REVERSE MORTGAGE INFORMATION: Tools, News and Resources to Help Seniors Decide

More and more seniors are utilizing reverse mortgages to pay off existing home loans, helping free up monthly cash flow to keep up with ever increasing monthly living expenses. Its not a new phenomenon but one that is far exceeding any other reason for obtaining a reverse mortgage. As the senior homeowner battles increasing fuel and food costs, rising health care costs and the roller coaster pressures on their retirement portfolio, the folks also making monthly mortgage payments are looking for some kind of relief. Recent reports are also showing that a large portion of the retirement ranks do not have sufficient retirement portfolios that allow them to handle any increase in monthly costs. In fact, a large portion don’t have enough, period.

As an example, a 71 year old man with an existing $100,000 mortgage would be paying principle and interest of $615 a month on a 6.25% loan and $5979 a year in interest. They could pay that off with a reverse mortgage and not only keep that $615 each month in their pocket or checkbook but the interest that would accrue on the unpaid balance would be over $1000 less than what they paid out the previous year. That $615 could be the difference in the client keeping the lights on or reducing credit card debt or anything they had to pay off that they couldn’t afford to do before. In addition, they would have access to monthly tenure payments or they could put any remaining equity into the credit line for future purchases or to cover the unanticipated “rainy day”. The credit line on a reverse mortgage grows over time at the prevailing rates, currently in the 4.60% range, not a bad return on YOUR money.

Not only can the reverse mortgage remove the headache of making those pesky monthly payments during retirement years, it can give the homeowner piece of mind that they can increase their monthly cash flow and lower overall interest accrual. With the new housing bill about to go into place, there are still many potential reverse mortgage clients sitting on the fence waiting to pay off home mortgages that do not currently qualify because they owe more than the varying lending limits allow. Those limits range from $200,160 to $362,790 but are set to go to a national limit of $417,000 or higher in some places. As an example, a person in a $300,000 home in a county where the lending limit is $200,160 will see a large increase in the amount of equity they can access and it can be the difference in keeping the home where a subprime loan was set to adjust to an amount the client could no longer afford.

To see the amount of a home mortgage you would be able to pay off, click the “Calculate Benefits” button on the left hand side at www.libertyreverseadvisor.com/rickmcinturff/about.htm.

The recent signing of the HOUSING AND ECONOMIC RECOVERY ACT OF 2008 (HR 3221) by President Bush puts into motion something that has been long in the making and that’s a modernization of FHA rules for reverse mortgages. Some of the changes facing potential reverse mortgage clients are an increase in the national lending limit from the individual county limits now in place. Folks in some parts of the country will see their lending limit rise from as low as $200,160 to an anticipated $417,000 and that’s good news for those with home values over their county lending limits since any equity access was determined from the lower of the appraised value or the respective county lending limit. In many cases where the reverse mortgage was to utilized to pay off an existing forward mortgage there wasn’t enough cash access to pay off that mortgage and the borrower either had to come to the table with money or look for alternative methods which often led to selling the home and in a down market, that’s neither easy or fun.

Another change is with the origination fee, currently capped at 2% of the lesser of the appraised value or the county lending limit. The new bill will keep the 2% up to $200,000 but cap the origination fee at $6000 which is more than $1200 less than some of the highest fees where county lending limits were as high as $362,790. In that case, 2% of that amount would have resulted in an origination fee of $7255.80.

Higher lending limits combined with lower origination fees are great for those seniors whose circumstances have them looking at ways to increase their monthly cashflow without making risky investments in a roller coaster stock market.

Some new additions to the bill are for folks in co-ops and those looking to use the reverse mortgage as a finance tool to help them purchase a home, most likely in a downsizing event. Currently, only New York co-op owners are able to secure reverse mortgages because of their prevalence. There are other pockets of the country with co-ops and this will be a relief for those co-op owners as other means of financing have disappeared as most boutique programs are no longer available. In the event someone wants to downsize from a larger, more expensive home, the ability to purchase a home using a reverse mortgage is also a welcome addition. As an example, someone in a $400,000 home can sell the home, take a portion of the proceeds for purchase of a less expensive home, say $200,000, and instead of putting up the entire value in cash, they can put down a small portion, in this example, half of the value and finance the other half and not only do they eliminate monthly mortgage payments, they keep a larger portion of their cash in their pocket and in this market, cash is king. Instead of having $200,000 left over from the sale of the home, they now have $300,000 and no monthly payments as long as they live in the home. That’s also great for those that don’t currently qualify for a regular mortgage because of bad credit or insufficient fixed monthly income as those programs have gone the way of the other boutique programs once offered by most forward lending brokers.

Some other features are a prohibition against requirements to purchase additional products as a condition for HECM eligibility such as annuities or life insurance policies. That is good news as the recent negative information about reverse mortgages has been because of this very practice. Folks short on cash flow that need a reverse mortgage should not have their money tied up in any annuity, be it immediate or deferred. The reverse mortgage provides more cash flow with less restrictions than the annuity could anyway in most situations where monthly cash flow is short. Another mention is about a study to determine consumer protections and underwriting standards for HECMs which will help to insure that purchase of any additional products by a consumer is appropriate for the consumer.

We like the new changes, they are consumer protection focused and open up opportunities to help save some homeowners from increasing monthly payments on their forward mortgages that were having a harder and harder time making that increased payment amount and the homebuying function is a great tool for credit challenged or those looking to downsize into more affordable housing.

We’ve written in the past about the reasons why HECM borrowers stay away from guaranteed lifetime payment options (like annuities or the HECM tenure option form of payment) despite strong research showing these are the optimal financial payment plans for most people.

Now, a new report from the Fidelity Research Institute sheds more light on the topic. As part of the recently released study , a survey of retirees and pre-retirees was conducted to help identify barriers to selecting annuities. (more…)

Fidelity Research Institute has issued a new report . The study is yet another thorough analysis highlighting the importance of permanent income streams in retirement. Although reverse mortgages are not mentioned in the report, several of the findings are very pertinent here.

Guaranteed income, according to the report, is simply income you cannot outlive. Traditional guaranteed income sources (social security, defined benefit pensions, etc.) are dwindling in importance and will be relied on less and less by future generations of retirees. The study notes that it will be critical for retirees (more…)

There is no question the most popular payment choice for HECM borrowers remains the HECM line of credit. Recent data from HUD shows that 94% of the 319,035 HECM loans originated from January 1990 through June 30, 2007 have either been straight lines of credit (81%) or credit lines combined with another payment form (13%).

The HECM line of credit option has increased in popularity along with the boom in reverse mortgages over the last year. At the end of March 2006 (when total number of HECMs stood at 188,000) the straight line of credit was the payment option selected by 78% of HECM borrowers. 92% of borrowers at that time chose either a straight line of credit or a line of credit combined with the tenure or term payment options. (more…)

We came across a new study that looks at some of the behavioral reasons why people tend not to choose lifetime payment (annuity) options – despite the fact that, more often than not, this would be the “rational” thing to do. The study comes from the Pension Research Council at the University of Pennsylvania’s Wharton School.

It’s an academic paper (a difficult read – formulas and all), but we pulled from it some interesting points that may be useful in helping reverse mortgage borrowers better understand the framework within which they make their decisions:

• Mental Accounting – According to the study, the most important reason for annuities being unpopular is mental accounting. Mental accounting refers to the tendency to view financial decisions in isolation rather than within a broader framework of total wealth. People tend to view the lifetime payment decision as an isolated gamble (“will I live long enough to recoup my initial investment”) rather than as a component of a larger retirement funding picture. The study notes:
  

  “If annuity outcomes are segregated from their impact on total retirement spending, then purchasing an annuity appears to be a gamble which increases overall risk, rather than a form of insurance which can reduce risk. In order to combat this problem, annuity marketers and financial advisors need to better frame the annuity as longevity insurance. Having longevity insurance in the form of an annuity should reduce the need for precautionary saving and thus allow annuity holders to consume more in retirement.”

• Availability Heuristic – People are prone to assign greater weighting to “more easily imagined” factors in their assessment of probabilities.
  

  “In the case of annuities, the availability heuristic may play a role in overemphasizing the possibility of dying shortly after the annuity is purchased, because there are many ways an individual can imagine his imminent demise. The likelihood of greatly outliving one’s life expectancy may, on the other hand, not have as much salience, except in those cases where family members or other acquaintances have survived to very advanced ages. This exaggeration of the likelihood of early death would make annuities appear worse…”

• Fear of Illiquidity – People often feel the need to have quick access to cash to take care of emergency needs. With lifetime annuity plans, liquidity is sacrificed in exchange for regular lifetime payments. The study notes:
  

  “(S)imilar to the behavioral mistakes that individuals make when assessing probabilities of dying at early ages, it is quite possible that individuals also overstate the likelihood of catastrophic events that may require sudden spending that could not be met after annuitization.”

In November 2006,we reported on a Boston College study showing that HECM borrowers would best be served by choosing the “lifetime tenure” payment option – an option guaranteeing regular monthly payments to the borrower until loan termination (death, sale of home, etc.). Yet, only about 5% of HECM borrowers actually chose this payment stream. The new Pension Research Council study points to some of the reasons why and can give borrowers valuable insights into their decisions.

You are likely aware that the popular Home Equity Conversion Mortgage (HECM) reverse mortgage program offers borrowers a variety of payment options by which they can receive the borrowed funds:

• line of credit – by far the most popular option under which borrowers can draw funds down as needed;
• lump sum
• term – fixed payment for specified number of years
• tenure – equal monthly payments for as long as the borrower remains inthe home
• combinations of the above

We’ve written before about reasons why the tenure option (or “lifetime income plan”) may be the best payment option for seniors – even though relatively few select it. Like an annuity, the tenure payment option provides a regular monthly income stream that can help protect borrowers from outliving their resources.

Now comes a detailed from the Center for Retirement Research at Boston College that clearly demonstrates that the HECM lifetime income plan (tenure option) is the best financial choice for seniors under almost all scenarios:

“We find that over a wide variety of assumptions about asset returns, the optimal strategy for all but the most risk tolerant households is to take a reverse mortgage in the form of a lifetime income. We are informed by the National Reverse Mortgage Lenders Association that only a small minority of borrowers choose this option, as most choose a line of credit. Our findings appear to be yet another manifestation of the widely documented reluctance of households to annuitize their wealth in retirement. There are substantial differences in reverse mortgage equivalent wealth among strategies, and in our base case a household with average housing and financial wealth…would be 33 percent better off taking a lifetime income at age 65 relative to taking a line of credit when financial wealth is exhausted.”

(From “, Wei Sun, Robert K. Triest, and Anthony Webb – November 2006 – emphasis added)

The study is based on an analysis of actual historical investment returns for the period 1975-2005 and simulates outcomes under a variety of potential scenarios and assumptions. As an academic study, the paper is, unfortunately, not an easy read for the average person. Much of it focuses on details of the methodolgy and other academic issues.

Still, as the reverse mortgage marketplace continues to grow, the study highlights an important issue that reverse mortgage counselors, lenders, policymakers and, most importantly, borrowers need to be cognizant of: Most senior homeowners would be financially better off choosing the lifetime tenure payment option. But, according to this graph from materials, only about 5% of HECM borrowers historically have chosen the tenure payment option:

Not only do the study’s findings run counter to the actual decisions being made by reverse mortgage borrowers, but also to much of the information and advice being given to potential borrowers. For instance, popular literature on reverse mortgages tends to be somewhat biased toward line of credit option because of the flexibility it offers and the fact that the HECM credit line “grows” while it remains unused. Examples:

“A credit line. You decide when and how much you wish to withdraw. This is, sensibly, the most popular choice.” (The Reverse Mortgage Advantage, p.99)

“This is what I believe to be the remarkable feature of the reverse mortgage…No other mortgage that I know allows this type of growth in a line of credit.” (The New Reverse Mortgage Formula, p.29)

Hopefully the Boston college study will spur additional discussion on the issue.