Financial advisors look to housing wealth and reverse mortgages to improve cash flow, liquidity, and extend financial security for aging homeowners.
In the wake of record financial market declines, financial professionals are scrambling to help clients remain calm and ride out the storm. Beyond handholding, they are recommending clients don’t sell in the down market to avoid dangerous sequence of return risks. However, they urge clients to increase cash reserves and decrease spending to conserve cash flow and build liquidity. Clearly, good advice – but easier said than done given the situation today.
Retirees Threatened Most by Financial Upheaval
Mandatory shutdowns, loss of income, and battered financial markets wreaked havoc on investment accounts and retirement nest eggs. While it’s an obvious problem for investors, it can be devastating for retirees relying on limited income and weakened savings.
Fortunately, immediate relief from making mortgage payments, often the largest monthly obligation, is available for some homeowners.
Temporary Relief from Mortgage Payment Obligations – Forbearance
Under the recently enacted federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, banks are authorized to enable qualified borrowers the ability to defer making monthly mortgage payments up to six months. This is not debt forgiveness as the unpaid amounts are added to the loan balance at the end, but it provides needed relief to household budgets for a while.
Permanent Relief from Mortgage Payment Obligations – Reverse Mortgages
Older homeowners (62 and older) may be eligible to refinance to a reverse mortgage that defers all payment obligations permanently. No repayment is required until the homeowner sells or no longer resides in the property. Depending on individual circumstances, all existing liens are paid off eliminating their payment obligations. Further, additional funds or a line of credit will be made available for any surplus. The unique terms of reverse mortgages were developed to meet needs of aging homeowners, who do not want to sell, but wish to remain in their home to age in place.
The HUD/FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage is the dominant program nationally, accounting for over 95 percent of all reverse mortgage programs. HECMs are most suitable for home values up to approximately $800,000. Higher valued properties may be better served by new proprietary, or jumbo, programs.
Massachusetts – Jumbo Reverse Mortgages Now Available
The Massachusetts Division of Banks recently approved new proprietary (jumbo) reverse mortgages for MA homeowners. These programs enable loan amounts up to $1,500,000 and provide terms substantially similar to the federally insured HECM.
Financial Advisors Utilizing Housing Wealth in Financial Planning
Massachusetts home values have achieved record highs in recent years. Thus far, these values have been less affected by the COVID-19 financial turmoil. Recognizing an opportunity, savvy planning professionals are exploring best practices to lock in and monetize these values to increase liquidity and be better positioned to achieve client objectives.
To a large extent, home equity (housing wealth) has not been a mainstream tool in the financial planning process. That is changing. Converting a portion of home equity to a line of credit and/or additional cash through a reverse mortgage is one strategy advisors are now exploring to cope with the financial setbacks and enable clients to maximize use of all their resources.
Timothy Ehlers, RICP, Financial Advisor, Wood Wealth Group, characterized the reverse mortgage as “the Swiss Army knife” in the planning toolbox for its versatility in solving a multitude of retirement challenges.
Reverse Mortgage Overview
- No monthly payment obligations – prepayments are permitted without penalty but not required. Monthly charges are deferred and accrue.
- Credit line growth – the undrawn balance of the credit line grows (compounding monthly) at the same rate charged on funds borrowed.
- No maturity date – repayment not required until no borrower resides in the property.
- Non-Recourse loan – neither borrowers nor heirs incur personal liability. Repayment of loan balance can never exceed the property value at the time of repayment. If loan balance exceeds property value at time of repayment, the lender and borrower(s) are protected by FHA insurance.
- Access to funds and loan terms are guaranteed – cannot be frozen or cancelled as long as the loan remains in good standing.
- Borrower obligations (to keep loan in good standing) are limited to:
- Keeping real estate taxes, liability insurance, and property charges current
- Providing basic home maintenance
- Living in the property as primary residence
George Downey (NMLS 10239) is the founder of Harbor Mortgage Solutions, Inc., Braintree, MA, a mortgage broker licensed in Massachusetts (MB 2846), Rhode Island (20041821LB), NMLS #2846. Questions and comments are welcome. Mr. Downey can be reached at (781) 843-5553, or email: GDowney@HarborMortgage.com