Money.com: ‘Everything to Know’ About Reverse Mortgages

As more American seniors find themselves economically impacted by the COVID-19 coronavirus pandemic, more of them may be looking at new financial options that they may not have considered before in order to make ends meet. One of these new potential options may be a reverse mortgage, and it’s in that spirit that Money.com has published a new article that purports to offer its readers “everything you need to know” about the product concept.

While the article offers objective information about the realities of a reverse mortgage transaction, it also takes a cautious approach in informing readers about the complexity of the product category.

“For seniors wondering how to fund retirement, tapping the wealth you’ve built in your home can seem appealing,” the article begins. “But reverse mortgages are complicated and can have big downsides you need to [be] aware of before you commit.”

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Detailing the history of the Home Equity Conversion Mortgage (HECM) program and recent reforms that have been instituted to it, the article does take into account the work of prominent financial researchers and academics who have discussed the positive potential of reverse mortgages in the financial lives of seniors.

“Used strategically, a reverse mortgage can greatly improve the sustainability of your retirement income,” said Dr. Wade Pfau, professor of retirement income at the American College of Financial Services as cited from a 2016 interview with Money.com.

In describing the process of a reverse mortgage becoming due and payable upon the borrower’s exit from the home, the article also cites Jack Guttentag, the “Mortgage Professor,” who previously discussed the process of repaying the loan when the borrower exits the property.

“That is not a weakness of the program, it is by design,” writes Guttentag in a 2018 Forbes column cited by Money.com. “The presumption is that the homeowner can make better use of the equity than his heirs.”

A potential borrower also does not have to own his or her home free and clear, contrary to what is characterized as a popular belief according to Bruce McClary, VP of marketing at the National Foundation for Credit Counseling (NFCC). Still, McClary advises prospective reverse mortgage borrowers to be sure they’re working with a loan officer who has their best interests in mind.

“If you’re facing financial hardship and you’re considering a reverse mortgage to ease that stress, one of the things you need to think about is how long this period of financial hardship is expected to last,” McClary says in the article. “If it’s temporary, you don’t want to get into debt long-term.”

Also listed is a series of pros and cons related to reverse mortgages. In the “pros” column, the article lists attributes including not requiring monthly payments while the borrower lives in the home; acting as a “safety net” particularly as an alternative to high-interest credit cards; using a reverse mortgage’s proceeds to put off drawing on Social Security; and a loan’s proceeds not being viewed as “income” for tax purposes.

In the column of “cons,” the article lists the inability of a borrower or heirs to claim a tax deduction when the loan is paid off; high costs like an origination fee, appraisal fee, closing costs and mortgage insurance premium; and the fact that previous homeowner obligations – particularly the need to continue paying taxes and insurance – still remain for reverse mortgage borrowers.

Read the article at Money.com.

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  • Chris did a nice job of summarizing a long article that covers a wide range of topics about reverse mortgages.

    The author of the article seem to reach out to a number of people in the industry now or at some time in the past. Yet the author suggests the following: “The biggest selling point for a reverse mortgage is that as long as you’re living in the home, the loan doesn’t have to be repaid…. And non-borrowing spouses are protected, as well. They can live in the home as long as it also is their primary residence.”

    Of course, everything after the first sentence of the quotation is nonsense. Not all reverse mortgages protect non-borrowing spouses and even HECMs have huge holes in providing that kind of protection. For example, if a borrower marries after getting the HECM, the new spouse cannot qualify for protection even though person is, in fact, a “non-borrowing spouse.” The only violation of a covenant where a fully qualified and eligible borrower can elect to defer payment of a HECM is when the borrower passes away. For example, if the home is not properly maintained, the lender has cited that condition as a violation of a HECM covenant, and the borrower is unable to satisfactorily cure the violation, NO non-borrowing spouse can elect to defer the payment of the unpaid principal balance. Also if the HECM has a case number assignment date before 8/4/2014 and all deferral requirements have been met BUT the lender does not approve the deferral, no deferral is available and there is no protection for the non-borrowing spouse.

    “A reverse mortgage can act as a ‘safety net’ by drawing on the equity you have in your home.” What does the equity in the home have to do with how much can be drawn??? A HECM borrower could have negative equity but if the HECM has a line of credit and there are still funds available in the line of credit, the borrower can draw that amount out at will unless, the Maximum Mortgage (or Principal) Amount would be exceeded by a requested draw or there is an uncured covenant violation.

    “Especially in a bear market like the current one, a reverse mortgage can give you a supplementary income stream that can keep you from drawing down your retirement nest egg.” Are we still dealing with reverse mortgage proceeds as if they were some kind of income? Reverse mortgages provide cash. Income comes normally through our work efforts or through earnings on assets. Reverse mortgages are NOT assets. HECM proceeds are cash inflow to the borrower.

    “On the flip side, though, you (or your heirs) don’t get to claim any tax deduction when the loan is paid off, as is the case for a regular mortgage.” Where does this nonsense come from? The Internal Revenue Code does not distinguish between forward and reverse mortgages. To the extent that the interest would be deductible if the mortgage were a forward mortgage, it is deductible on a reverse mortgage. And heirs can get income tax deductions on the interest that is paid but trying to summarize those rules is beyond scope of this comment.

    “‘…HECM… Mortgage Insurance Premium… ensures that the borrower will never be in an un-equitable position….'” Per Dictionary.com, unequitable means inequitable which means not equitable in the sense of unjust or unfair. Perhaps the person that the author quotes is talking about not having negative equity but that is not true in any sense. If a HECM borrower decides at termination to keep the loan, the borrower MUST pay the amount that is due and payable in full. The ONLY time that the nonrecourse feature can kick in is at termination.

    “’A reverse mortgage is simply a loan. It’s not an income qualifier….” In what context is the term “income qualifier” related to? Part of the problem with the industry is a lack of looking at reverse mortgage proceeds as cash inflow rather than income. We have some of that in place in the so called Financial Assessment. There is no better place to see the ignorance in the overall industry than in the HECM financial assessment worksheet. Section D is titled “CALCULATION OF IMPUTED INCOME FROM ASSET DISSIPATION.” That title is explained on Page 53 and 54 of the Financial Assessment and Property Charge Guide. Looking at a savings account of $28,000 and a TALC life expectancy of 18 years, the “computed monthly income” is $130. But is that income or cash inflow? When was the last time you closed a savings account and say to yourself, what a lot of income? Even though the interest earned is taxable, the creators of the worksheet correctly show it in the 100% category (meaning non-taxable) since the balance is nothing more than part of the capital of the HECM applicant. So why call it income? The correct name for the total in Section D is “computed monthly cash inflow.” Cash inflow includes all forms of cash income but cash income does NOT include all types of cash inflow. With all of the misnaming and incorrect concepts used in the assessment, the sole adjective in its name should be something other than “financial.”

    “In addition to the ‘typical’ reverse mortgage through which the homeowner receives monthly payments….” Really?? Proprietary reverse mortgages do not not have that option and few HECM borrowers take advantage of tenure or term payouts.

    “…the loan will need to be repaid — which might mean selling the home in order to come up with the funds. ‘That is not a weakness of the program, it is by design…. The presumption is that the homeowner can make better use of the equity than his heirs.’” Why not just say, all mortgages work that way?

    While that is not all of the questionable statements in the article, time requires moving on.

  • “In the column of “cons,” the article lists the inability of a borrower or heirs to claim a tax deduction when the loan is paid off”

    This ‘myth’ was debunked by Barry Sacks, et al, in an article entitled, “Recovering a Lost Deduction” in the Journal of Taxation, April 2016.

  • Jim Veale spelled it out in detail, I don’t think anyone could have explained it any better.

    The in-depth detailing of Jim’s comment should be read by many, a lot to learn from Jim’s comment!

    I especially liked the paragraph that stated,

    ““A reverse mortgage can act as a ‘safety net’ by drawing on the equity you have in your home.” What does the equity in the home have to do with how much can be drawn??? A HECM borrower could have negative equity but if the HECM has a line of credit and there are still funds available in the line of credit, the borrower can draw that amount out at will unless, the Maximum Mortgage (or Principal) Amount would be exceeded by a requested draw or there is an uncured covenant violation”.

    Good job Jim,

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

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