As the reverse mortgage industry becomes more populated with a wider variety of products with different potential advantages for potential clients to observe, the potential for reaching different types of customers is similarly expanded. In particular, the proliferation of private variations of the reverse mortgage that is separate from the government-sponsored Home Equity Conversion Mortgage (HECM) program opens up the reverse mortgage product category more broadly to a wider variety of clients with higher home values and net worths.
This is according to Stephen Resch, VP of retirement strategies at Finance of America Reverse (FAR). Positioning the reverse mortgage product category — whether discussing either a HECM or a private product — can come down to a matter of presentation and various scenarios that demonstrate potential utility, according to a discussion with Resch at RMD’s conference HEQ: The Future of Home Equity in Retirement held this month.
Attributes of the market of wealthy borrowers, incorporating the ‘dormant asset’
At the end of the day regardless of the economic status of particular borrowers, the truth is that there is commonality in what is both wanted and needed from financial plans in later life regardless of the assets or income a person has access to, Resch says.
“I think it boils down to, in my mind, really no matter whether you’re an affluent client or [someone from] middle America, you all have the same needs,” Resch explains. “And you all have the same goals and desires. Those are really planning for a safe and effective later life income asset distribution plan and [what] legacies you leave behind. Bringing home equity into that planning process helps to make it work, no matter whether you’re very affluent, or as I said, just a Main Street American. There’s opportunity to enhance your planning strategies using home equity.”
Legacy and risk management are the names of the game when Resch discusses how reverse mortgages can be effectively characterized to more affluent borrowers.
“Most of my clients I would consider mass affluent,” Resch explains. “They’ve got invested assets of probably anywhere between $500,000 up to $3-$3.5 million dollars. The average is about $3 million. So in any event, that’s the client base that I’m working with. When I’m talking to them about incorporating home equity, I position this as a risk and legacy management program.”
The idea of talking about this specifically as a reverse mortgage is not a component of the conversation at the beginning, Resch says. Instead, it’s discussed in terms of what it can provide for a client’s risk and legacy management preferences and goals first.
“I never talk about this as being a reverse mortgage to begin with,” Resch says. “What we’re doing here is bringing liquidity options and flexibility to that later life income and legacy planning process, and that’s the opportunity to incorporate the dormant asset into that financial planning process. We’re looking at a 30-year term in many cases where we have to plan for, and it just makes sense to include home equity.”
Moment of realization for clients, discussing costs with advisors
As clients begin to approach their 60s, many of them start thinking in more specific terms about the time that is available to them to start making as solid of financial plans as possible, Resch explains.
“My clients are, for the most part, baby boomers,” Resch says. “I like to talk to them about this as early as possible generally, as soon as they’re turning 62. I find that for the most part, as clients are moving into their 60s, that’s really when the lights start going on in their head about how this [may be the] last decade to really work and do some strategic planning. And so, they’re much more open to talk about concepts and ideas than they were even just a year earlier, when they were in their 50s.”
With the client more resolved to find these solutions, the conversations also have to inevitably extend to their financial advisors who have to know the numbers upfront in many cases, Resch says. That’s just the way they’re wired when coming up with a specific financial plan for their clients.
“When I talk with financial advisors, they’re more numbers people: they want to hit the cost thing right away,” Resch says. “So, depending on who your audience is, I think it’s just something to keep in mind when you talk with clients. You want them to understand the concept, and the advisors won’t even buy into a concept until they understand what it’s going to cost.”
Reverse mortgage as ‘an insurance policy,’ and when a HECM may be best
Framing the discussion around costs can be key for making the stakeholder understand exactly how this plan can accomplish what the client has set out to do, while also remaining transparent about what it will take to put a sufficient plan in place, Resch explains.
“When we talk about costs, [I explain that] it’s more like an insurance policy than a mortgage,” Resch says. “I hardly ever use the term mortgage in early conversations. What I discuss is that this is a risk and legacy management program. On the question of cost, generally depending on the product you use, we have no-cost proprietary products and then the FHA products.”
To give a full perspective on the costs, Resch compares them with total net worth. On average, he looks at anywhere between zero and 2% of net worth on average as what the client will spend to put the program in place.
“This is going to provide them cash, it could be eliminating [a forward] mortgage payment, [it has a] growing line of credit and a non-recourse feature, and it can be financed,” Resch says. “So again, we’re putting this program in place that has tremendous value to the planning process. And yet, they don’t even have to write a check for it. They can finance this, except for counseling fees, of course. But it’s that great opportunity to safeguard their asset and income distribution plan.”
There may be some scenarios where an affluent borrower may choose to go for a HECM product over a proprietary offering even if they have equity above the Federal Housing Administration (FHA) lending limit of $765,600, Resch adds.
“A lot of times when we can have someone with a higher value property, they don’t have liens,” Resch says. “It really all depends on what they’re using this for. Someone may want to put a risk management plan in place where they have a growing line of credit, and they don’t have to think about it. They don’t need a lot, but they want it there. They could have multimillion dollar properties start out with a $300,000 or more line of credit. In 20 years, it’s going to be worth double that, and that may be all the risk protection that they need. So, it just really depends on that situation.”
View Stephen Resch’s full presentation, including with a case study at the HEQ event website.