Affluent Retirees Using Reverse Mortgages Until Investments Rebound

Screen shot 2010-02-28 at 1.58.11 PM.pngHeraldNet contributor Tom Kelly writes that many older folks don’t know how or where to look for funds which allow them to maintain the lifestyle they’re used to, but some are turning to reverse mortgages.

In an article over the weekend, Kelly describes how a couple who owns 35 weeks of time shares each year who took out a reverse mortgage on their home in New Mexico to ensure they wouldn’t have to skimp on or cut back on activities once they arrived. And they can protect their home with the House and land packages.

“I know a lot of people are skeptical about reverse mortgages, but it worked for us,” Frank Williams said. “Our friends want to leave everything they have to their kids, and that’s OK. Our kids are doing fine, they own their own homes, and would rather see us enjoy the rest of our lives.”

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According to the article, Williams decided a reverse mortgage was the right choice, despite having other assets the couple could sell.

“I had some assets that I didn’t really want to sell because I thought they would rebound and do quite well,” Frank Williams said. “So, I look at the reverse mortgage as a way of buying us some time for those assets to come back. The bonds that I did sell were not yielding anything close to the interest rate we were paying on the home equity loan, so I sold them and paid it down.”

Some retirees use reverse mortgages to pay for affluent lifestyle

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  • 35 weeks of time share each year??? Where is there HECM defined principal residence? Here is another “technical” default. Oh yeah, they have their schedule filled out through 2022. Where is the intent to live in that home for more than 6 months and one day? I hope both the service provider and the HUD OIG do not ignore this article or “technical” default.

    Abusing the HECM privilege for any reason should be clamped down upon immediately. I have great difficulty in believing that seniors are finding investments that economically are providing them with a net return after tax than the interest cost they are accruing on a fixed rate HECM. Worse, this does not take into account their upfront investment cost.

    Selling assets at an assumed loss and then generating a huge interest deduction with the pay down of a reverse mortgage is a difficult investment strategy to economically justify unless there was sufficient income to offset the interest deduction and the majority of the interest deduction produced a significant income tax benefit. Worse if the reverse mortgage was a fixed rate HECM, that cash will be very difficult to get back other than through another HECM.

    I see little redeemable in this strategy or any investment strategy using a HECM in this economic environment. While I understand using the proceeds of a HECM to provide contributions into an IRS/DOL qualified pension plan does make a lot of sense, using the proceeds for general investment purposes seems a little too risky in this economic environment especially with the HECM upfront costs.

    I hope others will prove why my opinion is wrong.

    • Their HECM defined residence is the home they own, not where they vacation for 35 weeks out of the year if they choose to do so. The article did not say they stayed in the same timeshare for 35 weeks, nor did it say the borrower left their home for 12 consecutive months.
      They are choosing to use the proceeds of the Reverse Mortgage as income (not invest it) in an effort to let their investments return from this market- This is a wonderful tool for them to enjoy their life and continue to live in the manner they are accustomed to. I wish my parents has chosen this option before cashing in on their investments when they were down over 70% and let the value return.

    • I'm reminded of the bumper sticker: “I'm spending my kid's inheritance now”, or something like that. Except for the possible default because of non-residency, I don't have much of a problem if they know what they are doing, consult a competent adviser to run their plan past and double-check with the kids. Enjoy your life and use the available tools (RM included).

      • dduck12,

        I typically enjoy what you write. This is no exception.

        Seniors have every right to enjoy their retirement including using the proceeds of a HECM. That is why I am in this business.

        I just have a huge problem with the primary justification for a HECM as providing some type of platform for maintaining investments or acquiring investments. Selling off losing investments seems like a much wiser decision.

      • Selling off losing investments seems like a much wiser decision.'

        I'm afraid I have to fire you as a client of mine.
        Drink more espresso.

      • Correct me if I'm wrong, but isn't the home the biggest loser as far as investments go over the last 16 + months? Not to mention with estimates of another 3.2 million foreclosures in 2010; they will continue to fall.

      • William,

        Please don't get too technical on us. Most of us view the home as a place to live and along with that an investment. However, you make a great point.

        Some would say we should have sold our homes in 2007 when values were towering. A friend of mine did tell me that, sold his home, and is renting to this day; another thought he was crazy and bought a second home. He is close to losing both homes. Stupid me, I just stayed in my home and have watched the value drop ever since. How about you?

  • I have been doing reverse mortgages for five years. I have originated a lot of them for “affluent” people who do not fit the profile of the “poor, needy” senior. Many of them are having problems with making their house payments, need home repairs/remodeling, one lady who's grandson had no medical coverage paid for his medical bills, homecare etc. The largest asset anyone usually acquires in their lifetime is a home. The reverse mortgage is the ONLY product on the market that allows them to access this equity without every having to make a payment. It's been a great tool for my borrowers and let the kids build their own assets. Why should their parents do without!

    • Diane,

      Most of us describe potential HECM borrowers as “house rich, cash poor.” They are generally not affluent. Normally the affluent have their home paid for or their outgo is significantly less than than their in flow.

      The truly affluent have far more than a home. For many of the people I have dealt with in other financial services businesses, the home is a significant portion of their wealth but the vast majority is in investments including other real estate and for some their own businesses.

  • I didn't interpret this as he sold some investments and paid down the reverse mortgage, Critic, but that they sold investments, paid down an exisiting HELOC and use an RM to payoff the remaining balance on the RM. Agree, no sense to sell and paydown a fixed RM.

  • The Facts (??),rnrnI hope you are not an originator. If you are, it is about time you become acquainted with HECM requirements because you sure do not know what a principal residence is for HECM purposes.rnrnFor your education, Section 4.8 A. 2) a. of HUD HECM Handbook 4235.1 states: u201cThe subject property must be the borrower’s principal residence, which is defined as the dwelling where the borrower maintains his or her permanent place of abode and typically spends the majority of the calendar year. A person may have only one principal residence at any one time.u201drnrnThe exceptions have to do with absences for medical and mental health; at least one borrower has to have the home as a principal residence after the loan funds; etc. There are only qualified exceptions to the general rule. Living in time shares is not among them.rnrnA principal residence is not the place that the homeowner spends the most time during the calendar year; it is where the homeowner lives most of the calendar year. According to this definition, the seniors in question have no principal residence for HECM purposes. They APPEAR to be in u201ctechnicalu201d and actual default, based on the facts in this article.rnrnIf you actually have some real fact instead of opinion I am missing, please provide it. In between you might want to choose a different RMD online name. I apologize if this paragraph seems harsh but you need to learn the rules before you reply.

  • Diane,rnrnMost of us describe potential HECM borrowers as “house rich, cash poor.” They are generally not affluent. Normally the affluent have their home paid for or their outgo is significantly less than than their in flow.rnrnThe truly affluent have far more than a home. For many of the people I have dealt with in other financial services businesses, the home is a significant portion of their wealth but the vast majority is in investments including other real estate and for some their own businesses.

  • dduck12,rnrnI typically enjoy what you write. This is no exception.rnrnSeniors have every right to enjoy their retirement including using the proceeds of a HECM. That is why I am in this business.rnrnI just have a huge problem with the primary justification for a HECM as providing some type of platform for maintaining investments or acquiring investments. Selling off losing investments seems like a much wiser decision.

  • Selling off losing investments seems like a much wiser decision.’nnI’m afraid I have to fire you as a client of mine.nDrink more espresso.

  • Correct me if I’m wrong, but isn’t the home the biggest loser as far as investments go over the last 16 + months? Not to mention with estimates of another 3.2 million foreclosures in 2010; they will continue to fall.nn

  • William,rnrnPlease don’t get too technical on us. Most of us view the home as a place to live and along with that an investment. However, you make a great point. rnrnSome would say we should have sold our homes in 2007 when values were towering. A friend of mine did tell me that, sold his home, and is renting to this day; another thought he was crazy and bought a second home. He is close to losing both homes. Stupid me, I just stayed in my home and have watched the value drop ever since. How about you?

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