seniorsfirst

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

Reverse mortgages have emerged to be an “out of the box” solution to the record financial market declines and consequential loss to retirement savings.

At the time of this writing, April 14, 2020, the COVID-19 pandemic is presumably approaching its apex.  Clearly, no one knows if or when this will occur, or when life, as we have known it, will return to some semblance of normality.  

One thing is certain though, that the devastating shock to the world’s economy and individual finances is unprecedented in history and unpredictable in recovery.  All of this leaves financial advisors and their clients scrambling to find answers and solutions to the problems created by the COVID-19 financial turmoil, especially for those in or near retirement.

Confronted with inadequate or diminished retirement savings, the top concern among aging Americans is running out of money in retirement.  For them, it simply boils down to cash flow and liquidity – having enough income to maintain their lifestyle, and adequate savings to afford anticipated and unforeseen financial needs.  For some, assistance may be available by way of their home through a reverse mortgage.  

Reverse Mortgage – An Innovative Solution to Stabilize Financial Security

The HUD/FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage is the national standard accounting for over 95 percent of all reverse mortgages. Although the HECM program has been revised and substantially improved in recent years with additional benefits and consumer safeguards, it remains a relatively unknown resource to the majority of financial advisors and older homeowners.  

The HECM reverse mortgage is a unique resource for eligible homeowners (62 and older) enabling them to convert a portion of their home equity to tax-free cash without selling the home or taking on unwanted mortgage payments. Properly utilized, the HECM reverse mortgage can improve cash flow and increase liquidity for those who take the time to learn more and determine if it’s a good fit for their situation.

Reverse mortgage loan amounts are determined by: (1) current home value; (2) youngest owner’s age – 62 or older; and (3) current interest rates and program pricing. Higher valued homes and older owners are entitled to larger loan amounts.  Currently, the maximum home value considered for the HECM program is $726,525. New proprietary (jumbo) programs are designed to serve higher values up to $4,000,000.

Massachusetts – Jumbo Reverse Mortgages Now Available

The Massachusetts Division of Banks recently approved new proprietary (jumbo) reverse mortgage loans for higher property values providing loan amounts up to $1,500,000. These programs not only provide larger loan amounts, they feature benefits substantially similar to the federally insured HECM, but at lower costs and don’t require onerous HUD/FHA approval for condominiums.

Strategic Considerations

The unique provisions of reverse mortgages, and how they may be used, are too numerous for discussion here. However, two of the most common considerations include:

Sequence of Return Risk.  In down markets, such as exist now, requires the sale of larger amounts of investments to generate the needed cash.  Retirement experts recommend a better solution is to coordinate withdrawals from investment accounts with tax-free withdrawals from a reverse mortgage line of credit. This preserves the value of investment savings in down markets.  Numerous studies confirm that a coordinated strategy can significantly increase and extend retirement security.

Eliminate Mortgage Payments.  The burden of making mortgage payments from fixed retirement income is a problem that might be eliminated.  A reverse mortgage pays off all existing mortgages and liens, and does not require future payments be made.

Example: An 80-year-old owner of a home valued at $1,200,000 with a mortgage balance of $350,000 requiring $2,587 monthly principal and interest payments. The jumbo reverse mortgage paid off the $350,000 balance and provided the borrower and additional $316,000 of cash for future needs – without the obligation to make any future payments.  Bottom line, monthly cash flow improved by $2,587 and savings increased by $316,000.

End Notes                            

• While reverse mortgage provide unique benefits to many homeowners, they are not suitable for all. Thorough understanding of the provisions, costs, responsibilities and long- term effects are essential to determine if one would be a good fit for each individual situation.
• Current financial market conditions are unstable and unpredictable.  The availability of each program is determined by individual lenders and secondary market investors to continue funding capacity.  Thus, program availability, terms, and pricing are subject to change at any time.
• The purpose of this article is to increase awareness and encourage investigation to learn if, or how, a reverse mortgage may be an appropriate consideration for individual situations and circumstances.
• For more complete information, visit the website of the National Reverse Mortgage Lenders Association (NRMLA) at reversemortgage.org, or feel free to call me with any questions.

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 is a Certified Reverse Mortgage Professional (CRMP) and can be reached at (781) 843-5553, or email: GDowney@HarborMortgage.com