RMD Report: Long Term Care Focus Increases in Reverse Mortgage Market

When drilling down on the primary reasons that a borrower may decide to take a reverse mortgage, whether they want to supplement their income, modify their home so it’s easier to stay there longer, or even head out on some kind of vacation, these reasons primarily boil down to a basic idea. It’s all about facilitating some kind of extension of comfort for those who likely need to find another source of income in retirement.

Long-term care (LTC) naturally fits into that equation. For the senior who wishes to use a reverse mortgage to fund the prospect of long-term care in any form — particularly if it’s in their home — the borrower wants to make sure that their retirement and ultimately their sunset years are comfortable and, ideally, peaceful.

This is one of several reasons why the idea of long-term care appears to be growing as a prospect for reverse mortgage borrowers, and industry participants at every level — from originators, to counselors and up through financial advisors — are taking notice.

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What originators are seeing

Reverse mortgage originators are about as close as the industry gets to having front-lines soldiers. Because they primarily interact directly with their borrowers and walk them through the reverse mortgage process up through, and in some cases, beyond the loan’s closing, they’re seen as the primary point of contact in terms of giving a borrower a fuller picture of their financial situation, and the possible future complications that could arise from health-related concerns.

Based on some perceptions, it looks as though LTC is becoming an increasing focus for potential reverse mortgage borrowers. In a couple of cases, though, that prospect and the potentially looming necessity for LTC wasn’t enough to actually push a borrower to pull the trigger, even if it was an issue that was at the front of their mind.

“I personally have had two people approach me who specifically wanted to do a reverse mortgage to assist with long term health care, but neither one went forward,” says Brandi Braley, originator with Neighborhood Mortgage in Bellingham, Wash. “One was working with an agency here in town and it was the agency who contacted me. She was a single woman with no family and wanted to stay in her home.”

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The ultimate decision had little to do with the recognition of the necessity for LTC, though, and more to do with the fact that this particular client needed more help than was previously thought.

“She did the counseling, but ended up not going forward because it was determined that she really did need to move into an assisted living home,” Braley described.

In the second case, a reverse mortgage wasn’t chosen as the solution to the potential issue of LTC funding, but the eventual choice of financial product was still used to help fund that necessity.

“The second one had two children. One was for the reverse and the other was against. They ended up getting a home equity loan to cover the costs,” Braley explains. “She was fortunate in the fact that she had the income to support the monthly payment for a home equity loan.”

The experiences were eye-opening for Braley, however. When asked if funding the prospect of LTC was part of her discussions with clients, she said they haven’t been primarily but may have to be in the future.

“I have only talked to people about using the funds for long-term health care specifically a few times. The only times I have done it is when they specifically say that is what they are intending to use it for,” she says. “I should probably add this as a key point when talking to borrowers [going forward].”

Old insurance policies fall short

Another reverse mortgage originator described that while the conversation concerning long-term care funding hasn’t come up much in his dealings with potential borrowers, the necessity is likely to increase because of inadequate funding on the part of previous insurance programs.

“Lots of talk about long-term care in the advisor industry but as of yet, I haven’t had a client close a loan for just that purpose,” says Rich Pinnell, originator with Guild Mortgage in Redding, Calif. “Seniors that took out long-term care policies years ago, as they were planning their retirement, are now finding out that the pay-out on those policies falls well short of what’s needed to sustain someone in long-term care, sometimes as much as several thousand dollars a month.”

Because of that emerging trend that he’s observed, Pinnell believes that the topic of LTC as a prospect to which a borrower can put their reverse mortgage proceeds toward will only increase in prominence as time goes on.

“I believe that this issue will grow in importance over the next few years as seniors recognize this shortfall, and the fact that a HECM grows at an annual rate better than almost all investments [means] it makes sense to get a line of credit now and let it grow for the future,” he says. “I’m spending a lot of time discussing this with my referral partners.”

Counselors

If counseling sessions are a metric to determine industry trends and borrower perceptions, then the prevalence of long-term care concerns are an increasingly important factor for potential reverse mortgage borrowers, considering how often it comes up in conversation. This is according to Jennifer Cosentini, housing director at Cambridge Credit Counseling Corp. in Agawam, Mass.

“I would say that funding in-home care is in the top five reasons our clients are looking for a reverse mortgage,” Cosentini tells RMD in an email. “In most of these cases we are speaking with a family member who has power of attorney or a conservator who is paying the bills and wants to keep the client in the home as long as possible.”

While the prevalence of long-term care funding appears to be picking up more steam in the reverse mortgage industry, Cosentini is of the mind that this has been an important issue for quite a while. The industry may just be starting to catch up.

“In my opinion this has been a trend for years,” she says. “Seniors want to stay in their homes, and who could blame them! I’m happy that the reverse mortgage can be an option for some seniors looking to stay at home and age in place.”

One of the reasons Cosentini believes long-term care will remain an important issue is twofold: the aforementioned trend she’s observed in the past, and the way that learning about a client’s personal situation emphasizes the ways a reverse mortgage’s proceeds can be applied.

“We learn about every client’s unique situation and reason for considering the reverse during the session so we can really focus on their particular needs,” she says. “When counseling someone who is doing the reverse for long-term care, we talk about how long the money could last and any other alternatives or resources that can help them with or without a reverse.”

Financial advisors

For the financial advisor community, the issue of long-term care is becoming more persistent simply because of the demographics associated with the baby boomer generation. This is according to Stephen Resch, vice president of retirement strategies at Finance of America Reverse (FAR). Resch is himself a financial advisor, and discusses ongoing trends with both clients and fellow advisors on a regular basis through his position at FAR.

What advisors will more specifically look at when examining this issue is a client’s more general financial situation, and the associated goals they have in concert with their situation. This can include the protections that they may need that make sense for their specific household situation.

“If protection against long-term care events makes sense, they need to proceed forward and do that,” Resch says. “If, by doing that, it causes a shortfall in household income, then we can look at a reverse mortgage to supplement that household income. A lot of it is semantics, but you want to make sure you’re doing what’s right for the household, rather than funding a product.”

In terms of long-term care contributing to an ongoing trend in the larger home equity conversation, Resch explains that he sees that very plainly.

“There’s no getting around it, it’s being driven by the demographics,” Resch says. “When you start rolling into your 60s, all of a sudden the lights go on and [you can] say, ‘I’m in my later years, I need to plan for all sorts of things.’ So you start to make Social Security decisions, Medicare decisions, Medicare supplement decisions, long-term care, [and you ask] what is going to serve as a risk to my asset longevity.”

This becomes increasingly important particularly as people are living longer, which means that their retirements are becoming longer, as well.

“The question becomes how you manage all those risks through a 30-year, or longer, funding period,” Resch says. “[You can] incorporate the home equity as an asset class to do it. So, yes, there’s definitely going to be a rise in that trend, I have no doubt about it. I’m seeing it both in my own practice and the conversations that I have with financial advisors all over the country every week.”

LTC costs, reverse mortgage use

Costs of LTC can vary based on a number of factors. According to data compiled by the U.S. Department of Health and Human Services, the average cost of in-home LTC in 2016 was: $20.50 an hour for a health aide; $20 an hour for homemaker services; and $68 per day for services in an adult day health care center.

The cost can also fluctuate depending on the time of day that services are provided, and change if it takes place on weekends or holidays. There are often variable rates in some community programs like an adult day service, which are provided at a per-day rate. Those costs can be more, however, based on extra events and activities.

While the National Reverse Mortgage Lenders Association (NRMLA) confirmed to RMD that it does not aggregate data concerning the application of reverse mortgage proceeds towards the funding of long-term care, data compiled by American Advisors Group (AAG) and released earlier this year revealed that one of the top 10 reasons their borrowers choose to take out a jumbo reverse mortgage is specifically to cover costs related to in-home care.

This edition of the RMD Report is sponsored by national appraisal management company Class Valuation.

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  • Let us look at the first issue per the title to the article first, Long-Term Care Insurance (LTCI). While buying LTCI with HECM proceeds is legal in almost all fifty states, California is different. As long as the deal does not violate the restrictions of 12 USC 1715z-20 (n)(1) and (o), the so called McCaskill provisions, there is no law promoting such transactions.

    Now let us look at California. California Insurance Code Section Number 785.1 reads as follows:

    “(a) (1) An insurance broker or agent shall not participate in, be associated with, or employ any party that participates in, or is associated with, the origination of a reverse mortgage, unless the insurance agent or broker maintains procedural safeguards designed to ensure that the agent or broker transacting insurance has no direct financial incentive to refer the policyholder or prospective policyholder to a reverse mortgage lender.
    (2) Except as provided in subdivision (b), individuals transacting insurance shall not receive compensation, commission, or direct incentive for providing reverse mortgage borrowers with a noncasualty insurance product that is connected to or a result of the reverse mortgage.
    (b) This section does not prevent an agent or broker from offering title insurance, hazard, flood, or other peril insurance, or other similar products that are customary and normal under a reverse mortgage loan.

    (Added by Stats. 2011, Ch. 223, Sec. 1. (AB 793) Effective January 1, 2012.)”

    This means that it is not the reverse mortgage originator who can get into trouble for selling LTCI to seniors as described in the cited provision but the insurance producer. In a call with the legal office of the California Insurance Commissioner shortly after the bill was based, certain regulatory exceptions were being considered such as if the loan is at least 5 years old BUT those exceptions were just being proposed and, therefore, not effective. To be clear the so called McCaskill provisions do apply to all reverse mortgage lenders and their originators who do business in California but their application is the same as at the federal level.

    ——————————————————–

    In part the opening paragraph to the article reads as follows: “When drilling down on the primary reasons that a borrower may decide to take a reverse mortgage, whether they want to supplement their income…. It’s … for those who likely need to find another source of income in retirement.”

    If people are looking for income they will NOT find it with a reverse mortgage. What they will find with a reverse mortgage is a limited source of cash. While many mistake income for cash, it is cash that is king in retirement.

    For example, let us say that a consumer is holding AQP stock that he bought for $400,000 and now is only worth $350,000. Unless AQP can guarantee to pay taxable dividends in the future, there is NO income in AQP stock today; however, there is $350,000 in cash in the stock. Too many times both consumers and advisers say they are looking for income when in fact they are looking for useable sources of cash. Even in retirement, CASH is still king.

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