Consider new uses of reverse mortgages for clients

Bolstered by the research of some leading financial advisers and new rules from the Department of Housing and Urban Development, reverse-mortgage lenders hope to recast the product's role.
FEB 16, 2014
For more than 20 years, reverse mortgages have been seen as a financial lifeline of last resort for seniors who are house-rich but cash-poor. Now, bolstered by the research of some leading financial advisers and new rules from the Department of Housing and Urban Development, reverse-mortgage lenders hope to recast the product's role. Reverse mortgages allow homeowners 62 and older with substantial home equity to tap that equity as a tax-free source of funds to pay bills or health care expenses, or to provide additional retirement income. Used properly, a reverse mortgage can also serve as a standby line of credit that can shield investment portfolios in down markets and improve chances that clients won't outlive their money. Unlike those who take on conventional mortgages, reverse-mortgage borrowers aren't required to make monthly payments. The loan must be repaid only when the borrower moves or dies, but interest accrues on any unpaid balances. “We in the reverse-mortgage lending industry find financial advisers are subject to the same myths and misconceptions as the general populace,” said Shelley Giordano, director of business development for Security 1 Lending and chairman of the industry's Funding Longevity Task Force. “We thought if we could bring together some thought leaders from various disciplines, we could focus on what's new in terms of housing wealth in the retirement distribution phase and help Americans have a more secure retirement.” Ms. Giordano listed some of those myths: The bank will get the house, children will be responsible for the debt, or the homeowner will have to leave if he or she runs out of money. Although none of those statements are true, a lender can foreclose on the property if a homeowner fails to pay property taxes or homeowners' insurance, as happened to some financially strapped reverse-mortgage borrowers during the Great Recession. THREE FACTORS The loan amount available to homeowners depends on three factors: home value — up to the current cap of $625,500 — interest rate and age of the borrower. The higher the home value and the older the homeowner, the bigger the potential loan amount. Low interest rates also boost the amount available to borrow. Nearly all reverse mortgages are government-issued home equity conversion mortgages. In response to problems that arose during the financial crisis, HUD issued new guidelines to the HECM Saver program in October that limit homeowners from borrowing more than 60% of the maximum reverse-mortgage loan amount at closing or in the first year after closing. 'RISK MANAGEMENT TOOL' Ms. Giordano pointed to joint research by task force member John Salter, a tax attorney specializing in pension matters, in conjunction with Harold Evensky, president of Evensky & Katz Wealth Management, and Shaun Pfeiffer, a professor of personal finance at Edinboro University. “Our study considers using a HECM Saver reverse mortgage as a risk management tool in conjunction with a two-bucket investment strategy, coined the standby reverse-mortgage strategy, in order to increase the probability a client will be able to meet predetermined retirement goals,” the three wrote in an article published in the Journal of Financial Planning in 2012. “A HECM is just another way we can help clients address their retirement income needs,” said task force member Marguerita Cheng, a financial planner and chief executive of Blue Ocean Global Wealth. A reverse mortgage also can be used as an income bridge to defer claiming Social Security benefits until an older age when they will be worth more, she said. Of course, even a standby reverse mortgage isn't without costs. Borrowers are charged 0.5% of the loan amount at closing, but that fee can be rolled into the loan. “The great benefit of an untapped reverse-mortgage line of credit is, it continues to grow at the rate of the cost of money,” said Alain Valles, president of Direct Finance Corp., a reverse-mortgage lender. Mary Beth Franklin is a contributing editor for InvestmentNews.

Latest News

The Stacking Strategy: How Intelligent Allocation Can Create Better Tax Outcomes
The Stacking Strategy: How Intelligent Allocation Can Create Better Tax Outcomes

What if one investment decision could create tax-saving opportunities across your entire portfolio? Chris Vizzi shares how the Stacking Strategy helps investors align tax planning, portfolio construction, and wealth preservation to maximize long-term outcomes while keeping more of what they earn.

AI could drag down RIA valuations, warns Alaris CEO Allen Darby
AI could drag down RIA valuations, warns Alaris CEO Allen Darby

Buyers spending on AI may treat less efficient sellers as overstaffed and price the cost of rightsizing into lower offers

Former Western Asset Management star bond manager fined $3 million
Former Western Asset Management star bond manager fined $3 million

Kenneth Leech pleaded guilty in June to one obstruction charge, and could face six to 12 months ⁠in ​prison.

Morningstar rolls out agentic AI platform built on its research
Morningstar rolls out agentic AI platform built on its research

Launch of Direct AI follows a model portfolio tie-up with Envestnet as advisors juggle AI adoption and private-market due diligence.

Advisor moves: Osaic draws Equitable advisor overseeing $245 million in assets
Advisor moves: Osaic draws Equitable advisor overseeing $245 million in assets

Meanwhile, Cetera's streak of Commonwealth recruitment continues in Washington, and an LPL advisor hops over to Raymond James in Maine.

SPONSORED Built on insurance experience to deliver on long-term promises

Knighthead Life entered the market with a competitive MYGA. A strong launch earned advisor confidence and paved the way for FIAs.

SPONSORED In the Age of AI, Trust Becomes the Advisor's Greatest Asset

As AI makes financial information more accessible than ever, Lana Hock explains why human judgment, trust, and empathy remain the qualities clients value most in a financial advisor