Awareness Grows for Reverse Mortgage Retirement Benefits

The Center for Retirement Research at Boston College has been garnering considerable press in the past few weeks for a recent report on how retirees can supplement their assets with home equity, primarily via touting the benefits of using a reverse mortgage or downsizing to a smaller residence.

But while reverse mortgages have become vulnerable to a variety of public misconceptions, an article from Morningstar helps make the case for these loans in a Q&A with Alicia Munnell, director of the Center for Retirement Research.

“[Reverse mortgages] are not a last-ditch-effort product,” Munnell said in the article. “But for those for whom it’s right or who can afford it, it will be a very valuable product over time because people are going to need to add their home equity to other sources of retirement income to get by.”

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Munnell, who also has a book coming out titled “Falling Short: The Coming Retirement Crisis and What To Do About It,” even likened reverse mortgages to annuities in the role they play in terms of asset allocation.

“So, if you take [a reverse mortgage] in terms of a steam of income over the rest of your life, it is very much like an annuity in terms of how the payments seem to you,” Munnell said. “They continue for as long as you live, and then the money is paid back out of the sale of your house. So, it’s a stable, predictable source of income that would allow you to take risks with the other part of your portfolio.”

Read more at Morningstar.

Written by Jason Oliva

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  • As a a point of clarification: only the term & tenure payments are truly predictable; line of credit growth over time is not and is also limited to the recorded maximum loan amount. Center for Retirement Studies and Ms. Munnell are doing a great job educating seniors.

      • From HECM Handbook 4235.1 Chapter 6 Paragraph 6, “when a maximum mortgage amount is stated in the mortgage, the lender is not secured for payments to the borrower
        beyond the stated amount.” The recorded maximum loan amount is either
        the MCA or 150% of the MCA, depending upon the State. This is also in
        4235.1

    • Reverse Engineer,

      I agree with the question Matt brings up. Where is there any authority for your statement that the line of credit is “limited to the recorded maximum loan amount?” Based on how the line of credit as of a specific date is determined as the difference between the principal limit as of that date and the sum of 1) the balance due as of the same date and 2) the total of all amortized set asides of that date, why would the recorded maximum loan amount (as you call it) come into play?

      (The opinions expressed in this reply are not necessarily those of RMS or its affiliates.)

      • My reference is HUD Handbook 4235.1, Chapter 6, Paragraph 6:

        “Where State law requires the mortgage to reflect a maximum mortgage amount, the lender must use an amount that is equal to 150% of the maximum claim amount. This amount is required because the loan payments are secured not only by the current value of the house but also by any possible appreciation in value. This amount is intended to protect the borrower in the later years of the mortgage. When a maximum mortgage amount is stated in the mortgage, the lender is not secured for payments to the borrower beyond the stated amount. If the mortgage balance reaches the maximum mortgage amount, payments to the borrower would cease or the borrower would have to try to extend the mortgage which may not be possible if the property value has declined or if other liens were placed on the property. Both of these risks are greatly reduced when the maximum mortgage amount is a higher amount.”

        Also, when reviewing loan docs with borrowers, the above policy is being implemented by the following loan docs excerpts:

        “BORROWER’S PROMISE TO PAY; INTEREST
        In return for amounts to be advanced by Lender up to a maximum principal amount….

        “This Security Instrument secures to Lender: (a) the repayment of the debt evidenced
        by the Note, including all future advances, with interest at a rate subject to
        adjustment, and all renewals, extensions and modifications of the Note, up to a
        maximum principal amount…

        Additionally, I have spoken directly with two very senior Officials at HUD who confirmed that a LOC draw or a Term payment that would cause the loan balance to exceed this stated Maximum Mortgage Amount would not be made. They went on to say that the only exception to this is for a borrower with a tenure payment plan.

        Therefore, the bucks stop with HUD; even if the LOC can achieve continuous growth in excess of the Maximum Mortgage Amount, it doesn’t mean that the borrower will able to draw it.

  • I don’t like to see the comparisons to an “annuity” without the caveat that the payment stream lasts only as long as occupancy of the home. The key advantage annuities have over RM tenure payments is portability.

    • REVGUY JIM,

      Even then your correction is wrong. There are at least four ways that a HECM tenure or term payment can be reduced, suspended, or terminated. The first is by request of the borrower. The second way is through a permitted payment of a property charge default by the lender (with or without the borrower’s permission) where the line of credit after reduction for the amortized tenure or term payment tentative set aside is insufficient to pay the defaulted amount in full. The third way is the filing of a bankruptcy petition (by a creditor or a borrower), which will cause payouts to be suspended at least until the matter is resolved and could result in a changed payout directly to the borrower. Finally, the last way is when the balance becomes payable by loan covenant.

      The life expectancy of the borrower never comes into play even when the payouts are determined on a tenure payout. What comes into play is so the called TALC life expectancy which is not based on sex, current life expectancy information for people of that age living in the US, medical condition, or other relevant information including life expectancy within the related MSA. It is a static matrix determined a number of years ago and corresponds solely to the HECM age of the borrower (that is rounded to the nearest whole number) at the time the payout was last determined.

  • The article is a good one and helps our cause in many way’s. We need to change our mindset about the reverse mortgage only being used as a last resort tool for survival.

    The HECM product can be a valuable tool for all classes of life styles, even the rich! Our product offers tax free funds to all that qualify.
    The options available on our LIBOR product offers many options to fit many needs and situations.

    We have plenty of opportunities, regardless of all the changes we have experienced and will be experiencing.

    Changing ones mind set is easier said than done but once we do it with the reverse mortgage and with those we serve, we have the potential problem licked!

    John A. Smaldone

  • Reverse Engineer,

    This comment is the reply mentioned in the reply to you above dated December 28, 2014. It starts now.

    After reading the section of the HECM Handbook you quote, your first comment begins to make sense. But the limitation only applies in states where the state requires that a maximum mortgage amount be stated in the mortgage. If there is no state law requiring the mortgage to state a maximum mortgage amount, there appears to be absolutely no restriction on the size of the line of credit.

    Your earlier statement that “the recorded maximum loan amount is either the MCA or 150% of the MCA, depending upon the State” is wrong. The HECM section you quote does not mention recording at all and there is no “either or” clause when it comes to what the maximum mortgage (not “loan”) amount must be; it is 150% of the maximum claim amount.

    So the mathematical formula for the maximum line of credit in a state where a maximum mortgage amount is required to be stated in the mortgage is as follows:

    LOC = PL – (BD + ∑ ASA), but only where the PL ≤ (150% MCA);

    But if the PL> (150% MCA), the LOC = (150% MCA) – (BD + ∑ASA)

    Where

    1) LOC stands for the Line of Credit.
    2) PL stands for the Principal Limit
    3) (BD + ∑ ASA) stands for the sum of the balance then due plus the sum of all of the amortized balances in all set asides.
    4) (150% MCA) stands for 150% of the Maximum Claim Amount.

    However, before making this a hard and fast rule, you need to check with your servicer to determine how they handle cases where the LOC > (150% MCA). Again this is not a HUD matter first but rather a servicer matter since they apply all such restrictions.

    (The opinions expressed in this reply are not necessarily those of RMS or its affiliates.)

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