Pitching Reverse Mortgages to High-Income Borrowers

While the refrain that reverse mortgages aren’t just last resorts for cash-strapped older homeowners may be canonical within the industry, many higher-income retirees may not be familiar with the Home Equity Conversion Mortgage and its potential uses.

Writing on his retirement-planning blog, financial planner and HECM advocate Tom Davison provides an all-in-one resource for explaining the product to more affluent potential borrowers.

“Reverse mortgages have evolved over the years, including significant improvements after 2008’s housing crisis, resulting in enhanced consumer protections, refined federal oversight, reduced costs, and better balance amount the interests of clients, lenders, and the Federal Housing Administration’s insurance backing,” Davison writes by way of introduction.

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Davison’s post features a handy table that shows the “highest and best use” of the product for a variety of potential scenarios. For instance, a homeowner looking to buy a vacation home would be best off with a lump sum HECM, Davison writes, while those seeking a safety net for health care emergencies or down markets would be best off with a HECM line of credit. But for higher-income individuals, Davison — based on his experience managing investment portfolios between about $500,000 to $4 million — lays out two “most common” uses of a HECM: improving an existing retirement plan to facilitate increased spending, or adding a rainy-day safety net to an already robust portfolio.

Perhaps the most valuable passage in Davison’s extensive post concerns the HECM line of credit option and its growth over time.

“A line of credit is the most flexible way to access cash and takes advantage of a unique and powerful feature: the borrowing limit grows every month,” Davison writes, adding that the fact the limit can’t be reduced or cancelled — as long as the borrower maintains his or her tax and insurance obligations — represents a major benefit over a traditional home equity line of credit. 

Using a graph to illustrate his point, Davison gives the example of a hypothetical $300,000 home, plotting the home-value appreciation against the compounding growth in the line of credit.

“The obvious result is more cash is available later — and in an amount that’s likely to grow substantially more than inflation,” Davison writes. “It may grow faster than most fixed income investments, especially those with guarantees like the FHA backing.”

Davison also points out research showing that using the reverse mortgage line of credit can increase a borrower’s entire estate size, calculated as the investment portfolio plus “housing wealth” minus the loan balance.

“Perhaps the rule of thumb is: when spending is pushed to the max, estate sizes suffer, but when housing wealth is used judiciously, both sustainable spending and estate size can improve,” Davison writes.

Read Davison’s full piece at his blog, ToolsForRetirementPlanning.com.

Written by Alex Spanko

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  • I would also call the reader’s attention to the lead piece on my toolsforretirementplanning.com blog noting the cap that appears to be in place on HECM disbursements. See: https://toolsforretirementplanning.com/2017/03/28/reverse-mortgage-disbursements-capped-additional-clarification-from-hud-required/

    The most recent Federal Register pertaining to HECM (1/19/2017) describes a Maximum Mortgage Amount of 150% of the Maximum Claim Amount (the appraised value of the property or the FHA Lending Limit of $636,150, whichever is less). For example, a house at the current HECM FHA Lending Limit would have a Maximum Claim Amount of $636,150. The Maximum Mortgage Amount would thus be 1.5 x $636,150 =$954,225. Lower priced homes would have proportionally lower Maximum Mortgage Amounts. These limits represent substantial amounts of cash available to homeowners, with higher limits applying to more expensive homes.

    The import of the updated regulations is not yet fully understood across the reverse mortgage industry, and I and others from the Funding Longevity Task Force have called for further clarification from HUD to bring closure to this discussion.

    Assuming the cap applies, the strategic principles in employing HECMs in financial planning applications will still apply, while the extent of impact will be tempered. Note that the ability of a homeowner in a $600,000 home to access up to “only” $954,225 in cash is remarkable.

  • Please note the blog piece described above was written in 2014. I would also call reader’s attention to the lead piece the toolsforretirementplanning.com blog on the cap that appears to be in place on disbursements from HECMs. https://toolsforretirementplanning.com/2017/03/28/reverse-mortgage-disbursements-capped-additional-clarification-from-hud-required/

    The most recent Federal Register pertaining to HECM (1/19/2017) describe a Maximum Mortgage Amount of 150% of the Maximum Claim Amount (the appraised value of the property or the FHA Lending Limit of $636,150, whichever is less). For example, a house at the current HECM FHA Lending Limit would have a Maximum Claim Amount of $636,150. The Maximum Mortgage Amount would thus be 1.5 x $636,150 =$954,225. Lower priced homes would have proportionally lower Maximum Mortgage Amounts. These limits represent substantial amounts of cash available to homeowners, with higher limits applying to more expensive homes.

    The import of the updated regulations is not yet fully understood across the reverse mortgage industry, and I and others from the Funding Longevity Task Force have called for further clarification from HUD to bring closure to this discussion.

    Assuming the cap applies, the strategic principles in employing HECMs in financial planning applications will still apply, while the extent of impact will be tempered. Note that the ability of a homeowner in a $600,000 home to access “only” $954,225 in cash is remarkable!

    • Tom,

      Thanks for pointing this out! We just wanted to highlight the points you made because they’re still relevant, but thank you for the additional info!

      Cheers,
      Alex

  • In support of the prior comments of Mr. Tom Davison in this thread, the existing provision at 24 CFR 206.19(f) is clear when it states:

    “No payments shall be made under any of the payment options, notwithstanding anything to the contrary in this section or in § 206.25, in an amount which shall cause the mortgage balance after the payment to exceed any maximum mortgage amount stated in the security instruments or to otherwise exceed the amount secured by a first lien.”

    The contrary provision at 24 CFR 206.25(c) covers tenure payouts beyond the limitation stated at 206.19(f).

    The current limitation at 24 CFR 206.19(f) comes into play at the point where the available line of credit plus the balance due first exceeds the maximum mortgage amount. Following the point at which the balance due and the available line of credit exceed the maximum mortgage amount, the amount which can be accessed by the borrower from the available line of credit will always be lower than the available line of credit. This is commonly called the point of diminishing returns.

    Some claim that an industry leader who is not employed by HUD is stating that both the note and mortgage documents are eligible for modification with HUD just like tenure payouts as described in the final but still proposed regulations at 206.25(c) as provided in 206.27(b)(10). This individual is said to have the backing of a prominent attorney providing legal services to the largest HECM lenders.

    Unless there is a legal opinion written to the borrower in question backing the opinion that note and mortgage modification will increase the limitation at 206.19(f), what will happen 20 years if HUD does not agree with that opinion? Will the attorney be in practice or the industry leader still be active in the industry? Remember the problem is not just that of the borrower but also one of reputation risk for the financial advisor who might have recommended the borrower to the originator and may be the originator as well.

    If the balance due is not very close to the maximum mortgage amount, there is no need to modify either the note or other mortgage documents; however, once the total of the available line of credit and balance due equal the maximum mortgage amount, access to the line of credit has reached the point of diminishing returns.

    Personally, I am no fan of any advice that goes against the plain language of the regs when no precedent can be cited; I also do not gamble when attending business meetings at casinos in Las Vegas or Henderson, NV. At the least, it seems the best course of action for following the advice of the industry leader is to: 1) get legal opinion that specifically advises the borrower that HUD will increase the limitation contained in 24 CFR 206.19(f) through loan modification solely based on the request of the borrower, and 2) obtain a disclosure statement signed by the borrower declaring that the borrower is fully aware of the risk from the limitation at 24 CFR 206.19(f).

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