Wealth Management Column: New Challenges for Reverse Mortgages

Reverse mortgages will likely have less appeal to financial planners following the implementation of program changes in October, writes Mark Miller in a column written for online publication Wealth Management.com. 

The new rules “are aimed at making reverse mortgages safer, and encourage their use as a long-term financial-planning tool—rather than as a disaster-recovery tool,” Miller writes. 

In reviewing the changes, including consolidated loan types, higher fees for mortgage insurance premiums, smaller loans, and more risk assessments, Miller notes the shift in use from a financial planning perspective. 

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“HECMs are best used as reserve backup funds, similar to a home equity line of credit,” he writes. “That’s what the saver HECM was good for—and with a mortgage insurance premium of 0.01 percent of a home’s appraised value, it was an inexpensive option. The new HECM that most closely resembles the older saver HECM doesn’t dramatically change the total loan amounts available.”

However, financial planners who have advocated for reverse mortgage use in an ongoing campaign to raise awareness of the benefits the loan type presents to retirees still maintain their position. 

“A paper published last year by John Salter, Shaun Pfeiffer, and Harold Evensky made the case that an HECM credit line can extend portfolio life anywhere from 20 percent to 60 percent, depending on the scenario specifics,” Miller notes. “Pfeiffer said the authors re-ran their numbers for the old saver HECM product against the revamped HECM, and found that the changes didn’t much affect their findings.”

Yet the relative benefit of a reverse mortgage versus a home equity line of credit may be less realized for some borrowers, financial planner Michael Kitces told WealthManagement.com. 

“…in many cases, you can get a HELOC with no fee at all,” Kitces said. “For someone who may not need the credit line anyway, if I have to pay all these upfront fees and costs, the HECM will not be very compelling.” 

View the original column

Written by Elizabeth Ecker

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  • It is interesting that larger lenders have embraced Michael Kitces when he views the new HECM understandably much less positively than the Saver. NRMLA was precisely right to name its recent convention “‘New Music: Changing the Reverse Mortgage Conversation,” especially since one of its main speakers was Michael Kitces. Of course, we all know NRMLA wanted a different conversation than Michael is making.

    While the industry is deviously promoting the idea that somehow the new HECM is better suited for financial planning than the Saver and is somehow also cheaper, Michael Kitces is stating it as it actually is. As to the industry knowingly and intentionally promoting a misleading comparison just read what Otto Kumbar recently wrote in Reverse Review when discussing one of the guiding principles of the Extreme Summit, rebranding: “The upfront mortgage insurance premium paid to FHA used to be 2 percent, and now it’s 0.5 percent for draws below 60 percent of the principal limit for the first year.”

    It is odd that Michael Kitces gets it right and our own Otto Kumbar intentionally does not. Today’s HECM is far more comparable to the Saver than any other product we have had in the past.

    We have a choice. If we insist on comparisons, we must do so with the highest standard of honesty and integrity or have our message exposed for the flim-flam it is. When addressing the CFP community we are not addressing financially unsophisticated seniors.

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