Parade: How to Determine if a Reverse Mortgage is Right for a Borrower

A Home Equity Conversion Mortgage (HECM) could be a viable choice for a potential borrower who has paid off their existing forward mortgage, and is looking for additional cash flow to fund expenses which may include repairs or healthcare costs. The solution should also make potential borrowers think long-term about associated costs and bequest assets, however.

This is according to a column written by certified financial planner (CFP) and President of the Charles Schwab Foundation Carrie Schwab-Pomerantz, in a new column published by newsmagazine Parade.

“On the plus side, a reverse mortgage will allow you to tap into a portion of your home’s equity without having to make monthly payments,” Schwab-Pomerantz writes. “On the downside, the fees and interest charges are typically higher than those for a cash-out refinance or Home Equity Line of Credit (HELOC). When combined with the amount of money you borrow, this can significantly erode the equity that you’ve built up in your home. Let’s go over more particulars so that you’ll be able to make an informed decision.”

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In detailing reverse mortgages, Schwab-Pomerantz covers only HECMs, and suggests her readers only consider this variation of the reverse mortgage product.

“That’s because HECMs are regulated and insured through the federal government by the Department of Housing and Urban Development (HUD) and the Federal Housing [Administration] (FHA),” she writes. “Other types of reverse mortgages don’t have these protections.”

Financing the costs of a reverse mortgage including the initial mortgage insurance premium (IMIP), third-party charges, origination fee, interest and servicing fee could encroach on the amount of proceeds a borrower can get from the loan, she says.

“Financing these costs will lower the amount you can borrow and eat away at more of your home equity over time—leaving less to your estate,” she says. “It’s important to understand that with a traditional mortgage you build equity over time. With a reverse mortgage, you deplete equity that you’ve built up over time.”

In the end, the reverse mortgage product has evolved very much over the years, but longer-term questions should be essential for prospective borrowers, Schwab-Pomerantz writes.

“For the right individuals in the right situation, reverse mortgages can be a uniquely effective way to stay in your home during retirement,” she says. “But it’s essential to think long term, weighing the benefits, costs and risks.”

Read the article at Parade.

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  • Here is a CFP (and there are less than 80,000 of them) going off the grid with her criticism of HECMs. The following is the hypocritical caveat of many CFPs who admonish others to understand reverse mortgage products when they themselves do not understand them: “…provided you understand exactly what you’re getting into….”

    However, the linked article does address one of the industry’s legendary myths when it states: “There are several kinds of reverse mortgage programs. I’m covering (and suggest that you only consider) what is known as Home Equity Conversion Mortgages (HECMs)….. That’s because HECMs are regulated and insured through the federal government…. Other types of reverse mortgages don’t have these protections.”

    Yet FHA insurance does not provide any substantial direct benefits to borrowers and it most certainly does not provide nonrecourse protection for HECM borrowers. Lenders provide nonrecourse protection in their mortgage documents. Besides under Federal law all reverse mortgage transactions are nonrecourse transactions by definition [15 USC 1602(cc)]. So why is FHA insurance so important for borrowers other than lenders require reimbursement for their direct costs?

    The writer goes on to say: “Let’s go over more particulars so that you’ll be able to make an informed decision.” That would have been OK had they been covered correctly.

    For example, “…the income you receive is tax-free since the money comes from a loan….” So unless the borrower is earning interest on the UPB (which is not remotely possible for borrowers), how are loan proceeds “income” to the borrower? Who cares if they are taxable, the loan proceeds have to be repaid.

    Here is another glaring error: “…you can’t owe more than the value of your home….” With HECMs, nonrecourse means that if the borrower does not pay off the ENTIRE balance due at termination, the only right the lender has is to take title to the home; the lender has no right to a deficiency judgment against the borrower thereafter. This means that if the BORROWER wants to retain title to the home at termination, the borrower must pay off the HECM UPB in full. Heirs have separate rules that apply to them.

    Here is but another incorrect concept: “However, once you leave your home for more than 12 months … the outstanding loan must be repaid….”

    Uniform Covenant 4. of the Model Mortgage Form Adjustable Rate states the following: “Borrower shall occupy, establish, and use the Property as Borrower’s Principal Residence after the execution of this Security Instrument and Borrower (or at least one Borrower, if initially more than one person are Borrowers) shall continue to occupy the Property as Borrower’s Principal Residence for the term of the Security Instrument.”

    Here is how the HECM Adjustable Rate Loan Agreement defines principal residence at 1.18: “‘Principal Residence’ means the dwelling where a Borrower and, if applicable, a Non-Borrowing Spouse maintains his or her permanent place of abode, and typically spends the majority of the calendar year….. The Property shall be considered to be the Principal Residence of any Borrower who is temporarily in a health care institution provided the Borrower’s residency in a health care institution does not exceed twelve (12) consecutive months.”

    The landing page for HUD’s HECM Model Mortgage Docs is

    https://www.hud.gov/program_offices/housing/sfh/model_documents

    The article is another glaring example of why it is so evident that the industry has barely scratched the surface as to “educating” financial planners, especially CFPs.

  • Congratulations to Schwab-Pomerantz on getting the facts correct about the HECM program and presenting them in a fairly un-biased way – few in her profession do!

    Nonetheless, she appears uncommitted to the various ways a HECM can be used to strengthen a retirement plan and improve overall outcomes, and IMO does her readers a disservice by not exploring them in her response, especially given the set of personal financial circumstances described by the couple posing her inquiry. Her only nod in that direction: “For example, you could use it to build an income “bridge” in order to claim higher Social Security benefits later, protect against having to sell assets during a bear market, pay for taxes on Roth conversions, pay for home renovations, or even buy a new home.”

    Still, I am encouraged by her fair-handed approach. It’s a giant step in the right direction for someone with her visibility at Schwab.

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