Data Key to Financial Planners’ Reverse Mortgage Perceptions

Originators and other players in the reverse mortgage space say that challenges remain when convincing financial planners and other retirement experts that reverse mortgages are a good idea for some borrowers, but a solid education can be the best cure for skepticism — and positive thinking about the products is gaining traction.

Shelley Giordano, chair of the Funding Longevity Task Force, says that she’s seen a steady improvement in understanding among financial advisors since the task force formed in 2012  Giordano specifically points to the gradual release of academic papers from researchers such as Wade Pfau, Gerald Wagner, and Barry and Stephen Sacks as key weapons against the perception of reverse mortgages as a loan of last resort.

“For the very first time, we [have] real data that stands up to this perception of what a reverse mortgage is,” Giordano says. Still, she noted that a lack of knowledge about HECM products continues to be pervasive.

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“Unfortunately, financial advisors generally are not trained on housing wealth,” she says.

Ed O’Connor, a reverse mortgage specialist for First Bank Mortgage in West Babylon, N.Y., says he’s also noticed an increase in the prevalence of positive news articles about reverse mortgages, but that he’s still gotten the best reception from advisors who have actively put in the work to understand HECM loans.

“If they’ve taken the time to learn about the product, it either fits for a client or it doesn’t,” O’Connor says. “They’re not changing their thought process just because the rest of the world is.”

O’Connor also speculated that some financial advisors are beginning to see a subtle advantage to recommending HECM loans to customers that otherwise would need to take money out of their 401(k) accounts; if the client chooses a HECM, the advisor avoids taking a hit to the amount of assets under his or her control.

For financial advisor Jack Dvir of Financial Pointe in Newbury Park, Calif., the change in perception about reverse mortgages came only after close consultation with a trusted advisor. A former certified public accountant and a financial planner for the past 16 years, Dvir initially saw HECM loans as a final option for homeowners who had simply run out of money.

But after getting to know a reverse mortgage consultant who provided unbiased opinions based on clients’ actual financial situations — including, he says, advising against reverse mortgages for multiple customers — he began to trust the product and see HECMs as a potential option to cover long-term care expenses and other costs that spring up during retirement.

He likened the use of reverse mortgages to elevator safety: “You don’t want an elevator with just one cable. You want multiple cables in case one snaps. I’ve come to look at reverse mortgages to provide that extra cable.”

Dvir said he’s discussed reverse mortgages with about half of his clients — some of whom still react negatively based on news reports they’ve seen about foreclosures or predatory lending tactics. When faced with a skeptical client, Dvir employs the same strategy that convinced him: He shows the customer the hard numbers, running various scenarios to show how a HECM might or might not help them. And he’s won some converts in the process.

“It’s hard to argue with the numbers,” he says.

Written by Alex Spanko

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  • One can surely argue with the numbers. Although the problem is sometimes with the math, where most examples fall down is the assumptions or the formulas.

    For example recently, an example was presented where the home appreciation rate was 3.3% based on national averages of home prices over almost a century. The author made the conclusion that he was 90% confident that a senior who is 62 years old would find that the line of credit would equal the value of the home by age 82. In applying the example to home appreciation in my tract (where homes first sold in 1951) and the actual appreciation rate is about 5.97%, the same conclusion could not be reached.

    Then the author of the example found the initial rate to be unacceptable and made his own estimate as to the average effective note interest rate. Yet in calculating the growth rate on the line of credit the author excluded the ongoing MIP rate of 1.25%. The author never explained why the expected interest rate was rejected. If the author had used the expected interest plus the MIP rate, he would have found the total was almost the same as his assumed interest rate he selected.

    Not long ago there was another schedule made by a different author that showed how the three bucket approach worked. The borrower took out the HECM in the early 1970s but the interest rate was an effective rate of about 5%. This despite no HECMs existing before the summer of 1990. Then the interest rates in the late 1970s through the early years of the Reagan Administration were in the teens so how could the average be 5% with today’s high margins? Due to the years selected (assumptions), the example made no sense.

    Finally another author correctly showed the line of credit growing monthly by one-twelfth of sum of the effective average note interest rate plus the MIP rate of 1.25% but then turned around and said that the balance due would grow monthly by one-twelfth of the effective annual note interest rate. He forgot that the formula for the growth rate on the balance due was exactly the same as that used on the line of credit.
    Another author correctly took into account the floor expected interest rate in determining the principal limit but then had no idea how the tenure payments were computed. The author blamed NRMLA for hiding costs in its calculator. The problem is what the author failed to take into account was that there is no floor for the expected interest rate (4.82% and 4.06% respectively) when computing tenure payouts.

    To say the numbers cannot be argued with is rather naive.

    • Perfectly illustrated, Sir. I have read MANY postings and articles by self-proclaimed “financial guru’s” who open with “gotta be 62, own a home, and have positive equity”, continue with “MUST pay prop taxes, ins, live in the home and maintain the property”, and end with “It’s not for everybody” (as if some could make a mistake).

      The facts ignored and unknown by these “Planner” types is that if you own the home free and clear? And stop paying prop taxes? You’ll lose your home. It’s disingenuous to suggest that the reverse mortgage is responsible for that when the exposure is universal.

      Another sad fact is the Planner’s assumption that the Retired Client is (somehow) eager to continue making house payments, and the offering of mortgage payment relief would be offensive to the Client, so Planners are reluctant to offend them with such a silly notion.

      Finally, the most amazing “Captain Obvious” moment by these Planners comes in their admonishment that the “Reverse Mortgage isn’t for everyone”. Well thanks for that but, let’s refine it…Do you own a home? Yes, this is for you. If you don’t own a home? It’s not for you. It is just that simple.

      There’s an assumed moral high ground taken by (specifically, but not exclusively–theres enough ignorance for everybody) the CFP that is less profound as one talks to the CLU elements. I believe that Life Insurance pro’s are just wired to be problem solvers, and CFP’s are hard wired to an educational standard rather than thinking outside the box.

      What sayeth thou?

      • Mr. Turner,

        You make a number of good points but I am also of that opinion that does not believe HECMs are for everyone. You make the point about owning a home but if the debt is too high and the borrower unable to bring it down to the range that the HECM will help, why encourage the homeowner to go further until the situation is attainable?

        Also I have had homeowners with $5 million and more valued homes in the hills surrounding LA, with far more in liquid assets. How will a HECM help them? Please do not try to sell the idea of a three bucket approach. These homeowners do not want any debt against the home and who can blame them especially one that yields so little in proceeds.

        When a fiduciary standard must be maintained, that high moral ground is a necessity. Perhaps insurance folks only have to meet a suitability standard. Unfortunately, in most states, a HECM originator does not have to meet even a suitability standard.

        There is litigation protection in cookie cutter content. It is generally considered safe.

        The trouble is we want others to adopt our standards (or lack thereof). We must learn how to pursue our objectives under their standards. Not so easy.

  • You are right Mr. Veale … the assumptions and formulae are always responsible for the outcome. But they’re needed for any planning analysis. Facts are current and past. The future requires assumptions. Every projected amortization schedule has lots of assumptions.

    What’s not subject to “argument” is that housing wealth is too large a portion of most retirees wealth to ignore. No assumption, just often the real situation.

    The HECM is an extremely versatile liquidity tool for accessing that housing wealth. So long as the residency and upkeep requirements (taxes, insurance, HOA dues, maintenance) are met, borrowers will:
    – Never be required to make a payment
    – Never owe more than the value of their home
    – Never be required to sell or move out of their home
    – Never experience the cancellation or maturity of their HECM.

    Further, the government promises behind the guaranteed Credit Line Growth and the guaranteed Life Tenure Payments make that guaranteed liquidity even more valuable.

    Financial planners could pick up on these facts alone. Some have.

    But until HECM professionals began using the very same planning language as the financial planning industry, getting the professional planners to listen was challenging. Hence assumptions and the terms and language of Financial Planners became necessary.

    Kudos to Shelley Giordano and the Funding Longevity Task Force for providing the excellent leadership in making that conversation happen.

    Alex Spanko’s article does a good job on the status of that conversation. Kudos to Mr. Spanko as well.

    • Mr. Barker,

      It seems much of your comment is wasted trying to make a defense of HECMs. No one in this thread so far has argued about the validity of the product. It seems you cannot separate the examples and case studies from the product itself.

      Yet let us look at just one of your claims about the product. You state: “Never owe more than the value of their home.” You obviously have never read The Model Mortgage Form (Home Equity Conversion) revised through 2/15/2015 Section 10 Subparagraph (E)(ii) on Page 5 of 14 at the HUD website at:

      https://portal.hud.gov/hudportal/documents/huddoc?id=HECM_Model_ARM_Mortgage.pdf

      That loan provision clearly states the borrower in that situation owes the full balance due unless he/she is willing to do a deed-in-lieu of foreclosure or correct the default. If your claim was true, in 2008, after the market in one community dropped by over 60%, I would have recommended to a HECM borrower who took out his mortgage in 2006 with a MCA equal to his appraised value at closing to take all of his proceeds from the line of credit (which in 2008 exceeded the value of his home), wait a month and pay off the HECM at the new market value so that his home would be debt free with substantial cash left over. Why was that not being done with every HECM borrower in that condition or close enough to it that their own funds could pay off any difference if your premise is true?

      Let us not be naive. If the borrower took out the action above and asked for a lien release, the servicer would have required that the payment be increased to the full balance due not a lesser amount.

      Mr. Larson and Ms. Giordano have created a task force which is trying to provide reasonable examples and case studies. Several members of the task force were already providing excellent HECM information through articles and white papers long before the task force was even formed. I am not sure about “that conversation” but the task force has a decent start at attempting to bridge the gap between retirement planning and a wide use of HECMs as part of that planning. But I never even mentioned the task force so why did you bring it up?

      If you are trying to drag my comment down to the level of “that conversation” with your last paragraph, I have nothing more to write.

    • Ed,

      Some of us appreciate the writings of Mark Twain who allegedly created the following adage: “Figures lie and liars figure.”

      Your comment reminds of Senator John Yerkes Iselin (played by James Gregory) in the 1962 version of the Manchurian Candidate. As he fumbles for the number of Communists in the current Administration, he begs his wife for just one single number to give the press.

      So it seems you are one of those who believes that the HECM independent actuaries are correct in declaring that the HECM ending balance in the MMI Fund is about an $8 billion loss. Please explain that number to all of us so that we can clearly see there is no need to argue with it.

      • In reply to “The Positive Realist”, who chooses to discuss anonymously, the actuarial number of $8B is pretty arbitrary when you calculate on a yearly/annual basis compared to a runout of funds or calculations over time. Considering that most HECM’s will last longer than a fiscal year. However, it’s interesting that you saw my comment revolve around that. It really had to do with the amount of time some people put into bashing others over simple comments. There, I’ve said enough.

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