Reverse Mortgages Became ‘Harder Sell’ After October 2

Reverse mortgages became a harder sell for potentially skeptical borrowers amid the most recent program changes, according to a syndicated financial columnist.

“Recent changes to reverse mortgages mean seniors and their families may have tougher decisions to make,” financial planner Liz Weston wrote in a column for the website NerdWallet.

Weston quotes a variety of experts in the column, which was picked up by the Associated Press, who claim that the new calculus of lower principal limits and potentially higher mortgage insurance premiums results in a less attractive product for certain borrowers — particularly those who may have been interested in a standby line of credit.

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“For a reasonably affluent client that has a $300,000 or $500,000 house, that’s $6,000 to $10,000 of upfront costs just in case you might ever need the line of credit,” financial planner and blogger Michael Kitces told Weston. “It’s just too much of am mental upfront hurdle for most clients.”

The column echoes concerns in the industry over the direction of the program under the new rules, which some have said will return the Home Equity Conversion Mortgage back to the days of being a product of last resort.

“These days, reverse mortgages may be best suited for the way many people have traditionally used them: to pay off existing mortgages so they can eliminate monthly payments or to generate monthly income in retirement,” Weston wrote, characterizing the opinions of noted HECM researcher Wade Pfau.

“Those borrowers actually benefited from some of the changes, which included a reduction in annual insurance premiums on borrowed amounts,” Weston continued.

Still, while the column posits that the “brief heyday” of taking out a HECM line of credit to protect against future financial troubles has ended, Weston concludes that the mainstream discussion of the strategy has raised the reverse mortgage’s profile among potential borrowers.

“It got more financial planners thinking about a product they used to shun,” she writes.

Read the full column at U.S. News & World Report.

Written by Alex Spanko

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  • “For a reasonably affluent client that has a $300,000 or $500,000 house, that’s $6,000 to $10,000 of upfront costs just in case you might ever need the line of credit,”
    I wish that were the case. I think they meant to say additional costs. The above numbers just represent the increase in the MIP. Actual costs on a $500,000 home are over $20,000. That is a hard sell for opening a standby LOC.

  • Grant you, the new ruling of October 2nd was a hard one to swallow. The most difficult one to digest for me is the lowering of the PLF.

    True, the up front MIP leveling off at of 2% was not easy to digest but remember, prior to October 2nd many borrowers were paying 2.5% in up front MIP charges if the 60% ruling was exceeded! We forget about that, don’t we?

    Also, as the article stated. the annual MIP was reduced from 1.25% down to 050%. In short, what I am saying is you can’t say arbitrarily costs went up across the board on the HECM, they did not!

    The lowering of the PLF is a hardship we have to live with. We have no choice other than to look for homes of higher value and lower loan to value ratio’s, other than that, the HECM can still be used for the many reasons it was used for.

    Today we have a more creditable product and one that should be able to be sold much easier today to the professional and financial advisory sector of the market place.

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

    • John,

      Let’s be clear. Mortgagee Letter 2017-12, not only changed HECM MIP rates but also PLFs.

      In order to comprehend the issue, you are right to separate out those who will receive more than 60% of their initial principal (especially at closing) versus those who receive a much lower percentage.

      Those who need the higher percentage of their initial principal limit, per HUD, are the least likely to pay down their HECM at any time before HECM termination. You are right that they save 20% on their upfront MIP costs plus 60% on their ongoing MIP rate. This is a good fit for seniors who do not quite need all of the proceeds that were available on 10/1/2017 but will be carrying their loan for years.

      But as to those who are clients of financial advisors and are looking for a cash reserve strategy throughout retirement, today’s HECM has a much bigger hurdle in the way of initial costs than on 10/1/2017. Mr. Spanko presented the problem in his RMD on March 19, 2018 at:

      https://reversemortgagedaily.com/2018/03/19/reverse-mortgages-became-harder-sell-after-october-2/#more-27245

      But let us look at a HECM mortgage that closed on September 28, 2017 versus one that closed on January 4, 2018. The appraised value of the home in each case is $600,000. Both parties have strong cash reserves with the HECM and do not expect to need the HECM except under the most unusual of circumstance. They have fully bought into the Standby HECM as a key part of their contingent cash reserves.

      After 30 years, both HECMs terminate. No monies were ever taken from the line of credit and no payments were made on the balance due. In the earlier transaction, the total upfront costs of the HECM were $12,000 but in the second $21,000 due to the 1.5% increase in upfront MIP. So let’s compare the financed costs assuming an average effective note interest rate on each HECM of 5.75%.

      For the first borrower who loan terminated on September 30, 2047, the balance due was $97,398. Yet the HECM that terminated on January 4, 2048 has a balance due of $136,272.

      This shows just the opposite of what you share. It is harder today to justify the upfront costs of a HECM to the financial advising community. Even though it is essentially a Saver, the upfront MIP costs over a Saver is now 19,900% more. Key members of the financial planning looked favorably on Savers with their much lower upfront MIP of just 0.01%.

      As the article by Mr. Spanko points out, today’s HECM is simply too costly to justify it for use by the clients of the financial advising community. I find it hard to agree with your findings.

  • Hello Treverse,

    I agree with you that the new PLF’s hurt the standby LOC strategy but there is something that can be done to help combat that. You can call me at 386-671-7526 to discuss if you would like.

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