For the last several years, there has been a major industry-wide push to spread awareness among the financial advisor community about how reverse mortgages can be a powerful tool in retirement planning. But recent changes to the product that lower principal limits and change mortgage premiums have some worried that the HECM has lost its appeal among financial advisors.
While some retirement income experts admit that the new rules do change things, they insist that the HECM still has real value from a financial planning perspective. RMD spoke to several leading experts for tips on how originators can connect with advisors to educate them about the product under the new rules.
Tip No. 1: Move past the stand-by line of credit, but don’t forget it.
Jamie Hopkins, co-director at the American College’s New York Life Center for Retirement Income, says that while the changes take the steam out of the stand-by strategy, it can still be useful in some cases.
“The stand-by line-of-credit option is less attractive, there is no way around that,” he says. “The line of credit will cost more upfront to set up and will grow a bit slower than in the past… Just from talking with advisors, many are less attracted to it now with higher upfront costs.”
But Hopkins says that while its appeal is diminished, the strategy is still valid and shouldn’t be forgotten. “This still remains a very viable and useful strategy, one that is underutilized today.”
Tip No. 2: Stress the use of a HECM to pay off an existing mortgage.
Hopkins suggests originators focus on the benefits of using a reverse mortgage to pay off an existing mortgage. Explain to advisors how a HECM can be a game-changer for clients carrying a mortgage into retirement who have limited resources but want to age in place.
“For anyone considering paying off an existing mortgage with a reverse mortgage, the program just got better,” Hopkins says. “It can help solve the cash-flow issue and can be presented as a more flexible mortgage that allows for monthly payments but does not require them in the event that income or savings gets tight in a given month. This is the strategy that I think will be most widely adopted by financial advisors moving forward as it stresses the importance of cash-flow management in retirement.”
Tip No. 3: Emphasize the HECM for Purchase.
Prominent retirement researcher Wade Pfau is releasing a second edition of his book, “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement,” that takes into consideration the new rules, and he says one of the topics he’ll be highlighting is the HECM for Purchase.
Pfau says the H4P program benefits from new guidelines, which dictate lower mortgage insurance premiums and a slower growth of the loan balance.
“I provide a case study about the HECM for Purchase and show that it can increase the probabilities for overall retirement success compared with strategies that would [have seniors] pay cash for the home or use a 15-year traditional mortgage to finance the home,” Pfau says. “The reason for this relates to the role of the HECM for Purchase program to reduce exposure to sequence of returns risk in retirement, which is a very important concept for advisors to understand when they are providing guidance to retiring clients.”
Tip No. 4: Curtail price concerns by focusing on how the product has been improved.
While taking out a reverse mortgage can be more expensive than other options in some cases, some experts insist the value is still there. The trouble for originators will be getting advisors to see past the price.
“Strategically combining a HECM opened sooner can help support more efficient retirement outcomes, even if the full retail upfront costs of the reverse mortgage must be paid,” Pfau says. “It is only through this type of education that I hope planners can start to overcome the new sticker shock.”
Shelley Giordano, a member of the Funding Longevity Task Force who has spent years working to promote awareness among financial planners, says it’s important to stress how the product has been improved.
“I think a lot of people have assumed that just because it costs something to set it up, the discretionary client is out the window. But that’s not the case,” Giordano says. “The product is so much better now, but this isn’t something that can be conveyed in a headline or in a TV ad; it requires us to sit in front of a financial advisor and discuss it.”
“Your sales force has to articulate that the changes are positive,” she says. “Yes, there’s a little bit more upfront cost for a whole lot of protection, but less overall cost to the customer. If you can explain that correctly, they will understand it.”
Tip No. 5: Educate, face to face.
Giordano says originators who can develop a solid connection with advisors and take the time to meet them one-on-one will have greater success.
“We have a lot of work in front of us. Lenders that have built real relationships with financial advisors will have a lot less difficultly continuing with their business, because they are able to sit with the financial advisors belly-to-belly and explain what has happened,” she says. “So there is definitely hope. But is it a hard job? Hell yes.”
Hopkins insists that this education is crucial. “Financial planners need to understand the benefits of reverse mortgages, and the recent changes did nothing to change the importance,” he says. “Clients have so much of their wealth tied up in home equity that it just can’t be ignored.”
Written by Jessica Guerin