Coronavirus Crisis Leads to Borrowers Using Standby Reverse Mortgage

An increase in reverse mortgage draw activity by borrowers in March is illustrative of the reliability of drawing on home equity in times of crisis, while also carrying implications for how reverse mortgage products may be perceived on the other side of the COVID-19 coronavirus pandemic. This is according to two financial professionals, based on draw data recently shared by reverse mortgage servicer Celink.

The draw activity as observed is illustrating that borrowers are using their reverse mortgage lines of credit in the spirit of the way that product feature is designed according to a Celink executive, and the additional uncertainty that the outbreak has introduced in the economy may have the effect of convincing financial planners that non-market investment sources can be beneficial considering the current climate.

HECM draws increase

When briefing industry professionals on patterns observed in reverse mortgage draw activity, Celink chairman and CEO Robert Sivori asked for a quick report on borrowers’ activity in drawing from their reverse mortgages, and related that there was an increase in activity of over 50%.

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“Week over week, if you look at the week ending [March] 13 versus the week ending March 20, we saw a 55% increase in the number of draws, it went to 1,055 draws,” Sivori said. “From the previous week, it was 720. And then the increase in the size of the draws […] we had a 14% increase. It was 8.7 million as of last Friday. The previous week and before that, it was 4.9 million. So, [the size of the draws has almost doubled].”

Draws on reverse mortgage lines of credit have also seen notable increases, Sivori said.

“And then we also are seeing […] some line of credit draws, the standby lines of credit, where some borrowers who had no balance or very little balance, maybe just the closing costs were on there — $3,000 — that did a full draw of $615,000 on that and they’re using it the way it was intended to be used,” Sivori said. “And by the way, these numbers fit January over February, as well. So, it’s been an increasing slope here on the draws being pulled down.”

The need for additional cash sources

This climate of volatility leading to more reverse mortgage draw activity has led to a “perfect storm” for establishing an alternative source of cash like a reverse mortgage according to Jamie Hopkins, director of retirement research at Carson Group.

“In this time of market volatility and loss of revenue sources I would expect people to start looking at loans, reverse mortgages, and other assets,” Hopkins tells RMD. “Right now is honestly the perfect storm of sorts for setting up or drawing from a reverse mortgage as interest rates are low, unemployment is rising, fixed income returns are low, and markets are volatile like we have never seen before.”

The climate of economic instability instigated by the coronavirus crisis has also created a scenario that reinforces why products like reverse mortgages exist in the first place, according to Dr. Craig Lemoine, director of the financial planning program and executive director of the Academy for Home Equity in Financial Planning at the University of Illinois Urbana-Champaign.

“You have this huge economic instability, and [in situations where] we have economic instability, we have lines of credit, we have reverse mortgage draws, and we have a safety net,” he says. “It’s the entire purpose of the product, the entire reason the product’s designed. This product can provide you an income stream for as long as you’re living in your home, and that income stream is going to be certain. And here we are, it’s certain and it’s there. So, I think this is one of the best illustrations of the power of a reverse mortgage product in today’s economy.”

Observing the reverse mortgage’s capability to avoid sequence of returns risk helps solidify why these kinds of products exist, Hopkins adds.

“I think reverse mortgages and credit lines can be a lifeline in times like this. It can be that cash flow aspect that can get you through the tough income and market times,” he says.

Crises can prove greater reverse mortgage viability

For many seniors, a climate of high anxiety will naturally lead to people exploring alternative financing options, Hopkins says. Many seniors likely saw reverse mortgages as one such alternative before a situation that illustrated it as an option worth exploring.

“During volatile times like now, we are seeing a cut back in wages and income sources, even in the ‘gig economy,’” Hopkins says. “This creates uncertainty and fear, so people will refinance, draw upon loans, and leverage their situation to get by. More sophisticated borrows also will see opportunities to borrow during high volatility and low interest rates.”

A crisis can also be a major testing ground, however, and for people who have gotten a reverse mortgage, they are now likely relieved that it is there waiting for them to help weather the storm, according to Lemoine. That means that authorities like financial planners should broaden their perspectives to include non-market sources of income, he says.

“I would hope that financial planners and advisors look towards consumer income sources that are not tied to the market, and even those that are not tied to traditional interest rate swings,” he says. “I can’t help but think that as a CFP professional, where I fit in advising clients and retirees, this reinforces the ability of a retiree and a client to have an additional income source in a time exactly like this one.”

Expanding financial horizons

Particularly in an environment which has seen record new claims of unemployment across the country, the United States is reminded of the idea that economic shocks present themselves periodically.

“I understand that from a retiree standpoint and the age that borrowers get into reverse mortgages, we may be beyond [concerns related to unemployment],” he says. “But we see economic shock every decade or so. There are always big economic shocks, they keep coming. We are reminded of that right now.”

It’s precisely for that reason that reverse mortgages should at minimum be re-evaluated, he says.

“I would believe and hope that financial planners and professionals reevaluate this very valuable resource and product as far as an income line declines,” he says. We can’t ignore that more and more retirees today than ever before don’t have pensions, and have gone to defined contribution 401K plans where we have fewer pensions offered. So, there’s even fewer permanent income solutions. So, I really hope that one takeaway from this disruption is that we see more activity in the reverse mortgage space and line of credit space for that reason.”

Still, many people do still view reverse mortgages as loans of last resort, though seeing greater use in a down market may help to prove their utility, Hopkins adds.

“[People tend to go] back to borrowing from the home in times of fear and uncertainty,” Hopkins says. “There is good news in that using reverse mortgages in down markets is not a bad thing from the borrower or retirees standpoint, but I do hope that these loans are being used appropriately in a financial and retirement plan and with a well-qualified advisor.”

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  • The title and contents of the article show just how confused the industry is as to the various strategies that were first advanced in a substantial way starting in about 2010 until around 2013. The Standby Reverse Mortgage (perhaps its best name) was not promoted as a standalone strategy. Rather Harold Evensky first incorporated it into his two bucket wealth management strategy which eventually became a three bucket strategy with the third bucket being a Standby Reverse Mortgage.

    The following three bullet points are taken from the executive summary of an article that appeared in the Journal of Financial Planning by Salter, Evensky, and Pfeiffer, titled “Standby Reverse Mortgages — A Risk Management Tool for Retirement Distributions” (sic):

    “Our study considers using an HECM Saver reverse mortgage as a risk management tool in conjunction with a two-bucket investment strategy, coined the standby reverse mortgage strategy (or SRM), in order to increase the probability a client will be able to meet predetermined retirement goals.

    The HECM Saver has unique and attractive features including lower cost; a non-cancellable line of credit; the borrower’s control over when, and if, he or she uses the line of credit; and a line that can be paid back at any time without a penalty.

    The SRM represents an additional source of readily available cash in a bucket strategy to draw upon when clients’ portfolio values deviate substantially from their expected glidepath (where their portfolio should be relative to their capital needs analysis).”

    The SRM article goes on to say: “…Simultaneous research by Barry Sacks and Stephen Sacks, recently published in this journal, provides the basic framework of using home equity as a source of cash in times of bear markets. However, our strategy moves a step further by offering a readily implementable alternative borrowing and payback methodology using the lower cost HECM Saver line-of-credit product within a bucket strategy.”

    Notice the four requirements of the SRM: borrowing and payback methodology 2) using a HECM Saver Line-of-Credit (HSLOC) and 3) all incorporated within a bucket strategy that 4) uses the cash from the HSLOC in times of bear markets.

    It is stated above by Robert Sivori that “…the standby lines of credit, where some borrowers who had no balance or very little balance, maybe just the closing costs were on there — $3,000 — that did a full draw of $615,000 on that and they’re using it the way it was intended to be used….”

    Notice Robert uses the term, “Standby Line of Credit” (SLOC), which members of the industry freely interchange with SRM. Yet it is not the large draw that validates the use of the SRM because we do not see a methodology of borrowing and PAYBACK using a HECM adjustable rate Saver. We have no idea what the intent of the borrower was when it comes to payback or draws restricted to bear markets. In fact this is not a methodology of borrowing but rather what appears to be a full draw of the available line of credit. Usually one would expect to see many draws in a bear market rather than just one.

    The technique pointed by Sivori may not fit into any strategy currently espoused by the leading strategists who support this industry such as Salter, Evansky, Sacks, Wagner, Pfau, and Hopkins as well as others. On the surface it might meet the informal strategy referred to by many as the “Ruthless Strategy.” This strategy is where the borrower holds the HECM LOC minimizing all draws until the loan is near maturity. Near maturity, the borrower compares the available HECM LOC to home equity and if home equity is only slightly more than the HECM LOC or less, the borrower draws down the entire amount available in the HECM LOC. Why this is ruthless is because only minimal MIP will have been earned and received from the servicer by FHA at maturity thus generally resulting in MIP reimbursement, thus harming the MMIF.

    So the pattern from the first example provided in the article better fits the ruthless strategy than the SRM strategy.

    Finally, the interviewees discuss adjustable rate HECMs as if most like the illustration that Sivori gives. Unfortunately, most HECMs have very little available through the HECM LOC. Why? The most common use of HECM proceeds is to payoff existing mortgages and other liens against the collateral at closing. Also many seniors have monthly cash flow shortfalls that cause a continual drain on proceeds through the HECM LOC and through proceeds withdrawn and few prepayments, the line of credit is not high as it otherwise could or should be, if the unpaid principal balance were properly managed through lower and fewer draws as well as frequent and substantial prepayments.

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