The Street: Reverse Mortgage ‘Growing Pains’ Created Safer, Stronger Product

Although afflicted by reputational issues that often stem from negative media coverage and a lack of full understanding regarding what they are, reverse mortgages have undergone an intense stretch of maturation into a product that has been refined by consumer protections and greater understanding. It’s these attributes that make reverse mortgages a viable option for many retirees.

This is according to financial planner Robert Klein, founder and president of Retirement Income Center in Newport Beach, Calif. in a new column at The Street.

“Like a child, reverse mortgages, including the Home Equity Conversion Mortgage (HECM) program, went through a lot of growing pains during their first 25 years,” Klein writes. “Legislation was enacted and implemented between 2013 and 2017 to strengthen the FHA Mutual Mortgage Insurance Fund (MMIF) and protect the viability of the reverse mortgage program.”

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The goal of these changes was to make sure that reverse mortgages would be used as a part of a viable retirement funding strategy, as opposed to a one-time cash infusion that would leave people with little left over after the initial surge, he says.

“[Key changes have] made the product safer, stronger, and less risky for the borrower. This includes a policy that allows borrowers to tap into no greater than 60% of the lending limit in the first year,” he says. “[New changes have also] provided greater scrutiny of income and credit. Mortgagees are required to complete a financial assessment of all prospective borrowers before loan approval and loan closing. This was put into place in 2014 due to an increasing number of property tax and hazard insurance defaults by borrowers.”

Also cited as a major example of program change include the addition of new protections for non-borrowing spouses, where the spouse can remain on title and in the home in the event that the older spouse predeceases a younger one. On top of this, the continued rise of the HECM lending limit makes reverse mortgages generally more attractive to borrowers, he says.

“When used as intended, a HECM can be a powerful retirement income planning tool in the right situation,” he says. “Although it sounds counterintuitive, it can potentially increase retirement spending and provide for a larger legacy.”

The benefits should be fully understood alongside potential negative attributes, however, including upfront costs, the encouragement to spend that comes with any cash infusion, the possibility that the line of credit will not be used and the potential inability to secure additional financing that is secured by the home.

Read the article at The Street.

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  • In a quick reading of the article above, one might be impressed with the knowledge of the financial planner but a deeper look shows just how incorrect the statements of a financial planner can be. This comment is based solely on what Chris wrote above.

    While the first half of the following sentence is understandable despite its exaggeration, what does its second half mean? “Also cited as a major example of program change include the addition of new protections for non-borrowing spouses, where the spouse can remain on title and in the home in the event that the older spouse predeceases a younger one.”

    Not all non-borrowing spouses are protected under the non-borrowing spouse rules that were first implemented and became effective on 8/4/2014. Specifically any non-borrowing spouse who was not married to the borrowing spouse at the time that the borrowing spouse obtained the HECM is automatically excluded from the non-borrowing protections. Also NONE of the non-borrowing spouses who are otherwise eligible to defer the HECM unpaid balance due can defer it where the related HECM has a case number assigned before 8/4/2014 UNLESS the related Mortgagee does not approve the deferral. Finally NO non-borrowing spouse can qualify to defer the balance due unless the cause of the HECM termination is 1) the passing away of the borrowing spouse, 2) the surviving non-borrowing spouse meets all eligibility rules to defer and 3) the non-borrowing spouse requests the deferral of the unpaid balance due as of the date of the passing of the borrowing spouse.

    There are two reasons why the last half of the quoted sentence in the first paragraph of this comment is false. First, there is no requirement that the older spouse must die before the younger spouse for the non-borrowing spouse rules to apply. Second, there is no requirement that a non-borrowing spouse remains on title following the death of the borrowing spouse but the property requirements of the qualification rules to defer the unpaid balance due must be met following the death of the borrowing spouse.

    The financial planner states that there is a policy that allows borrowers to tap into no greater than 60% of the lending limit in the first year. The problem is that the 60% disbursements rule limitation is based on the initial principal limit (IPL) of the HECM, not the related lending limit for the related HECM which is much greater than the IPL.

    “’Legislation was enacted and implemented between 2013 and 2017 to strengthen the FHA Mutual Mortgage Insurance Fund (MMIF) and protect the viability of the reverse mortgage program.’” Here is another myth. There was only one piece of legislation that was passed and enacted in that five year period “to improve the fiscal safety and soundness of the program” was The Reverse Mortgage Stabilization Act of 2013, Public Law 113-29, signed by the President on 8/9/2013. Since that law is internal as to HUD, it did not require implementation. However, HUD/FHA, on its own, deleted and replaced existing regulations at 24 CFR Parts 30 and 206 with the regulations proposed on 1/19/2017 and finalized on 9/19/2017. HUD also handed down almost three dozen Mortgagee Letters in that five year period but no, the only new law passed by the legislative branch of the federal government on 7/30/2013 and enacted by the signing of the President on 8/9/2013 was Public Law 113-29.

    The financial planner pointed out that a potential negative attribute of a HECM is “the possibility that the line of credit will not be used.” How is that a negative attribute? He also claims that financial assessment “was put into place in 2014” rather than the date of its implementation on April 27, 2015.

    Despite his very impressive degrees, license, and credentials, the financial planner is clearly confused about HECM details. Within this article is an implicit warning not to rely on the presentation that a financial planner (even with all of the education of this planner) makes to his client about reverse mortgages. Although not discussed in this comment, how can our industry expect a financial planner to keep up with all of the changes occurring to proprietary reverse mortgages?

    So when originating a reverse mortgage with a client of a financial planner who supposedly provided all of applicable rules of a reverse mortgage to the client, make sure to manage the expectations of the client by going over the details of the reverse mortgage as you would with any other prospect or you may end up with some frantic calls from the client later on.

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