Standby Reverse Mortgage Line of Credit: A Retirement ‘Must Have’

When it comes to using a reverse mortgage in retirement planning, there are several strategies that make the standby line of credit feature a “must have” in the eyes of financial advisors and their clients.

That’s primarily due to recent Home Equity Conversion Mortgage (HECM) program changes over the last couple of years, which have changed the way reverse mortgages should be perceived in modern day retirement planning, says Colleen Rideout, home equity retirement specialist at Retirement Funding Solutions.

Launched in January by former Security One Lending head Torrey Larsen, RFS is a company that has roots in collaborating with financial advisors by showing, through academic research, how a reverse mortgage can help retirees fund their longevity. Larsen was instrumental in establishing the Funding Longevity Task Force in 2013 with reverse mortgage industry veteran Shelley Giordano, now the principal of consulting firm Longevity View Associates.

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The Task Force is comprised of distinguished reverse mortgage researchers like John Salter, associate professor of financial planning at Texas Tech University; former Mature Market Institute Director Barry Sacks; Tom Davison, CFP; and Wade Pfau, professor of retirement income at the American College—among others.

Since its inception, the group has produced several studies from its members on the practical use of a HECM, and how it fits, as part of a comprehensive retirement plan. It’s this research that has helped “open up a new strategy” in educating non-reverse industry professionals on the merits of HECMs, says Rideout, who regularly teaches continuing education classes on reverse mortgages in her home state of Colorado as well as nationally.

Earlier this month, Rideout presented at the National Association of Insurance and Financial Advisors (NAIFA) 2015 Annual Conference in New Orleans. Her presentation spotlighted the “must have” reverse mortgage line of credit feature to a crowd of financial planners.

“The line of credit strategies are very basic,” Rideout says. “Once you learn—as an advisor or an insurance agent—how the line of credit works, then you can build other strategies on top of that.”

Rideout’s presentation also examined several different strategies a borrower can use the “standby” line of credit feature on their reverse mortgage to complement other their retirement assets.

Research has shown that when using a reverse mortgage in the retirement planning process, rather than using a HECM as a loan of last resort, significantly increases the likelihood of a retirement portfolio’s success.

“What interests advisors is that the line of credit is a hedge against rising interest rates because the growth factor on the credit line rises with interest rates,” Rideout says, adding that the credit line can also hedge against falling home prices.

For example, even if home values fall in the next 10-15 years, the line of credit isn’t tied to property value in the future, so if values fall the credit line is still growing, Rideout says.

The “standby” strategy can help retirees delay drawing from Social Security, avoid dipping into other assets and provide a cash reserve to help weather market turmoil or sudden emergencies like health care costs or home repairs.

“It’s another pot of tax-free money that can be used in any number of ways to provide income, protect assets and provide liquidity in the future,” she says.

Since the HECM program changes in 2013, Rideout has done at least 200 presentations across the country on the topic of reverse mortgages geared toward financial advisors and insurance agents. The purpose: to get in front of financial professionals and show them the changes that have evolved the HECM program to what it is today.

“It’s absolutely a 180 degree mind shift that happens in the classes from when I start to when I finish,” she says.

This year was the second time Rideout presented at NAIFA’s annual conference on the topic of home equity use in retirement. Although she has recognized a growing interest for reverse mortgages among advisors, she admits there is still much more that needs to be done to broaden reverse mortgage education to other stakeholders and professionals working with retirees.

“We have to be able to touch and get into the compliance departments, and get them up to speed on what the reverse mortgage is today—not what it was 10 or even five years ago,” Rideout says.

Rideout notes two common reactions among advisors after learning more about how reverse mortgages fit into a retirement portfolio.

“The first one is: this sounds two good to be true. The second one: why isn’t everyone doing this?” she says. “It all comes back to: you don’t know what you don’t know.”

Written by Jason Oliva

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  • The wording in the article was awkward such as: “Research has shown that when using a reverse mortgage in the retirement planning process, rather than using a HECM as a loan of last resort, significantly increases the likelihood of a retirement portfolio’s success.” This seems more of a proactive use of a HECM rather than reactive. Our focus on needs based seniors created a last resort or reactive perspective about HECMs.

    Like annuities, equities, debt instruments, options, and other financial products, HECMs are not planning tools but are products that need to be incorporated into retirement planning. It is what a senior does with a HECM in the execution phase of retirement planning which can make a HECM a very useful and positive tool during retirement or a rather ineffective one.

    HECMs are not just protection for portfolios. That is a very limited concept. They have the potential for much broader use and to date have yet to be seen for their full potential. It is not the growth in the line of credit which gives the adjustable rate HECM its greatest value in retirement but its being open ended.

    It is the closed end nature of fixed rate HECMs that make them far less useful in retirement. With the first year disbursements
    limitation rule in place, is there a real need for fixed rate HECMs? For some it seems to be a means to generate more lender revenue in purchase transactions, a rather despicable practice.

  • After some consideration, it seems one paragraph needs comment. It is odd in that it attempts to tie the employment of the delay of the start of Social Security benefits (DSSSB) to the Standby Strategy. Even more it is claimed that the Standby Strategy can help retirees with the DSSSB but never explains how. Here is that paragraph: “The ‘standby’ strategy can help retirees delay drawing from Social Security, avoid dipping into other assets and provide a cash reserve to help weather market turmoil or sudden emergencies like health care costs or home repairs.”

    How is it that the Standby Strategy helps the DSSSB? While there is nothing wrong with employing more than one strategy using a HECM, they at some point may conflict. Due to its high risk of loss, it is very difficult to give a blanket endorsement to using HECM proceeds to delay the actual taking of Social Security benefits but if proceeds will be used in that endeavor then monthly payments should be taken as tenure payments. While the tenure portion of the line of credit will be greater than a term payout set aside, the additional period of time will come at a relatively low loss of proceeds compared to future term payout carve outs.

    For example, for a 62 year old, a tenure payout of $400 per month with an expected interest rate of 4.5% is $74,040 while a term payout of $400 for 8 years would be $30,722; thus the carve out difference is $43,318. If life expectancy is 85, then for 17 years at $400 per month, the carve out for this deferred payout pales in comparison with the $81,600 that will be received in those years especially when one looks at the total $38,400 that will be paid out in the first 8 years for a line of credit carve out of $30,722.

    Remember that is no risk of loss on the carve outs of the line of credit. A carve out in no way impacts the balance due until the related payout is actually paid to the borrower. At any time a term or tenure payout can be stopped and any amount remaining in the related carve outs are available to the borrower. So for example if our 62 year old borrower above stopped the $400 tenure payouts ten years after they start, the amount added to the free line of credit would only be $37,600.

  • Great article Jason,

    I feel the article and Torrey Larsen’s approach to a “Stand By Line of Credit” points out a great sales tool the industry can use daily!

    The new HECM does give us in the industry the opportunity to open new doors and sell our product in a different way, such as Torrey Larsen’s approach with financial planners.

    In so many way’s a line of credit is much better than a life time income or a income for a time certain. The only exception are for those that do not have the ability to self manage there financial affairs or because of illnesses that would require the senior to have a specific monthly income.

    The article points out so many savvy retirement advantages in having the line of credit available.

    John A. Smaldone

    This is the expressed opinion of John A. Smaldone only and does not represent an opinion of Willow Bend Mortgage or their affiliates.

    • John,

      The only person who does NOT get income in the reverse mortgage transaction is the borrower. These seniors are borrowers, not investors. HECMs are as good as it gets for borrowers so why is it necessary to intentionally mislead seniors that what they are getting is in any way income? This industry practice is disgraceful and should be drummed out.

      Now we come to how we mislead ourselves. Today we hear that the current HECM with financial assessment makes HECMs an even better product for the clients of financial advisors. Yet since April 27th we have seen the worst totals for case number assignments of any four month (plus) period ended on August 31 in more than a decade. Who are we kidding?

      If financial advisors or more importantly the senior population generally see HECMs in more favorable terms, our numbers do not show it. After all, if our numbers are not going up and we claim that far too seniors who could benefit from HECMs are not originating them, then something is wrong somewhere.

      In fact the problem lies with us. Somehow we (including me) seem incapable of convincing the right segment of seniors that HECMs have never been better.

  • In 2003, a US President stood on a ship of war and declared “mission accomplished” in Iraq. This claim of “must have” is much the same.

    With endorsements and case number assignments in decline, how is it reasonable that we declare “mission accomplished?” We are at the start of a long process. It is far too early to declare victory.

    Optimism in the face of four straight years of low endorsements is not reckless but neither is it rational. A good outlook and optimism are significantly different. Until endorsements reach the 80,000 range, claiming that financial advisors have concluded that HECMs are “must haves” is merely fooling ourselves.

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