Reverse-mortgage firms aim at wealthy

A wealthy retired couple in their late 70s enjoyed an annual income of $80,000 but wanted to increase their standard of living.
MAR 19, 2007
SAN FRANCISCO — A wealthy retired couple in their late 70s enjoyed an annual income of $80,000 but wanted to increase their standard of living. After speaking to their financial adviser, they did something most rich people wouldn’t dream of doing: They used a reverse mortgage to tap into the value of their $4 million home in Los Angeles. “They got along OK, but with another $50,000 [of annual income], they can do what they want,” said their adviser, Phil Swan of South Pasadena, Calif. “It was the perfect solution for them.” Reverse mortgages, once considered the option of last resort for poor people who wanted to hang on to their homes, are growing in popularity. Now two of the nation’s biggest players in the industry have set their sights on the wealthy. BNY Mortgage Co. LLC of West Paterson, N.J., for example, is introducing a fixed-rate reverse mortgage to capture the business of affluent retirees, according to co-president Craig Corn. By offering a fixed-rate product, the company hopes to alleviate what traditionally has been a big concern to advisers: unpredictable interest costs. Meanwhile, Financial Freedom Senior Funding Corp., which claims that it completed 54% of all reverse mortgages last year, is also banking on rich customers. The Irvine, Calif., company offers a so-called jumbo reverse mortgage, which is designed for more expensive homes and comes with relatively lower fees. Though Financial Freedom expects to make improvements to that product over the next two years, the shift upmarket is out of the barn, according to James Mahoney, the company’s chairman. “[A reverse mortgage] was only perceived as the product of desperation, and now it’s being viewed proactively as a retirement tool” by rich people with other alternatives for raising cash, he said. Even so, financial planners should exercise caution before embracing these products, industry experts said. “This is a very, very expensive product,” said Ken Scholen, Burnsville, Minn.-based director of the Reverse Mortgage Education Project of Washington-based AARP. “It’s not going to be mainstream until the costs come down.” Timothy Spiess, partner in charge of the personal-wealth-advisers group for Eisner LLP, a New York accounting firm, said that tax experts — himself included — look “askance” at reverse mortgages. “I don’t like them per se,” because the same results can often be achieved by better, cheaper means for wealthier clients, he said. “But I’m open-minded.” Mr. Spiess, a former partner at KPMG LLP of New York, said he recently freed up cash flow for a retired California client with a $2 million home and limited income by getting the son to begin buying the house. But a reverse mortgage was worth considering as a solution in the absence of the son’s willingness to invest, Mr. Spiess admitted. Linda Tatman, a financial adviser with Financial Management Network Inc. of Mission Viejo, Calif., used a reverse mortgage for a client with $1-million-plus home to raise cash. The client had sufficient income for living, but she needed the cash to help finance her son’s legal fees in a custody battle for his child. “We’re not just using [reverse mortgages] as a last resort,” she said. The push upstream comes as reverse mortgages are gaining acceptance. Last year, 80,000 reverse mortgages were closed, up from 40,000 in 2005, according to the National Reverse Mortgage Lenders Association in Washington. In previous years, there were generally about 20,000 each year, the NRMLA said. But even those statistics understate the growth, because the size of the average reverse mortgage is growing rapidly, said Mr. Mahoney. Though he did not disclose the average size of a reverse mortgage completed by his company in 2006, the largest one was on a $20 million home, he said. NRMLA does not yet collect data on the size of reverse mortgages, Mr. Mahoney said. Historically, the typical reverse-mortgage customer has been 74 years of age, with a home worth $300,000. The rich generally are defined by the industry as having homes worth $800,000 or more, said NRMLA president Peter Bell. Fee-only wealth managers agree that it would be unwise to rule out reverse mortgages. “It’s on our radar, and it’s not infrequent to investigate it,” said Jeff Lancaster, a principal with Bingham Osborn & Scarborough LLC, which manages $1.9 billion from San Francisco. “But it rarely works when you tease out the math.”

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