Would a Retirement Plan with a Reverse Mortgage Hold Up in Court?

Reverse mortgages have long been touted as solutions to some retirees’ long-term financial plans, but using equity as a retirement asset may still be a foreign concept in the courtroom.

Writing in Forbes, financial planning writer Robert Laura points out that in legal settings, one’s retirement picture could require detailed explanations — such as in a recent scenario in which Laura was asked to serve as an expert witness in a court case.

“Attorneys and judges aren’t financial advisors, and while many of them may have a solid grasp of the key concepts, I found myself needing to explain every minor detail, including assumptions and what-if scenarios that are usually discussed but not calculated into the plan,” he wrote.

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For instance, Laura was asked why he didn’t consider this particular client’s home to be an asset, given the amount of equity she had built in it. 

“Yes, it is an asset, but they also need a place to live during retirement,” he wrote. “Whether they stay put or use the equity to downsize or eliminate their mortgage, you can’t just throw every asset into the mix for retirement income.”

He also noted using reverse mortgages in retirement isn’t as widely adopted among the financial planning community as some might expect.

“While I would argue that this situation falls into a generally accepted planning category, the reality is, items like this are open for interpretation and can vary from planner to planner based on their background, experience, and whether or not they sell products related to reverse mortgages,” he wrote.

Check out the full analysis of financial plans and courtroom scrutiny at Forbes.

Written by Alex Spanko

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  • Reverse mortgage or not, marital assets (all), including equity in the home are always taken into consideration ration for a divorce scenario. If not, then someone is not doing their job in representation. Some points of this article may not be properly articulated, as it seems to be lacking. Could a HECM be utilized in settling the divorce? Possibly.

  • Ed,

    I do not pretend to know how a divorce settlement pertains to the blog above but your assertion about HECMs being used to settle a divorce is odd.

    I know couples who have been legally divorced for years with no property settlement on the horizon.

    A HECM is a cash flow product whose.proceeds can be used to fund a divorce property settlement but not the settlement of the divorce itself.

  • What is shown in this article is not whether HECMs should or should not be recommended in financial planning but rather, the financial planner needs to document the determining factors that caused the planner to recommend the course of action they do.

    Courtrooms cannot recreate the situation at the time that the planner makes his/her recommendations so documentation must make the situation as clear as possible. It could be just as wrong to blindly recommend a HECM as it is not to consider it, maybe worse depending on the jury or judge.

    The article is more of a warning to financial planners to document their reasoning for recommendation of including or excluding specific financial products within the scope of what is being considered in developing the plan. Most financial plans even those produced by the best financial planners have flaws when viewed with 20/20 hindsight but that does not mean one is better off with no plan or one’s own plan.

  • I commend George Owens on his comment, he hit the nail on the head!

    We are not financial advisers, yet we do show our senior clients how the HECM can fit into their overall retirement plans. Most of us know are product well and understand the component parts of it and how it can fit into retirement plans for seniors.

    Equity sitting in a seniors home is great but is it being utilized to the full benefit of the senior?

    As far as the financial planners not widely adopting and not using the reverse mortgage in retirement as one would expect is because they have not been properly educated on our product! The financial planning community is a viable source for us, if approached properly!

    Remember, it is very important we understand the financial planner and advisors world before we can educate them on ours!

    John A. Smaldone
    http://www.hanover-financial.com

    • John,

      Reaching out to the financial community has been an interesting experiment with a backlash from HUD clearly displayed in Mortgagee Letter 2017-12. With so much weighing on the growth and size of the line of credit, HUD responded not only with a lower starting point for lines of credit with lower PLFs but a policy shift that causes not only higher upfront costs for most financial planning clients but also lower growth rates. Many leading the vanguard in this sector of our business responded with both disappointment and amazement at how quickly HUD has responded. HUD is showing that it is not only paying attention to our marketing strategies but also to recommended uses of proceeds.

      Some have pointed to the actuarial report for fiscal 2016 and the pending one for 2017 as the primary cause of HUD’s issuance of Mortgagee Letter 2017-12 and while there is no doubt this was a concern addressed in that Mortgagee Letter, it is not the sole issue addressed there. Of course, we hear the cry that really Mortgagee Letter 2017-12 is for the best but when haven’t same individuals responded with that cry to HUD policy shifts that were certain to keep the industry in endorsement stagnation.

      Yet not all is lost even though endorsement progress has been set back at least months if not several years. What CFP wants to advise a client that something that is claimed to be insured by the government is changing once again and the changes will reduce the HECM benefits described just last year when the client was 61? To grow out our beachhead with financial advisers we need more consistency. Will HUD allow that?

      Can we be assured that community banks and credit unions will want our assistance? While we are a solid defensive move for them as to some of their customers, we need better training on this front in order to be effective with a plan moving forward.

      Finally H4P is still stuck in the mud and barely doing better than HECMs as a whole on a percentage basis. Fiscal 2017 ended once again with less than 2,900 endorsements. While the fiscal year 2018 increase in endorsement volume of 18.4% increase over the highest H4P endorsement total for a fiscal year (fiscal 2015) to date was great, total endorsements are too low to look at this product as being capable of leading us out of stagnation. After the 18.4% only represents an increase of 449 endorsements.

      We have new opportunities but we are lagging due to HUD “improvements” to the program. Several years ago, HUD came to a NRMLA convention promising a hands off major changes policy for the program because of how pleased it was with the changes that were implemented on September 30, 2013, August 4, 2014 and April 27, 2015. It seems the annual FHA reports to Congress on the MMI Fund for the last two fiscal years along with the way that financial planners were looking to use HECMs, caused HUD to terminate that policy in late August 2017.

      Right now we need to work the sources of demand we currently have while exploring new ones. Secular stagnation does not seem to be dying out on its own.

    • John,

      I only agree with the first five words of the following: “We are not financial advisers, yet we do show our senior clients how the HECM can fit into their overall retirement plans. Most of us know are product well and understand the component parts of it and how it can fit into retirement plans for seniors.”

      Unless the financial plan includes nothing more than a few thousand in assets and the home with a medium percentage mortgage on the home, we should staty away from showing seniors “how the HECM can fit into their overall retirement plans.” Doing that in most other circumstances means we are going beyond our scope of licensing as mortgage originators and acting as the financial planner.

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