Reverse Mortgage Program Changes Impact Americans’ Retirement Security

Of late, reverse mortgages have been touted as ways to supplement retirement income and offset the rising challenges retirees are facing.

However, new data shows that more than half of today’s households lack enough retirement income to maintain their pre-retirement standard of living — in part due to reverse mortgage changes that took effect in 2013, according to a recent report by the Center for Retirement Research (CRR) at Boston College. 

The report analyzes the National Retirement Risk Index (NRRI) in 2013 — the latest data available — which shows the share of working-age households who are “at risk” of being unable to maintain their pre-retirement standard of living in retirement.

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And as measured by the NRRI, Americans’ financial preparedness has only slightly improved since 2010. 

In fact, 52% of households are considered at risk, only a 1% drop from 2010, impacted by reverse mortgage rules, the rise in Social Security’s Full Retirement Age and the decline in interest rates. 

Last year, the Department of Housing and Urban Development (HUD) simplified the Home Equity Conversion Mortgage (HECM) rules and lowered the percentage of the home’s value that borrowers could tap in the form of a reverse mortgage at any given interest rate. [HUD has since issued new program changes in 2014, which made more proceeds available for some reverse mortgage borrowers.]

“Our expectation was that the NRRI would improve sharply in 2013; it certainly felt like a better year than 2010,” the CRR writes. “But the ratio of wealth to income had not bounced back from the financial crisis, more households faced a higher Social Security Full Retirement Age, and the government had tightened up on the percentage of housing equity that borrowers could extract through a reverse mortgage.”

Other factors reduced the NRRI, creating a push-pull environment impacting Americans’ finances. These drivers included increasing equity and house prices.

In the NRRI, home ownership and home prices have a significant impact because households are assumed to access their home equity at retirement by taking out a reverse mortgage. The higher the home value, the more a household can extract in cash and turn into an income stream through annuitization.

Ultimately, however, the NRRI suggests retirement shortfalls are a major problem and that, to address this issue, Americans must save more and/or work longer.  

Access the full report here

Written by Emily Study

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  • FINANCIAL WATER BOARDING

    Let the MIP protect the reality of the foreclosure impact on
    the reverse mortgage program. Send the regulators back to the trenches they dug in front of us. The Financial Assessment regulation must be repealed before it is launched or we will all live to regret it, big time.

    The financial water boarding planned for our senior prospects for a reverse mortgage — referred to as the financial assessment — will succeed in washing out what is left of the program in jig time. When next summer rolls around, we will all be looking for work elsewhere. The FA will not contribute to saving the few we’ve been worrying about, that end up in foreclosure. The regulation will mostly succeed in limiting the industry from survival and we will still have foreclosures as before from the very people we qualified under the new rules.

    The current hell bent infringement of senior dignities will
    contribute to the end of the reverse mortgage program as we know it. The widows I have in my pipeline will not cooperate with the demeaning process that in fact it is. Already, the RM process for eligibility has brought sanity to a halt with impacting regulation well beyond the severity of the issues they address. As a well experienced loan officer, I have changed my mind and will urge the RM industry to throw out the demeaning financial assessment regulation before it destroys our means of employment and takes out the very prospects who need help to survive their senior years utilizing their own home equity.

    With the FA in place, there will be few takers of the reverse mortgage. Few of our prospects will endure the intense questioning that it requires. The loan officers who came to help them will soon be overwhelmed with regulation to prove eligibility as seniors turn to bankruptcy and other means to survive.

    The FA is a self defeating regulation. Read it and weep. Read it again and experience the anger arising in your soul as you visualize the impact of the questions you are required to ask. The order we have been given to read it three times is necessary because we will not believe our eyes what it will do to our livelihood and those of our prospects. There is no wisdom to support this inquisition except that a mean spirited government with their own agenda requires it. The time to fight for senior rights is now. This is truly an insane snf mindless fix for the reverse mortgage program. We will not outlive our stubbornness to succeed if we stand by now while it strangles us.

    How long will it take for sanity to restore our senses? Can we restore it after it is ruined completely? These are fair questions now.

    The Financial Assessment is not a solution unless your goal is to eliminate the REVERSE MORTGAGE PROGRAM from our list of retirement benefit choices.

    I have sent these remarks to Senators in Arizona, NORMLA executives and my own employers in the RM industry, and now here in REVERSE MORTGAGE DAILY. The results will lie in the hands of good men (and women) who choose to stand by and do nothing while more doors close in front of people in the wings who choose to use their own home equity to survive — as the doors slam shut a little tighter on all of us trying to help them.

    Let’s repeal it NOW while we still can.

    • Warren – How is your job search going? The only ones I know of that are floundering in reverse are the ones that required a big bank to give them free hand-outs and coddle them while they were employed by said banks. Don’t throw in the towel so easily my friend.

      • Happy fighting the CFPB at The Federal Savings Bank. Thanks for asking long ago.

  • “However, new data shows that more than half of today’s households lack enough retirement income to maintain their pre-retirement standard of living — in part due to reverse mortgage changes that took effect in 2013, according to a recent report by the Center for Retirement Research (CRR) at Boston College. ”

    Really?

  • The financial language in this article is far too imprecise to provide fully reliable conclusions.

    When the word “income” is used, it automatically excludes all proceeds from the sale of equities (other than certain dividends), bonds (other than interest), annuities (other than the related interest), installment sales (other than interest), and the proceeds from other asset transactions such as the sale of options. There is a reason for distinguishing cash inflow and income; they are not synonymous.

    I have worked with many seniors who lack sufficient income to enjoy their retirement years but when their liquid, near liquid, and other assets are combined together with that income, they have more than sufficient resources to enjoy their retirement years. One can easily use income tax returns to substantiate taxable and to some degree non-taxable income; however, there is no guarantee such information will be a source of verifiable cash inflow or assets which are available for conversion into cash. As to taxable income from flow through entities (such as S corporations, partnerships, etc.), reportable taxable income is not necessarily anything close to the cash distributed to that owner during the tax year.

    While the basic premise that the cash flow of the average senior probably did not change much between 2010 and 2013 is probably true, the imprecise language in the article leaves one to wonder about the degree and reasonableness of that conclusion.

    (The opinions expressed in this comment do not necessarily reflect those of RMS or its affiliates.)

  • John,

    It seems as to the limitation of 60% of the principal limit on first year disbursements (hereafter referred to as “the rule”), you are looking at it in light of our traditional needs based client. Yet this is not a mortgage replacement product alone. It is a cash flow debt product secured by the borrower’s principal residence. (Its proceeds can be used to prevent bankruptcy as well as foreclosure. It can level out erratic monthly cash flows without significant incremental cost as well as allow for more efficient investment and tax planning resulting in overall increased cash flow.)

    The rule itself is no different for fixed and variable rate HECMs. The fixed is a closed end product which allows for no distribution of funds from the loan after initial funding while the variable is open end and allows for available proceeds to be taken at almost anytime. So it is not the rule which creates any difference but rather the type of loan.

    The upfront MIP charge has absolutely nothing to do with how much the borrower ACTUALLY takes in the first year. It is all about how much is available to the senior in the first twelve months. For example, if the senior has mandatory obligations of 59% and elects to have 10% more held in the line of credit during the first year, the senior will be charged 2.5% as upfront MIP at initial funding rather than 0.5%. If the senior does not elect the 10% additional amount, she would have had 1% available to her anyway and her upfront MIP would only have been 0.5%. Those taking a fixed rate HECM in this situation would most likely prefer the higher initial draw despite the higher upfront MIP than those taking a variable rate HECM simply because those with a variable rate HECM have so many more options and generally have access to all proceeds after a year.

    So the big problem with the rule for a senior with a variable rate HECM is that they cannot use all of their principal limit in the first year as long as their mandatory obligations at closing are less than 90% of the principal limit. Seniors with a fixed rate HECM will lose all funds at initial funding in excess of what the rule permits.

    • My appreciation to you for your pointing this out to me. You are always on the spot and ready to come to one’s aid, like me!

      I have a lot of repect for you and your knowlwdge. I also hope you and your family had a very Merry Christmas. I only hope we have a 2015 beteer than many years we have seen in the past.

      Happy New Year my freind,

      John

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