Financial Planner: Don’t Overlook Reverse Mortgage in Time of Crisis

While recent legislation aimed to assist Americans in the midst of economic turmoil caused by the COVID-19 coronavirus pandemic has been beneficial, mortgage forbearance options made available to people through the Coronavirus Aid, Relief, and Economic Security (CARES) Act has not addressed other living expenses that could leave people on fixed incomes vulnerable. This is why the option of a reverse mortgage should not be overlooked.

This is according to George Gagliardi, financial advisor with Coromandel Wealth Management in Lexington, Mass. in a new editorial published at Wicked Local Lexington.

“The CARES Act has granted a temporary reprieve for those who are having difficulty making mortgage payments because of reduced income — up to 12 months of forbearance which must eventually be paid back with interest — but it hasn’t done anything for the other living expenses,” Gagliardi writes. “While people scramble to get HELOCs (home equity lines of credit) on their homes, tap their retirement plans (not a good idea unless a last resort) or plead with creditors for forbearance on their debts, many are overlooking Home Equity Conversion Mortgages (HECMs) as an option.”

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As long as at least one spouse is age 62 or older, a reverse mortgage can provide a “superior” way to access cash and reduce debt, Gagliardi says.

Recognizing that it may have been a while since some people may have paid reverse mortgages any attention, Gagliardi describes recent changes that the HECM program has undergone that could help to make the potential benefits more easily understood.

“The up-front FHA insurance premium was increased to 2%, but the FHA surcharged that is added to the loan rate was decreased from 1.25% to 0.5%, which represents a savings to those who roll their existing mortgages into the HECM as well as when the line of credit is accessed for cash,” he writes. “Maximum HECM mortgage amounts have been increasing each year. In January 2017, the maximum was $625,000. Today it is $765,525.”

Other recent changes include the tightening of loan limits to ensure the solvency of the reverse mortgage program, as well as the potential for a second appraisal if a home is perceived to have the possibility of an inflated valuation, he says. Private reverse mortgages are also more prevalent for those homes who may have values or available equity above the HECM lending limit, he adds.

Reverse mortgages can allow someone to delay the taking of their Social Security benefits, cover long-term care (LTC) expenses, generate “on demand” tax deductions, or finance the sale of a retirement home after selling the current home, he says.

“Reverse mortgages are a practical way to tap the equity locked up in your home, and free up cash that might be urgently needed now or later on in your retirement,” Gagliardi writes. “To ignore them is to possibly put your current and future financial security at risk when the solution to these issues is sitting there right under your nose.”

Read the column at Wicked Local Lexington.

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  • This article is a great example of what happens when even CFPs who are unfamiliar with reverse mortgages try to explain them. Per his business website, Mr. Gagliardi is a CFP and RIA.

    The CFP states: “‘… a reverse mortgage can provide a “superior” way to access cash and reduce debt….” How does a reverse mortgage reduce debt? Any moneys paid from a reverse mortgage increases debt. So even if an existing mortgage is paid off by a reverse mortgage, the total debt of the borrower remains the same unless there are closing or other costs involved in the origination of the reverse mortgage and/or the payoff of the existing mortgage which would generally increase total debt, not decrease it unless those additional costs were paid out-of-pocket by the borrower.

    Then the R?IA tries to explain the financial impact of the 10/2/2017 changes to MIP by saying: ““The up-front FHA insurance premium was increased to 2%, but the FHA surcharged that is added to the loan rate was decreased from 1.25% to 0.5%, which represents a savings to those who roll their existing mortgages into the HECM as well as when the line of credit is accessed for cash….” I have no idea what is talking about when he discusses the impact of the 10/2/2017 MIP changes on the line of credit as some kind of “savings”. Although the cost of the initial MIP is computed by multiplying the percentage by the maximum claim amount (MCA).

    As to whether MIP is less under one regime or another, many factors come into play. Forgetting about the dramatic changes to the Principal Limit Factors and the floor for the expected interest rate that took place on 10/2/2017, let us look at two computations. In both cases the effective note interest rate over the life of the HECM is 4.2%, the loan terminates at the end of the ninth year, and the initial unpaid principal balance is $100,000 before adding in upfront costs. The appraised value of the home at closing is $600,000. Total upfront costs other than the initial MIP are $9,500 and assume no prepayments or payouts following closing through termination. The youngest borrower in each case is 70 years old. Assume that the $100,000 in proceeds in each case paid off an existing mortgage.

    In the first case where the upfront MIP is 0.5% and the ongoing is 1.25%, the total initial unpaid principal balance at closing is $112,500. At termination the unpaid principal balance is $183,524 of which $3,000 is the initial MIP, $9,500 are the other upfront costs, accrued ongoing MIP is $16,290, and accrued interest is $54,734 leaving $100,000 in principal. In the second case where the upfront MIP is 2% and the ongoing is 0.5%, the total initial unpaid principal balance at closing is $121,500. At termination the unpaid principal balance is $185,321 of which $12,000 is the initial MIP, $9,500 are the other upfront costs, accrued ongoing MIP is $6,789 and accrued interest is $57,032 leaving $100,000 in principal.

    So in the first case where initial MIP was 0.5% and ongoing MIP was 1.25%, the initial MIP was $9,000 less than that of the second case but ongoing MIP was $9,501 more than the second case meaning there was a total savings in MIP of $501 in the second case; however, accrued interest in the first case was $2,298 less than the second case, meaning that the total costs of the loan in the first case was $1,797 less than the second case.

    So even though there was $501 in MIP savings as the CFP indicated, the total loan costs were $2,298 more. The reason is that the upfront MIP of $9,000 difference created overall higher interest costs in the second case even though total MIP costs was lower overall. So in this scenario lower MIP costs meant higher overall loan costs.

    The RIA then goes on to say: “Maximum HECM mortgage amounts have been increasing each year. In January 2017, the maximum was $625,000. Today it is $765,525.” First, the RIA not only gets the name of the HECM nationwide lending limit wrong but also the lending limit amouts he cites. Then the RIA confuses us by telling us that the Maximum Mortgage Amounts (MMA) for HECMs goes up annually. Well, unfortunately in the world of HECMs, the MMA is defined in loan documents as 150% times the MCA in many states such as California. So while the lending limits may have gone up for the last four years in a row, that does not tell us what the MCA is for a particular loan unless we are also told what the appraised value of that home was at closing and the calendar year in which the related case number was assigned.

    As to the National Lending Limit changing annually, we have seen 5 changes in 12 years. The county limits were terminated on 11/6/2008 and on 11/7/2008, a new national limit of $417,000 was implemented in Mortgagee Letter 2008-36 which also allowed amounts up to $625,500 in certain high cost areas.

    The first of the five changes was given to us In Mortgagee Letter 2009-07 which terminated all high cost area adjustments for HECMs making the lending limit a truly single nationwide limit. The Mortgagee Letter was issued on 2/24/2009 and retroactively set the lending limit to $625,500 for all of calendar year 2009.

    Following calendar year 2009, there was no change in the limit for 7 years. Then on 12/1/2016, HUD posted Mortgagee Letter 2016-19 in which HUD barely increased the HECM nationwide lending limit to $636,150 for calendar year 2017.

    On 12/7/2017, the lending limit was raised substantially to $679,600 in Mortgagee Letter 2017-17 for calendar year 2018. Then on 12/14/2018 in Mortgagee Letter 2018-12 HUD raised the lending limit to $726,525 for calendar year 2019. Then on 12/3/2019 in Mortgagee Letter 2019-20, HUD raised the lending limit to its current level of $765,600 for all of calendar year 2020.

    The CFP goes on to say: “Reverse mortgages can… finance the sale of a retirement home after selling the current home….” Rather finance the sale of a retirement, he most likely meant to say — finance the purchase of a retirement home.

    The problems listed above were just from the summary by Chris of the linked article. Because of the time needed to comment just Chris’s summary, I will read the linked article but will not make any comments about it here.

  • George Gagliardi spelled it out very well as why the reverse mortgage should not be overlooked, especially during these times of uncertainty!

    This article goes to show you that more and more financial planners have the reverse mortgage on their minds as a tool to use in their Tool Box!

    Originators need to recognize this as well as the companies they work for and many are finally doing just that! The secret is how to approach the financial planning industry properly and with diplomacy!

    Financial planners are not looking for hot shot sale person to go in and sell them on the product. You want referrals, in order to get those referrals and a long term working partner, one has to be prudent in their approach!

    First off, find out as much as you can about the financial planner you are going to call on, do your home work. Find out the size of the firm, check to see what their client make up is, how long have they been in business, check with the Better Business Bureau and do what ever it takes to know as much about that financial planner as you can before making the call!

    Then, don’t charge in as that hot shot sales person I mentioned. Let the financial planner know you have a product that could help them with their counseling and advice to their clients. Try and set up an appointment with them, let them know you want to know as much about their business so you can possibly refer clients to him or her as well as explaining the product that could fit in their Tool box that will be of true value to their clients!

    Sure theire are many more areas of knowledge one needs to properly deal with the financial planning industry, but these are some ideas. Follow some of these guidelines and you may find yourself with a long term partner to work with you and refer business to you!

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

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