% added to the rate each month ensure the homeonwer retains title until their passing or moving away. Taxes, homeowners insurance and property upkeep are required, but they will no longer have monthly payments of any type to pay back the loan. Reverse mortgages are typically paid back after the passing of the last remaining homeowner by the sale of the home by the estate and any remaining equity goes to that estate.
The same estate that was managed by the financial planners and estate planners will have to at the very least consider the use of the home’s equity to make up for the 10% equity loss and $2.3 Trillion in investment losses if it wants to replace the lost cash flow those 2 could have provided. This is the same cash flow that can be used to pay off the average 53% in mortgage debt for those 65 and over as well as credit card debt, remaining installment loans, increased property taxes, increase health care costs and generally, the increase overal cost of living without reducing the quality of living. With the recent increase in the nationwide lending limit to $625,500 and the addition of product such as the reverse mortgage for purchase program, there are now MORE products for MORE of our seniors than ever in the plight to recover access to cash.
For those that have found this site useful in better understanding reverse mortgages, please share the information with your financial planning group or estate planning representative to at least get them thinking about using a reverse mortgage to help increase your monthly cash flow where other plans (maybe their own) have fallen short. A reverse mortgage can be used to clean up after you thought all could have been lost.
