Financial Planners: Chase’s HELOC Pause Could Give Reverse Mortgages an Advantage

Last week, JPMorgan Chase announced that it has temporarily halted acceptance of applications for home equity lines of credit (HELOCs) due to the ongoing economic effects of the COVID-19 coronavirus pandemic, specifically the combined impacts of rising rates of unemployment and initial projections that home prices could fall.

The exit of a major financial institution from the home equity lending space – albeit temporarily – may have the potential to give consumers more of an incentive to look at other forms of equity release – including reverse mortgages – to meet the financial needs that have stemmed from the financial shock caused by the pandemic’s effect on the economy, according to financial planning and retirement financing professionals who spoke with RMD.

HELOCs: prone market conditions, lack of availability

The Home Equity Conversion Mortgage (HECM) program could be seen as a potentially more stable alternative to other kinds of lending due to its sponsorship by the federal government, and its relative insulation from external market forces which can affect more traditional forms of home equity lending. This is according to Dr. Wade Pfau, professor of retirement income at the American College of Financial Services and founder of RetirementResearcher.com.

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“This certainly speaks to one of the advantages of the HECM program in that a reverse mortgage line of credit cannot be frozen or cancelled,” Pfau tells RMD. “A problem with traditional HELOCs is that they are often not available at the times of stress when they are most needed. They are not an alternative to a reverse mortgage when it comes to a buffer asset for retirement.”

Similarly, there are other potentially problematic attributes for a HELOC in comparison with a reverse mortgage, according to Stephen Resch, VP of retirement strategies at Finance of America Reverse (FAR).

“I have had clients say they would set up a HELOC as a backup funding source, but my concern has always been that a HELOC requires monthly payments,” Resch tells RMD. “It can also be cancelled or recast if the value of the collateral changes (like in 2009 when many were cancelled).”

How reverse mortgages are different

For those that opt to instead go for the reverse mortgage line of credit, there are several potentially beneficial attributes that are useful in this kind of economic climate, Resch says.

“Once in place, a reverse mortgage line of credit is permanent for as long as the homeowner maintains conditions of the mortgage, which really are no different than any other mortgage in that they must pay taxes, insurance and maintain the property,” he says. “There is also no amortization period after 10 or 15 years like a HELOC, and available credit will grow and compound over time, regardless of what happens to the value of the collateral.”

Another key advantage rests in the payment structure, particularly as people may be more conscious at the moment about the amount they could be paying in fees, Resch adds.

“A reverse mortgage line of credit never requires a principal or interest payment for as long as the borrower lives in that home,” he says.

The exit of a major lender like Chase from the home equity space also speaks to reverse mortgage being a valuable source of income in a volatile time, 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.

“I think you’re seeing a freeze on HELOCs because of how asset liquidity is going,” Lemoine tells RMD. “To that end, it’s not surprising that they’re freezing HELOCs for the time being. If you had home valuations in certain markets react to a recession, I think it naturally makes sense that we’re seeing that kind of a result.”

Everything reacts together, as corporate earnings reflect the reality of the current situation, which pushes markets down, he says. This can create worries that home values may not be where they were previously estimated to be.

How this can affect reverse mortgage sales conversations

For reverse mortgage professionals who have been approached by an interested client due to the current economic conditions, this may help those interested parties realize that more traditional HELOCs are far more affected by external economic factors than reverse mortgages are, Resch adds.

“The fact that Chase decided to no longer accept HELOC applications reinforces the fact that HELOCs are subject to market conditions,” he says. “A reverse line of credit is an inherent feature of the adjustable rate, FHA-insured reverse mortgage and not subject to market conditions.”

Depending on the need of the borrower, a reverse mortgage could help to make a positive difference in a retirement plan because of the additional flexibility the product could bring to the table, he says.

“Adding a reverse mortgage whether to eliminate an existing mortgage payment, provide cash or credit to the borrower, brings flexibility, options and choices,” he says. “And for times like these, it brings liquidity to the planning process which may help ensure a successful, long-term retirement funding plan.”

The exit of Chase from the HELOC space could also provide an advantage for reverse mortgage originators, Lemoine says.

“For good or bad we have insurance we have to pay into with reverse mortgages, but it gives security,” he says. “This is a huge opportunity in the home equity income space. I think it relates to reverse mortgages because we can see the reverse product float to the top of fixed income instruments. This is why we have guaranteed income, this situation reminds us why we have a permanent income stream available so they don’t have to draw from the stock market right now.”

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  • The article is full of misconceptions.

    Why do we go to such lengths to hide what a reverse mortgage is? It is NOT a source of income but of cash. It is not an asset but a DEBT.

    Is a reverse mortgage a buffer asset of any kind? Not long ago the promoter of that view was saying that the line of credit on a reverse mortgage was a buffer asset. Then he defined buffer assets as assets. If the line of credit is an asset, it is the strangest asset I know. For example, if the owner of a bank savings account takes out $20,000 from a $100,000 savings account, $80,000 is left. If a borrower takes out $20,000 from a reverse mortgage line of credit with $100,000 available to the borrower, not only is the line of credit reduced to $80,000 but the borrower owes $20,000 more on the unpaid principal balance. Thus with the savings account, the owner economically only losses $1 for every dollar taken from the savings account, but with the reverse mortgage line of credit for every dollar taken, the borrower economically losses two dollars. The amount available in the line of credit on a reverse mortgage is not an asset but a notation as to how much additional debt a lender is willing to provide the borrower without taking out a new loan. Now this same person is calling a reverse mortgage a buffer asset. Yet with a fixed rate reverse mortgage, what is left after closing for the borrower to draw? Even with the adjustable rate reverse mortgage, how is that an asset?

    A reverse mortgage is not an equity release product. The only true equity release products are forward mortgages with LTVs of 100% (or more). One can make the case that reverse mortgages may be partial equity release products. There is a single equity release transaction and that is a sale of the entire ownership in the home.

    “‘This certainly speaks to one of the advantages of the HECM program in that a reverse mortgage line of credit cannot be frozen or cancelled’…” But is that true? When a HECM borrower does into default, the line of credit is frozen (in the sense it is unavailable to the borrower) until the default can be cured. If not cured, the loan matures and the line of credit goes away. When the Maximum Mortgage Amount comes into play and the advance requested would make the unpaid principal balance exceed the Maximum Mortgage Amount, the line of credit is temporarily frozen as to the amount requested. As to cancelling the line of credit, what happens to the line of credit where a non borrowing spouse is named the sole mortgagor on a HECM, the payment of the unpaid principal balance is deferred, and the loan is performing? So as can be seen even a HECM can be frozen and its line of credit cancelled. We also know that the only proprietary adjustable rate reverse mortgage with a line of credit offered in the last few years has a mandate that after the period of time stated in the mortgage documents, the line of credit MUST BE cancelled.

    “‘A problem with traditional HELOCs is that they are often not available at the times of stress when they are most needed.'” After nearly 50 years in practice as an IRS enrolled agent and later, as a CPA, I have never a loan this is not true of. Just look at our own industry with proprietary reverse mortgages all but completely fading out in 2008 after just a few years (in come cases months) on the market and even now with proprietary reverse mortgages beginning to fade (and some already gone or at least “suspended’). Even today, the low income HECM prospects that were available to us just over a decade ago, slowly faded away as changes came to HECMs.

    Here we go AGAIN. “‘The exit of a major lender like Chase from the home equity space also speaks to reverse mortgage being a valuable source of income in a volatile time….'” No reverse mortgage is a “valuable source of income.” Income implies that the loan proceeds provided the borrower are not subject to repayment of ANY kind. We saw such misuse of the word income disguising loan proceeds in the SEC findings on ENRON; in fact, several well respected partners at one of the world’s largest CPA firms went to jail over the findings that such misuse (if not abuse) was criminal fraud. Reverse mortgages can be a valuable source of cash (but NOT income).

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