Worlds Collide: Is 2016 the Year for Reverse Mortgages & Financial Advisers?

Although reverse mortgages withstood significant changes over the past year, they’ve also gained a few allies in the financial planning sector—several of whom see increasing opportunities for the reverse mortgage and retirement planning worlds to intersect in 2016.

A slew of financial planning research and commentary last year helped add some extra credibility to the reverse mortgage product. Bolstered by new program tweaks and new consumer protections, reverse mortgage press coverage ranged from calling them retirement’s “best bet,” and even “saving grace.”

Aside from RMD coverage, a fair share of the articles touting the benefits of reverse mortgages came from financial advisers, retirement planners and even a Nobel laureate. Such increased attention could even be an early indicator of the shrinking communication gap between the reverse mortgage industry and the financial planning world.


“There are several signs in the air that the world is starting to get a little different,” said Tom Davison, a certified financial planner and special projects coordinator with Summit Financial Strategies, Inc. in Columbus, Ohio.

Davison co-authored a paper last year with Keith Turner, an Ohio-based reverse mortgage adviser with Retirement Funding Solutions, describing the various strategies in which a reverse mortgage can be used in retirement planning. The paper, which was published in the The Journal of Retirement in November 2015, also detailed the effectiveness of reverse mortgages in helping retirees increase their portfolio longevity and spending horizons over the course of a lengthy retirement.

Davison’s initial interest in reverse mortgages dates back only a couple of years. While he admits he did know a little about the product, it wasn’t until Davison looked at the reverse mortgage line of credit and the growth it could produce decades into the future that he realized there is a “tremendous amount of potential” for the product within the context of retirement planning.

“That was pivotal—realizing the growth of the cash that was available in the line of credit 20-30 years later,” Davison told RMD.

He’s not alone. The line of credit is largely responsible for winning over many planners, advisers, and other experts—one of whom recently changed her mind about reverse mortgages completely.

“We’re seeing an increase and awareness for the use of home equity, including reverse mortgages, in the financial planning industry,” said Jamie Hopkins, associate professor of taxation at The American College of Financial Services in Bryn Mawr, Pennsylvania. “Planners refined to the retirement income planning—that group of planners are now very interested in the effective use of home equity.”

Apart from his professorial role, Hopkins also serves as the co-director of The American College New York Life Center for Retirement Income, and oversees the college’s trademarked Retirement Income Certified Professional (RICP) program. As opposed to the common Certified Financial Planner (CFP) designation, where Hopkins notes very little is taught about the strategic uses of reverse mortgages, the RICP is one of the few designations that actively teaches advisers how to systematically use reverse mortgages in retirement planning.

The RICP also teaches advisers about the most recent updates to the Home Equity Conversion Mortgages. Through the program, Hopkins estimates that two years from now thousands of more people will have learned about reverse mortgages. But simply knowing is simply not enough. Reverse mortgage professionals also need to acquaint themselves with the financial planning community. And that means being able to speak planners’ language.

“The reverse mortgage world needs to start understanding how the retirement income planning world works,” Hopkins said. “Far too often I talk to reverse mortgage specialists and they don’t know how reverse mortgages fit into retirement income planning. There needs to be an understanding on both sides so the industries can have good communication.”

Like many in the general public, financial planners also harbor their own misconceptions of reverse mortgages. But there are opportunities to bridge the knowledge gap in 2016, including the need for more joint research between advisers and originators, Hopkins said—similar to the Davison-Turner efforts mentioned earlier.

Diverse attendee mixes at conferences that invite more advisers to reverse mortgage events (and vice versa) also presents a great opportunity for industry crossover, he added.

While some advisers may have looked into reverse mortgages in the past prior to the most recent series of program changes, and have not yet bothered to revisit them, others may still be turned off as a result of perceived high costs and the loan of last resort reputation, said Wade Pfau, principal and director of retirement research at McLean Asset Management in McLean, Va.

“A fiduciary planner has to look out for the best interests of their clients,” Pfau said. “As a side effect, the best interests of the planner can be served through research that shows how the legacy value of assets can be improved by a reverse mortgage.”

Pfau, who is also professor of retirement income at The American College, serves as a member of the Funding Longevity Task Force, a group of financial planners established in 2013 by reverse mortgage industry veteran Shelley Giordano. One of the major focuses of the Task Force is how the strategic use of home equity can add value to retirement planning. It was through the Task Force, after having attended one of the group’s meetings, that Pfau began to look at reverse mortgages differently.

Last year, he published a paper in the Social Science Research Network titled “Incorporating Home Equity into a Retirement Income Strategy.” In the paper, Pfau highlights six different methods of using a reverse mortgage in retirement planning and how they impact spending and wealth for retirees.

Like much of the recognition from the financial planning community, Pfau’s research emphasizes the effectiveness of using a reverse mortgage line of credit, a feature he says is still widely misunderstood by advisers.

“An issue that nobody understands is how the line of credit is able to grow over time,” Pfau told RMD. “They don’t understand how there can be value.”

Pfau plans to address this issue in a forthcoming piece that will be published in the Journal of Financial Planning this March. That article, he said, will provide simple examples to explain both why the credit line grows and how this feature can be a value to the consumer.

For advisers, reverse mortgages offer a new opportunity for education and a way for them to search for new clients, Pfau said, especially given the recent changes to Social Security that take effect this year.

“Social Security claiming has kind of lost its momentum with the changes to the program last year,” he said. “If I had to predict what the next hot topic is going to be, I’d say reverse mortgages—for advisors to both seek education and use them as a way to drum up interest among potential clients.”

But, considering home equity and Social Security are the cornerstones of many people’s retirement wealth, advisers may no longer be able to plead ignorance on reverse mortgages and how they fit into an effective income planning strategy.

“There is going to be more attention paid to reverse mortgages because home equity and Social Security are the biggest assets for most Americans,” Pfau said. “It’s really in the adviser’s best interest to learn about reverse mortgages and do their due diligence on them.”

Written by Jason Oliva

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  • It is sad that the line of credit is so poorly misunderstood. The line of credit has no growth rate.

    The line of credit is the difference between the principal limit and the sum of the balance due and all set asides, all measured as of the same date. Only the principal limit is guaranteed to grow monthly. For example if the current principal limit equals the balance due, the line of credit has no growth; it is zero.

    When the only existing set aside was the servicing fee set asides and the interest rate applied to the balance due for the month was different than the expected interest rates, the “growth rate” of the line of credit was different than the one-twelfth of the sum of the note interest rate plus the MIP rate.

  • It is sad that the so called growth in the line of credit is so poorly misunderstood. First, we can only talk about a growing line of credit when there is an adjustable rate HECM involved. Generally, where is no set aside or the only set aside is a Life Expectancy Set Aside, then by default the available line of credit will grow at the same rate as the balance due and the principal limit.

    The only FHA approved method for computing the line of credit is to subtract from the principal limit the sum of the balance due and the outstanding balances in all set asides (all measured as of the same date). It was always very disconcerting to HECM borrowers when the line of credit was relatively small and with no activity in the line of credit, the line of credit was smaller the very next month and yet that computation was mathematically correct.

    Then it was surprising to many borrowers (and originators) when the repairs set aside stayed open for several months to find out that the available line of credit grew much faster than either the balance due or principal limit.

    While most of our amortization schedules do a pretty of demonstrating the determination of the available line of credit based on the draw assumptions used in creating the schedule, few take the time to see if the line of credit growth rate tale is valid especially where there is a servicing fee set aside and the available line of credit is small. The results can be surprising.

    This is the difference between education and simply what is needed to get by. Unfortunately most of those we now associate as financial advisers seeing the value of HECMs fall into the latter category.

  • Well, if you ask me, the most critical part of structuring your finances and optimizing savings is just having a plan. Whether you use a spreadsheet or a tool like OnTrajectory or some other website — you have to get everything out if front of you so you can make smarter decisions. Once you do that, then implementing your disciplined savings strategy becomes critical.

    • Daniel,

      Before getting a plan together, it is generally a good idea to round up what your assets and liabilities are, and getting a handle of your contingent assets and liabilities. It is also a good idea to list all sources of income and their approximate amount by cycle (monthly, bimonthly, annually, etc.). Then it is a good idea to do a projection of net income for the next twelve months and a separate projection of cash flow covering the same period of time.

      After you know where you are and where it is you are going in the short-term, then it is time to begin planning. Before that, plans may be nothing more than an unrealistic expression of a dream or “the way it should be.”

  • This is a great article written by Jason and the timing could not be any better.

    The article spells out in detail how valuable the line of credit can be used as a retirement planning tool and why financial planners are recognizing as such.

    My friend James Veal is right, the growth in a line of credit is very misunderstood, why? As far as I am concerned it is because many of us in the industry is not explaining it properly.

    I don’t mean to throw stones but I have talked to many seniors who have talked to loan officers from different companies and they think they are earning interest on their line of credit. Also, so many of them are comparing it to the interest they can earn on a CD or savings account, which is much better!

    What also is sad is that many of these seniors I talk to are under the impression the so called interest they think they are earning is tax free!

    What I just got through explaining to all of you above is the bare facts and 100% true my friends. Many of our seniors our misled, not intentionally but never the less, the ones I am referring to have been given wrong information. Also, many financial planners have as well.

    Most of you that are reading my comment understand what I am saying. A line of credit, as great as it is, is not an interest bearing instrument! Our line of credit has a growth rate attached to it, simply meaning that the line of credit grows each month!

    Again, as most of you know, that growth rate we refer to equals the index value (Usually LIBOR), plus the margin and plus the monthly MIP.

    Yes, the total growth rate is usually is much greater than what the interest rate would be on a CD or savings account would be. However, as most of you know, the line of credit receives a growth rate, which means each month the borrower has more money to borrow on their reverse mortgage than they did the month before!

    Unfortunately, many loan officers do not explain it this way to their senior client or even to a financial planner.

    Don’t take me wrong, those few of you reading my comment that are finding out for the first time how the line of credit actually works is good. The line of credit is a great and I mean great retirement planning tool. Think of this for a moment, here sits our senior clients with a large amount of money set aside in a line of credit and they see it grow each month! Wow, even better, this money is available to them anytime they want or need it. Anytime and with no restrictions as well as having no tax consequences on it when it is taken out of the line!

    That is pretty hard to beat, not only that but just think of the service that financial planner is giving to their client by using a reverse mortgage and its line of credit to plan those seniors retirement!!

    John A. Smaldone

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

    • John,

      I am a little lost. Please excuse my criticism but like most of those I do not understand your concept of the line of credit.

      For example, you state: “Think of this for a moment, here sits our senior clients with a large amount of money set aside in a line of credit and they see it grow each month! Wow, even better, this money is available to them anytime they want or need it.” How is that true during the first twelve months following origination if the borrower has taken the maximum permitted under the first year disbursements limitation. Even if a borrower is required to accrue a 2.5% of the MCA in the first year, if mandatory obligations were 70% and the 10% additional principal limit was elected, the borrower cannot take out anything above 80% of the principal limit following closing.

      John, while you are correct that the formula for the growth rate for a month on both the balance due and the principal limit includes the sum of three factors: 1) the index rate for the month, 2) the margin selected at closing, and 3) the annual MIP rate but what you miss is that total must be multiplied by a fraction (one-twelfth) to get the month’s growth rate.

      There is more but enough is enough, my friend. I have followed how James Veale originally explained it about 7 years ago. It seems there are very few who have taken the time to read it and the HUD Handbook on HECMs covering this calculation. Hopefully this whole issue will die when the last HECM with a servicing fee set aside terminates.

      • The_Critic,

        You make some good points, however, you must remember that the article zones in on financial planers.

        Different type of clientele, this is why my comment was presented the way it was. I put in a much more detailed response for everyone to view, because I thought your observation was a good one.


  • My detailed reply to The _Critic,

    I realize I answered The_Critic’s question in a direct reply, however, I wanted to point out my response in a detailed way that everyone could see and understand it.

    My example in my main comment was assuming a great deal of money was left over and put in a line of credit in the first 12 months. The reason was because our borrowers had very little debt, which meant the UPB did not come anywhere close to reaching the first 12 month 60% max.

    This meant our senior borrowers had plenty of money left over up to 60% of the gross PL to do what they wanted to do with it, they chose to put what they had left over in a line of credit

    In my case, they do have money they can draw from their line in the first 12 months if they chose to do so. The second year, they will have that much more they can put in their line and in my scenario, that is exactly what they did!

    My example assumed the seniors did not take anything from their line of credit in that first 12 months, even though they could have! So, when I refer to “WOW”, this money is available to them any time they need it, that is true in my scenario! This couple took the advise from their financial planer and used the reverse mortgage as a true retirement planning tool!

    The_Critic’s example is another scenario that could well be the case, opposite of mine, however, I chose to point out a different example for different reasons!

    Remember, the article is zoning in on financial planers and advisors. Financial planers have more of a chance to have clients with a great deal of assets and homes with a great deal of equity. I took this into consideration when I presented my example.

    I hope I helped clarify my position as to why my comment was presented in the way it was to both The_Critic as well as everyone reading this clarification comment.

    I appreciated the reply to my initial comment from The_Critic, it was a good reply with a great question that needed clarification for all the readers of The Reverse Mortgage Daily!

    John A. Smaldone

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

    • John,

      While there is a lot of positive things happening between the two groups, the title is a little over the top. It is on the early side of when we will see a substantial increase in endorsements due to the growing and positive relationship. It will need time to mature but so far, so good.

      Yet we have things to do from our end. Financial advisors have the right to assume that we know what we are talking about when we discuss the line of credit and how it changes. Yet how many originators could predict what the line of credit will be month to month when a servicing fee set aside is attached to the HECM? While the servicing fee set aside may never come back, some other type of set aside could cause similar problems.

      It is time for lenders to step up and educate their originators on how our product works. While we may provide information on strategies while enhance the use of HECMs in financial planning, we have a responsibility to provide accurate information on the products we sell.

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