Are Broker Dealers Promoting Reverse Mortgages To Clients?

image A new article from Bank Investment Consultant Magazine writer Howard J. Stock covers the changes HERA brings to reverse mortgages and details how some broker dealers are approaching the product. 

According to Higher Loan Limits for Reverse Mortgages, many broker dealers remain wary of reverse mortgages, which Howard writes are regulatory hot potatoes for advisors.  AARP legal policy director David Certner added that it’s not a good idea to invest money borrowed at a cost of around 10% of the total loan unless the circumstances are dire. "To put [reverse mortgage] money into an investment product that also charges fees doesn’t make much sense," he says. 


ING owned Primevest, a broker dealer declined to comment on the new limits and Raymond James said it won’t let any of its clients invest funds raised though reverse mortgages.

But for some retirees who either haven’t saved enough or who have been slammed by recent market turmoil, the new limits may make reverse mortgages a welcome option. But "If I was a financial advisor, I’d look at all other sources before tapping reverse mortgages," Certner says. 

Mr. Certner, good thing you’re not a financial advisor. 

Higher Loan Limits for Reverse Mortgages

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  • I am not sure I have ever heard a sound reason to obtain
    a HECM FHA Reverse Mortgage for purposes of investing the
    proceeds. This concept totally misses the mark of the
    concept. A free and clear home has no counterpart:it is the
    best of the best investments any family can have.

    The Reverse Mortgage is designed for two classes of Seniors:

    1. Those that need Money
    or and
    2. Those who do not need money,but want money to
    fulfill a long sort after dream

    Either or both goals should be the open choice of Senior
    Homeowners who have substantial equity in their homes.

    I cannot conceive of any one seeking a Reverse Mortgage
    who does not fall into one of these two categories.

  • Bob, I realy dont understand that response.

    The problem here is putting one blanket statement out there for all seniors.

    Do you know each borrowers risk tolerance,net worth, goals, levels of diversification?

    If not, no one should regulate or restrict anyone from using this money however they want to.

    “A free and clear home has no counterpart:it is the
    best of the best investments any family can have”

    Your kidding right????

  • Gail,
    Your concurrence carries a lot of weight,since you
    are a senior and a Reverse Mortgage Consultant. Security
    is upper most in our considerations as we plan to weather
    the storms of the future.

  • Steven,
    I do not mean to cast any dogma against Seniors who
    may choose to invest for their future. It is very important
    to openly discuss the details of any financial proposal
    with close members of the family,unless otherwise directed
    by the Seniors.
    Irrespective of current vagaries of the market place, I
    continue to feel there is still no place like HOME. Can’t
    think of a close second choice to a free and clear home.

  • You guys can go do what you want, but while you’re doing it, I will humbly volunteer to write all the business with the marketplace Bob identifies: those homeowners who have their hands forced and also those who are seeking some personal financial leverage.

  • The issue ought not be Bob’s comments but the one from David Certner that reverse mortgages should be a method of last resort.

    This reflects a common view among many CPAs, attorneys, and stock jocks. It was a reasonable one when private-label Equity-Share and Term reverse mortgage programs were still being written, and municipally-sponsored reverse mortgages designed to satisfy tax liens and pay remodeling costs did require signing over the title.

    But these designs disappeared from the marketplace back in mid-90s and few of these other professionals have seriously reviewed reverse mortgage designs since then. What has opened up with their disappearance is a legitimate market for personal financial leverage to get something else done – the reverse mortgage is just a funding tool.

    A free and clear home is a great thing if you can afford it. Not only can you not take it with you when you go, most likely the kids would prefer the dollar value of the home instead of the home itself. In the meantime, you can’t live off it before that day comes.

    Professionals who make unreasonable anti-reverse mortgage statements think they have summed up a powerful argument in a neat emotional sound bite that will end the whole conversation in their favor.

    When you get one of those statements, let them start to get drunk on the sweet smell of victory for a moment or two. Wait longer than one would normally would to reply in a conversation. Then look down with a thoughtful expression, then look up, smile, and ask them a simple counter-question … “Let’s talk about tax-equivalent yields, and by the way… is your E&O insurance paid up?”

    In the stunned silence that follows, gently explain that, “I’m only asking in case the kids learn that you advised Mom & Dad into a asset spend-down program creating taxable income instead of using some of the existing dollar value of the home and which is usually not taxable itself, and which also does not affect the taxation of other retirement benefits. A lot of them don’t like that.”

    A hard question in a soft voice gets their attention, but can also makes it possible to clear out the old baggage and start the real discussion. Do not gloat or make the meeting about you. Your goal is not to overpower an enemy; you goal is to make them stop thinking that you (or a reverse mortgage) are an enemy so you can create a new alliance. That’s what’s in the way of doing some planning work together for the benefit of the client.

  • I support and agree with Bill completely. If you compare the loss of assets due to a spend-down vs the closing costs of a reverse mortgage, you will find it doesn’t take much of a spend-down to cost more than obtaining a reverse mortgage.

  • Mr. Peters,

    Al Capone allegedly said: “My mother always told me that a kind word goes a long way but I found a kind word backed up by a gun goes farther” (or words to that effect). Maybe you should try Al’s technique.

    Your insights into the professional world of CPAs and attorneys are flawlessly and hopelessly amiss. It is time you get out of the world of make believe. Your childish skit is nonsense. I cannot believe the total and sheer lack of professionalism expressed in it.

    I’m sorry but I have never had E&O insurance; however, I cannot speak for “stock jocks” as you call them. Like attorneys we, CPAs, have malpractice insurance. I was the partner in charge of taxes for the ninth (now seventh) largest CPA firm in Los Angeles County for over sixteen years. I was also employed by Kaiser Steel Corporation as head of its income tax department in the early eighties.

    Please explain how a reverse mortgage has an after-tax equivalent yield of anything. Are you saying that a reverse mortgage will always result in the principal taken being greater than the value of the home at the time the mortgage is due and payable? The TALC schedule demonstrates somewhat similar phenomena but where is the after-tax yield on that schedule? Can you provide that information in a readily understandable format?

    Why isn’t a reverse mortgage a loan of last resort? It clearly is. But it is also a LOT more than that.

    How do you know what common views CPAs or attorneys hold? Please cite your source.

    In most cases, I am the first CPA my clients have ever met. They can’t tell me what those initials stand for. Without looking it up somewhere, can you? Most do not have attorneys. As experienced as you seem to claim to be with dealing with CPAs and attorneys, you must have a slew.

    I know of few CPAs or attorneys (again I cannot speak for “stock jocks” as you call them) who advise their clients “into a asset spend-down program creating taxable income instead….” Where was I when that was being taught?

    You seem to know a lot about my profession. I wish you spent as much time in my former profession as I have in your present “profession”.

  • Mr. Koebel,

    Are you as poorly informed as Mr. Peters?

    What type of spend down are you referring to, an estate or a Medicaid “spend-down”?

    How does a reverse mortgage compare to either one? In fact a reverse mortgage MAY enhance either one. I know at least one attorney who encourages reverse mortgages with the spend-down technique he uses for Medicaid purposes.

  • Now let’s get to the article.

    For a writer, the opening paragraph is a delight: “On Nov. 6, new regulations officially raised the maximum amount that homeowners, age 62 years or older, can “borrow” by selling their homes back to the bank.”

    Forgetting about the fact that regulations are much different than mortgagee letters, let’s move to the end of that paragraph. The author holds to the old myth that reverse mortgage borrowers are, in fact, sellers and the bank is purchasing the property. Based on this introduction to the author, it is no wonder his insights are dubious. It seems he can’t get the lending limit right at $417,000 (versus his $419,000).

    It seems the author believes that “advisors” have regulatory restrictions in recommending reverse mortgages. I would love him to cite the regulations.

    It is refreshing, however, that David Certner is hestitant to advise seniors to borrow on a reverse mortgage and then use the proceeds to buy investments that have large commissions associated with them. I see nothing wrong with that attitude.

    The other day I read a book on reverse mortgages that advises consumers to buy an annuity if it pays more than the reverse mortgage. What nonsense is that? The book was written by a CPA. The advice could not be worse. There was no caution about 1) the possible need for joint and survivor provisions, 2) income tax liabilities, 3) surrender penalties, 4) the economic costs of some or all of the loan being outstanding versus the slow buildup of debt from tenure payments, and 5) many other issues.

    When it comes to protecting seniors from inappropriate investments, I wish more “advisors” thought like Mr. Certner. If they did, the explosive nature of the McCaskill hearings would have been far less dramatic.

  • We are way off track from the topic of the initial post; I’m sorry I contributed to it.

    Mr. Veale,

    The worst disagreements I have ever experienced in my life came from circumstances where each party misunderstood the position of the other. On top of this, there was usually a misunderstanding about terminology, so that each meant something different from the other for the same term, word or phrase. I think that both may be the case here.

    My example was offensive to you and you profession; that’s the last thing I want. It was meant for situations where another advisor was so highly confrontational that their behavior moved the focus of the discussion away from the circumstances and goals of the client. The goal of the example was to stop the assault and get the discussion redirected back to the client, not to score points or beat up the interrogator.

    These rougher meetings have one thing ion common: the other advisor inaccurately tells me why reverse mortgages are a bad idea, rather than asking if and how one might work for the present case. I’ve had more of these with attorneys and stock brokers rather than CPAs, and I usually get a few cases brought to me by CPAs, so I am most definitely not on the warpath with the accounting profession.

    I used E & O as a generic term for malpractice insurance in my post.

    There are several aspects to tax equivalent yield.

    Since I could be talking to a stockbroker, insurance agent, or even a realtor, I want to make sure that the other advisor understands that reverse mortgage proceeds are not taxable as ordinary income or capital gains unlike Qualified Plan or IRA assets, annuities, or investment or rental properties. If they want to look at the numbers for some comparative scenarios, I refer them to a tax professional for the fact-checking and the calculations.

    Reverse mortgages can help preserve other income-producing and/or investment assets. They can boost retirement income by eliminating the monthly cash flow drag of a mortgage payment and/or provide a supplemental income stream. Since the IRS treats all reverse mortgage funds as loan proceeds, the client may be able to reduce or delay their reliance upon the spend-down of other taxable assets.

    Unlike many other sources of income, reverse mortgage proceeds do not enter into the calculations of income affecting the taxation of Social Security benefits or the amount of Medicare Part B premiums.

    Since most retirees are concerned about outliving their money, using a reverse mortgage for income before starting the progressive liquidation of other assets can allow them to use a more conservative investment strategy for those other dollars and/or could aid accumulation (possibly tax-deferred) for future needs. This could be especially true in a down market, where spending that asset down would probably cause an accelerated zero balance due to negative compounding.

    Rejecting a reverse mortgage as a source for cash flow or income without taking this into consideration could be advice that a spouse or concerned child or beneficiary might see as an actionable trigger for a complaint or other action.

    The reverse mortgage’s line of credit growth rates are low now, but can still match or outperform many fixed annuity or CD rates depending upon what underlying index and lender’s margin are in use. It is guaranteed to be ½% greater than the current loan interest rate as an underwriting hedge to sustain retained equity in the home. The balance of the line of credit offsets a corresponding amount of the loan balance; Depending upon the rate circumstances, the reverse mortgage line of credit can present the opportunity to equal or pocket a spread.

    Medicaid spend-down requires some special attention, and usually an attorney is directing the process, but since one of my reverse mortgage clients is the former Medicaid recovery collections manager for our state, I’ve been getting good advice about how to accomplish this without exposing the client or a spouse or an estate to future recovery claims unnecessarily.

    Back to the original topic:

    Any Broker Dealers eyeing reverse mortgages as a source of investment dollars is desperate. They got beat up several years ago for not supervising reps who were participating in equity stripping strategies via cash-out refinance mortgages for accumulation clients, so this would only be volunteering for more potential trouble now with an even more sensitive demographic.

    The SEC and FINRA both view home equity as safe dollars (we wish that were true), so you would have to meticulously document the suitability of moving those dollars into an at-risk portfolio, and more so when the homeowners are retirees who are more apt to need income rather than accumulation and who have a far smaller time frame to recover from market losses. And since that the borrowed funds are accumulating loan interest and that the new outside investment is taxable, you have instant compliance issues.

    If Mr. Certner was talking about using reverse mortgages as the least advisable method of funding outside securities investments, then he’s absolutely correct that reverse mortgages would not be the most ideal source of funds for the reasons listed above. This would be buying on margin, but from a private source (the equity of the home)instead of an account balance with a broker dealer. What is your last resort if the investments fail? No reverse mortgage can bail you out now.

    If Mr Certner was stating that reverse mortgages are a means of last resort in all cases, he is mistaken and we can agree to disagree about this. Just ask the seniors who own their homes free and clear why they got a reverse mortgage; it’s because it made something else that they needed possible.

    The folks who dislike reverse mortgages seem to dislike what they are, which is a loan with costs and interest. The folks who like them like what they do, which is fund other things and for whom the costs are acceptable.

  • Bill Peters,
    I feel your last sentence about Reverse Mortgages sums up the feelings of many Seniors. Those that like them, love them as
    it provides them with financial choices to address their needs
    or desires.
    For a summary of what closing cost would be in any given
    case may I suggest a site that you will put in your
    computer tool bar.
    This is the official site for the National Association of
    Reverse Mortgage Lenders. Unlike many sites on the Net that
    want to contact you and require your e-mail address, etc, this
    site will never ask for personal information.
    What you will get is a comprehensive Reverse Mortgage Calculator
    that is geared to the FHA HECM Reverse Mortgage program.
    There are no cost. No one needs any credentials to access it:
    it’s purpose is to help us evaluate benefits offered by
    this program. It is available to anyone in the World.

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