MetLife will no longer accept applications for reverse mortgages, the New York-based insurer said today in a statement that didn't disclose terms. Photographer: Scott Eells/Bloomberg
MetLife Inc. (MET), the largest U.S. life insurer, agreed to sell its reverse-mortgage portfolio to Nationstar Mortgage LLC as Chief Executive Officer Steven Kandarian retreats from banking to limit U.S. regulation.
MetLife will cut about 500 jobs as part of the move, said John Calagna, a spokesman for the insurer. The company will no longer accept applications for reverse mortgages, New York-based MetLife said today in a statement that didn't disclose terms.
Kandarian has agreed to sell about $7.5 billion of deposits to General Electric Co. (GE) and said in January he would stop originating traditional home loans after the Federal Reserve rejected MetLife's plan for a dividend increase. Banking operations generated less than 2 percent of 2011 operating earnings and subjected the company to Fed oversight.
"Given MetLife's strategic focus as a global insurance and employee benefits leader, the company decided in 2011 that a bank holding company structure was no longer appropriate," according to today's statement.
Bank of America Corp., Wells Fargo & Co. and MetLife, once among the top issuers of reverse mortgages, have been retreating from the market after the housing slide eroded the home equity that seniors draw on to qualify for the loans.
Reverse mortgages are loans that convert a homeowner's equity into a lump sum or line of credit and are generally available for those 62 or older. The balances, including interest and any fees, generally must be repaid at death by the borrower's heirs or through the sale of the home.
MetLife said in March that another capital plan, which included share buybacks, was rejected by the Fed after the regulator found the company would fall short of a U.S. capital standard in a severe economic downturn. The insurer will probably stop being a bank holding company by the end of June, MetLife said in March.
Nationstar Mortgage Holdings Inc. (NSM), a lender and servicer, was taken public in March by Fortress Investment Group LLC. (FIG) Lewisville, Texas-based Nationstar expanded last year by purchasing servicing rights from Bank of America and sub- contracted with other institutions to handle their most troubled loans.
Nationstar rose 1.9 percent to $15 at 4:15 p.m. in New York. MetLife advanced 1.4 percent to $36.47.
The insurer was advised by K&L Gates LLP and Deutsche Bank AG (DBK), according to the statement. MetLife said in January that most of the 4,300 employees at the main mortgage-origination business would lose their jobs with the unit's closing.
A spokesman for Nationstar didn't immediately return a call seeking comment.
To contact the reporter on this story: Zachary Tracer in New York at ztracer@bloomberg.net; Andrew Frye in New York at afrye@bloomberg.net
To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net
MetLife Inc. (MET) (MET), the largest U.S. life insurer, agreed to sell its reverse-mortgage portfolio to Nationstar Mortgage LLC as Chief Executive Officer Steven Kandarian retreats from banking to limit U.S. regulation.
MetLife will cut about 500 jobs as part of the move, said John Calagna, a spokesman for the insurer. The company will no longer accept applications for reverse mortgages, New York-based MetLife said today in a statement that didn't disclose terms.
Kandarian has agreed to sell about $7.5 billion of deposits to General Electric Co. (GE) (GE) and said in January he would stop originating traditional home loans after the Federal Reserve rejected MetLife's plan for a dividend increase. Banking operations generated less than 2 percent of 2011 operating earnings and subjected the company to Fed oversight.
"Given MetLife's strategic focus as a global insurance and employee benefits leader, the company decided in 2011 that a bank holding company structure was no longer appropriate," according to today's statement.
Bank of America Corp., (BAC) Wells Fargo & Co. and MetLife, once among the top issuers of reverse mortgages, have been retreating from the market after the housing slide eroded the home equity that seniors draw on to qualify for the loans.
Reverse mortgages are loans that convert a homeowner's equity into a lump sum or line of credit and are generally available for those 62 or older. The balances, including interest and any fees, generally must be repaid at death by the borrower's heirs or through the sale of the home.
MetLife said in March that another capital plan, which included share buybacks, was rejected by the Fed after the regulator found the company would fall short of a U.S. capital standard in a severe economic downturn. The insurer will probably stop being a bank holding company by the end of June, MetLife said in March.
Nationstar Mortgage Holdings Inc. (NSM) (NSM), a lender and servicer, was taken public in March by Fortress Investment Group LLC. (FIG) (FIG) Lewisville, Texas-based Nationstar expanded last year by purchasing servicing rights from Bank of America and sub- contracted with other institutions to handle their most troubled loans.
Nationstar rose 1.9 percent to $15 at 4:15 p.m. in New York. MetLife advanced 1.4 percent to $36.47.
The insurer was advised by K&L Gates LLP and Deutsche Bank AG (DBK), according to the statement. MetLife said in January that most of the 4,300 employees at the main mortgage-origination business would lose their jobs with the unit's closing.
A spokesman for Nationstar didn't immediately return a call seeking comment.
To contact the reporter on this story: Zachary Tracer in New York at ztracer@bloomberg.net; Andrew Frye in New York at afrye@bloomberg.net
To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net
MetLife will no longer accept applications for reverse mortgages, the New York-based insurer said today in a statement that didn't disclose terms. Photographer: Scott Eells/Bloomberg April 26 (Bloomberg) -- MetLife Inc., the largest U.S. life insurer, agreed to sell its reverse-mortgage portfolio to Nationstar Mortgage LLC as Chief Executive Officer Steven Kandarian retreats from banking to limit U.S. regulation. Mark Crumpton reports on Bloomberg Television's "Bottom Line." (Source: Bloomberg)
"Why do I need to save? I'll just tap the equity in my house when I retire," said a former client at the end of 2006. He and his wife were in their late 50s, and I was recommending that they increase their retirement contributions.
During the real estate boom, I encountered a lot of people who thought they would use their home equity to fund everything from big splurges, to college tuition, to retirement. When the bubble burst, many were forced to spend savings and cash in investments and now face retirement with home equity that is on average 30 percent lower than it was at the peak. For some of these near or current retirees, the allure of a reverse mortgage is calling.
A reverse mortgage is a home loan that allows homeowners 62 and older to convert a portion of the equity in their homes into cash, as long as the home remains their primary residence. Most reverse mortgages are offered through the Department of Housing and Urban Development and are guaranteed by the Federal Housing Administration (FHA) through a program called Home Equity Conversion Mortgages (HECM). (FHA provides online counselors as well as valuable information at: http://1.usa.gov/nJKRpy or by phone at (800) 569-4287.)
Unlike a traditional mortgage, there's no lengthy underwriting process, and you don't make monthly principal and interest payments. You are required to continue to pay real estate taxes, utilities, and hazard and flood insurance premiums. The amount you can borrow depends on several factors, which include the age of the youngest borrower, the current interest rate, the appraised value of your home and whether the rate is fixed or adjustable. The more valuable your home is, the older you are and the lower the interest rate, the more you can borrow.
If the home is sold or no longer used as a primary residence, or the borrower dies, then the loan, the accumulated interest and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your surviving spouse or estate. If the house sells for less than the money owed, the FHA takes the loss -- no debt is passed along to the estate or heirs.
In essence, a reverse mortgage can help retirees convert an illiquid asset -- a house -- into a liquid one that can help supplement retirement income. Sounds too good to be true, right? For some, it is. One big downside to reverse mortgages is that younger retirees who use them may run out of money and options at too young an age. These folks may have been better off selling their homes and using the equity to purchase another home or renting. Additionally, it may make sense to spend other assets before extracting home equity via a reverse mortgage.
Another consideration regarding reverse mortgages is the cost. FHA charges a single upfront mortgage premium equal to 2 percent of the home's appraised value or $625,500, whichever is less. The borrower is also charged a 1.25 percent annual premium on the entire loan balance. In addition, the borrower is charged a monthly servicing fee of up to $35. Add it all up, and it's clear that a reverse mortgage isn't a good choice if the borrower will move out of the home in three years or less because of the high costs upfront. It's also important to remember that reverse mortgage payouts can impact a borrower's eligibility for means-tested benefits programs, like Supplemental Security Income (SSI) and/or Medicaid.
Consumer Union issued a warning on reverse mortgages, which noted "deep concerns about the suitability of the products for some borrowers" and "the aggressive marketing and misleading advertising of reverse mortgages to seniors." Celebrities like James Garner, Robert Wagner, Fred Thompson and Henry Winkler have all been paid to tout the benefits of reverse mortgages.
You may be wondering, "What does the Fonz know about reverse mortgages?" The answer is not much, which is why I strongly recommend that, if you are serious about a reverse mortgage, consult a registered investment advisor or an attorney who can help determine if it is in your best interests.
(Jill Schlesinger, CFP, is the Editor-at-Large for www.CBSMoneyWatch.com. She covers the economy, markets, investing or anything else with a dollar sign on her podcast and blog, Jill on Money, as well as on television and radio. She welcomes comments and questions at askjill@moneywatch.com.)
"Why do I need to save? I'll just tap the equity in my house when I retire," said a former client at the end of 2006. He and his wife were in their late 50s, and I was recommending that they increase their retirement contributions.
During the real estate boom, I encountered a lot of people who thought they would use their home equity to fund everything from big splurges, to college tuition, to retirement. When the bubble burst, many were forced to spend savings and cash in investments and now face retirement with home equity that is on average 30 percent lower than it was at the peak. For some of these near or current retirees, the allure of a reverse mortgage is calling.
A reverse mortgage is a home loan that allows homeowners 62 and older to convert a portion of the equity in their homes into cash, as long as the home remains their primary residence. Most reverse mortgages are offered through the Department of Housing and Urban Development and are guaranteed by the Federal Housing Administration (FHA) through a program called Home Equity Conversion Mortgages (HECM). (FHA provides online counselors as well as valuable information at: http://1.usa.gov/nJKRpy or by phone at (800) 569-4287.)
Unlike a traditional mortgage, there's no lengthy underwriting process, and you don't make monthly principal and interest payments. You are required to continue to pay real estate taxes, utilities, and hazard and flood insurance premiums. The amount you can borrow depends on several factors, which include the age of the youngest borrower, the current interest rate, the appraised value of your home and whether the rate is fixed or adjustable. The more valuable your home is, the older you are and the lower the interest rate, the more you can borrow.
If the home is sold or no longer used as a primary residence, or the borrower dies, then the loan, the accumulated interest and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your surviving spouse or estate. If the house sells for less than the money owed, the FHA takes the loss -- no debt is passed along to the estate or heirs.
In essence, a reverse mortgage can help retirees convert an illiquid asset -- a house -- into a liquid one that can help supplement retirement income. Sounds too good to be true, right? For some, it is. One big downside to reverse mortgages is that younger retirees who use them may run out of money and options at too young an age. These folks may have been better off selling their homes and using the equity to purchase another home or renting. Additionally, it may make sense to spend other assets before extracting home equity via a reverse mortgage.
Another consideration regarding reverse mortgages is the cost. FHA charges a single upfront mortgage premium equal to 2 percent of the home's appraised value or $625,500, whichever is less. The borrower is also charged a 1.25 percent annual premium on the entire loan balance. In addition, the borrower is charged a monthly servicing fee of up to $35. Add it all up, and it's clear that a reverse mortgage isn't a good choice if the borrower will move out of the home in three years or less because of the high costs upfront. It's also important to remember that reverse mortgage payouts can impact a borrower's eligibility for means-tested benefits programs, like Supplemental Security Income (SSI) and/or Medicaid.
Consumer Union issued a warning on reverse mortgages, which noted "deep concerns about the suitability of the products for some borrowers" and "the aggressive marketing and misleading advertising of reverse mortgages to seniors." Celebrities like James Garner, Robert Wagner, Fred Thompson and Henry Winkler have all been paid to tout the benefits of reverse mortgages.
You may be wondering, "What does the Fonz know about reverse mortgages?" The answer is not much, which is why I strongly recommend that, if you are serious about a reverse mortgage, consult a registered investment advisor or an attorney who can help determine if it is in your best interests.
(Jill Schlesinger, CFP, is the Editor-at-Large for www.CBSMoneyWatch.com. She covers the economy, markets, investing or anything else with a dollar sign on her podcast and blog, Jill on Money, as well as on television and radio. She welcomes comments and questions at askjill@moneywatch.com.)
The last few years of running a business in the reverse mortgage industry has been a wild ride. From principal limit reductions to lender exits, it has been anything but boring. But after what seemed to be one negative after another, things seem to be changing now for the better.
After a few extremely challenging years in Washington, several changes made to the Federal Housing Administration's (FHA) reverse mortgage program to ensure the program's viability are paying off. Earlier this year, President Obama's fiscal year 2013 budget showed the HECM program being cash flow positive for the second year in a row and it couldn't have come at a better time.
Detailed in the President's budget, the Department of Housing and Urban Development (HUD) was forced to cut two programs related to nursing homes and assisted living facilities because they require subsidies to operate at break-even. If the HECM program wasn't generating receipts for the government, it could have likely suffered the same fate.
While the budget turnaround is great news, it may not be as important as an increasing acceptance, if not positive coverage of reverse mortgages in the media.
Several recent studies from the financial planning community have led to more acceptance from trade media and those people employed in the financial planning industry. The main stream media's perceptions of the product are also changing. It was only a short time ago when it was common for reverse mortgages to be described ONLY as a loan of last resort. Slowly, that trend has changed, and it felt like it started after the New York Times' columnist Ron Lieber wrote that Reverse Mortgages are Here to Stay.
Sure there has been some less-than-glowing coverage along the way, but after watching a full positive segment from NBC Today on reverse mortgages last week, it's hard to argue the public's perception hasn't changed.
But with all this good news, HUD and analysts expect reverse mortgage volume to fall again in 2012. It shouldn't come as any huge surprise though; when you lose Bank of America and Wells Fargo in less than a year, you can't expect everything to bounce back right away—or can you?
At the most recent National Reverse Mortgage Lenders Association event in New York there was discussion on one of the panels about when the industry will get back to 100,000 units in annual production. Let's just say that the panelists had a pretty optimistic view of when that will happen.
Now I have no doubt we will get back there, but to think the industry will go from an estimated 60,000 units in 2012 to 100,000 in 2013, they must be dreaming. I mean no disrespect to any of these people; I just can't see it happening so soon.
The industry is doing everything it can to bounce back from the Wells Fargo and Bank of America exits, and luckily there are several lenders who are making investments in the space to fill the void. It's interesting though, to see the lenders who are doubling down and hiring like crazy are primarily those who operate different models than Wells and Bank of America did.
Lenders like American Advisors Group and One Reverse Mortgage are purely call center-driven and are doubling down on their business models. There is still room for the a more traditional model, but both lenders are solidifying that having a retail call center is a huge asset—and people are noticing.
New Players About to Enter the Space?
It's no secret that big players like New York Life have been posting job openings about entering the business, and while it seems the insurer will no longer enter the business, there are plenty of others waiting on the sidelines.
In order to get volume back to 100,000 as fast as possible, the industry needs some of these companies who are waiting on the sidelines to get into the game. Let's be honest: there has never been a better time. If a company decided to pick up a top-10 lender in the next six months, it's realistic they could build it into one of the top-3 reverse mortgage lenders in the country. When Bank of America and Wells Fargo were in the business, this wasn't possible.
The good news is that there is plenty of interest. During the NRMLA conference, one executive at a leading player in the industry smiled and told me his company was getting so much attention from institutional investors that it felt like it was 2006 all over again.
Unfortunately, I couldn't get too many details about who he was talking about, but there are several high-profile private equity companies that I know of who are actively looking to make an acquisition.
All great news, but the problem that needs to be addressed is this: Why haven't they pulled the trigger yet? I'm told it likely has to do with some secondary market issues, but I do think those issues will get worked out in the end. According to investment bankers I've spoken with, the fact that industry volume is down isn't as much of a concern as it used to be because of one thing: demographics.
The number of baby boomers who are age 65 is increasing by 10,000 every day according to AARP. Even though volume has been down, the penetration rate has risen from below 2% in 2009 to roughly 2.25% in 2012 according to data from Reverse Market Insight. The demographics of the industry will take over and volume will go up, there is no question.
Luckily, the industry is doing everything it can to ensure these companies are comfortable about entering the space. When exactly everything will be lined up and there will be major acquisitions or new entrants is anyone's best guess—kind of like those people on the panel talking about when the industry will get back to 100,000 units.
While I have no idea when it will happen I do know one thing for certain… the faster we get more mid to large companies into the reverse mortgage business, the faster we get back to 100,000 units.
BOSTON (MarketWatch) — My, how things go full circle. A few years ago, before the housing market crashed, experts warned Americans against counting on the equity in their home to fund their expenses in retirement. Six years later, experts are singing — even in light of a still-depressed housing market — a slightly different tune, telling retirees and pre-retirees they will have to consider many tactics, including a reverse mortgage, to afford retirement.
Consider: Fidelity Investments this week joined the fray with a survey noting that working American households may face a potential 28% drop in income in retirement and that four in 10 retiree households already report not having enough income to cover their monthly expenses.
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To bridge that income gap, Fidelity is telling folks to do the usual things: adjust their asset allocation, increasing the percent allocated to stocks; increase their savings; delay their retirement date; and annuitize their retirement assets. But Fidelity is also telling folks, as researchers at the Center for Retirement Research just did last week, to tap into their home equity.
According to Fidelity, 72% of people it surveyed own a home and 32% of homeowners have no mortgage. "Through downsizing and expense reduction, this home equity could be harnessed to generate income in retirement," Fidelity said in its release.
John Salter, an associate professor in the Personal Financial Planning department at Texas Tech University, is among those who agree with Fidelity's assessment that people will need to find ways to use home equity for retirement income. "Many current and future retirees' homes will be one of their biggest assets, and this may be a resource moving forward that shouldn't be ignored," he said.
To be sure, Fidelity did not explicitly say "use a reverse mortgage." But increasingly, advisers and others such as Salter are telling Americans to at least consider the product when building a retirement income plan. "I believe reverse mortgages will be a very important tool to consider now and moving forward with retirees," Salter said.
(Read the Center for Retirement Research at Boston College report, "How Important Is Asset Allocation to Financial Security in Retirement?", which recommends the use of reverse mortgages here.)
According to Salter, reverse mortgages haven't always been viewed favorably, but all that changed when the Federal Housing Administration (FHA) launched the Home Equity Conversion Mortgage (HECM) Saver in October of 2010. Prior to the HECM Saver, there was the much maligned HECM, which many viewed as an expensive product with upfront costs, upfront fees for insurance, closing costs, monthly service fees and the like.
"I came from the same camp as most financial advisers thinking the HECM was too expensive to be justified as a mainstream planning tool, but with the HECM Saver option, I have since reconsidered, and subsequently learned many of the benefits of the product that are quite attractive."
Learn more about the differences between HECMs and HECM Saver at this website.
Benefits of reverse mortgages
Those benefits, according to Salter, include the following:
The loan benefit can be taken as a line of credit, tenure payments for life or term certain, or a cash-out.
It's a non-recourse loan, meaning the liability to homeowner/estate is never more than the value of the home. The FHA insurance picks up the difference.
A key distinction between "forward" and "reverse" mortgages is that the Department of Housing and Urban Development doesn't allow any so-called seller concessions for its reverse mortgage for Purchase program.
The program, which allows a qualifying borrower to purchase an entirely new home or relocate by way of a reverse mortgage, has failed to gain traction after its first two years on the market. Many say, however, the product could be a reverse mortgage sleeping giant. Seller concessions could be a step in the right direction, the industry says.
Back in February, the Federal Housing Administration (FHA) released revised seller concession rules for all FHA lending and requested comments from lenders. The updated rules for seller concessions limit the amount a seller can contribute to the closing costs.
Although the rules have been updated, they still exclude the reverse mortgage for Purchase program—something industry trade group the National Reverse Mortgage Lenders Association (NRMLA) went to bat for in a recent letter to HUD in response to the request for comments.
"Given the large monetary investment required by a senior in connection with the HECM for Purchase loan transaction, that these transactions do not represent a large portion of the loans which the FHA insures, that the new rule will limit concessions to 3%, and that the rule making does not posit or further justify limiting the use of seller concessions in connection with HECM for Purchase loan transactions, we respectfully request that the FHA allow seller concessions in connection with HECM for Purchase loan transactions," reads the letter, signed by NRMLA executive vice president Steve Irwin.
Allowing for seller concessions would be "excellent," says Jerry Tomlin, reverse mortgage specialist at Atlantic Bay Mortgage Group, based in Virginia Beach, Va.
"Because of the market we're in right now, seller concessions dominate almost all contracts," he says, calling it an added incentive "any time you can get the seller to help pay some of your closing costs, especially with a loan that has a perceived high cost already."
Another perk is that allowing seller concessions for both "forward" and reverse-for-purchase transactions would be one less thing to explain to Realtors or prospective homebuyers who don't understand this caveat of the reverse mortgage for Purchase program.
"Education is always the hardest part of the reverse mortgage, and once you've gotten over the hurdle of the reverse mortgage concept, and can move to the Purchase, it's easier to say, 'There are no caveats,'" Tomlin says.
While it's unclear how much HECM for Purchase loan volume would increase were the rule to change, it would make the process "so much easier," Tomlin says.
The Purchase program, which HUD launched in 2008, hasn't exactly gotten off to a booming start. Wells Fargo and Bank of America, two lenders that have since left the reverse mortgage business, were in the top three for HECM for Purchase volume, along with MetLife.
Even then, the numbers aren't too impressive: While Wells originated 1,000-plus between December 2008 (when the program was introduced) and November 2011, according to Reverse Market Insight data. The number drops steeply for second-place MetLife, which had 300-plus loans as of November 2011. Bank of America and Cherry Creek both posted just 100-plus Purchase loans in that time frame, and Security One rounded out the top five with less than 100.
There may not be a huge market for this type of loan, but Tomlin says he appreciates NRMLA's efforts.
"What they're trying to do for us is put us on a level playing field with other loans available to seniors where they can get seller concessions," Tomlin says, adding that it's an "unnecessary rule that was written in."
And if HUD does begin allowing for seller concession on HECM for Purchase transactions, it's a win for everyone involved, according to Tomlin.
"I don't see any downsides to it; there's no danger in it, especially with the limit," he says. "It's not harming the senior in any way; it's not going to harm HUD with their mortgage insurance; it's not going to increase T&I defaults; and helps seller sell their houses."
Reverse mortgages are the Rodney Dangerfield of financial planning tools. Long thought of as something retirees used in last-ditch efforts to stay in their house, they were seen more as leaky lifeboats than as financial planning tools.
They were badges for people soon to be broke.
I should confess that I shared that view. Based on reader mail, reverse mortgages were great examples of too little, too late. The vast majority of the people who wrote in asking about reverse mortgages really needed to rethink where they lived, not draw down what was usually their last asset.
But all that may be changing.
If a recent Journal of Financial Planning paper gets traction, the use of reverse mortgages will move from people who are desperate to practical people who have both home equity and some financial assets.
This will happen for a totally unexpected reason: Retirees can use a reverse mortgage as a tool for increasing the probability they won't outlive their assets while increasing their retirement spending.
In other words, if reverse mortgages are used early, rather than late, they can be as important in the retirement planning toolbox as life annuities.
Barry H. Sacks, a San Francisco tax attorney and Stephen R. Sacks, a professor emeritus of economics at the University of Connecticut (and the brother of Barry Sacks), made this discovery by thinking differently about financing retirement.
Rather than wait until all financial assets were exhausted and then taking out a reverse mortgage, they asked how things would turn out if retirees took out a reverse mortgage first or early. This would allow them to use withdrawals from the reverse mortgage to delay or reduce withdrawals from financial assets.
None of this matters, they found, if the retirement income withdrawal rate was set at an initial 4 percent, with the amount adjusted upward for inflation in each succeeding year.
In that case, there was a 90 percent chance that investment money alone would last through 30 years of retirement.
Things change, however, when you up the withdrawal rate, as many retirees need to do. When the withdrawal rate is increased, they found that using a reverse mortgage increased the odds of remaining solvent throughout life.
Taking a 6 percent withdrawal rate and using a reverse mortgage first or early, for instance, provided an 80 percent probability of "cash flow survival" for 30 years, while using a reverse mortgage last provided only a 50 percent probability of cash flow survival.
Similarly, taking a 6.5 percent withdrawal rate and using a reverse mortgage first or early provided a 70 percent probability of cash flow survival for 30 years, while using a reverse mortgage last provided only a 40 percent probability of cash flow survival.
Surprisingly, this enormous increase in retirement income seldom comes at the expense of net estate value. In a majority of cases, they found net worth at the end of 30 years (remaining home equity and remaining retirement assets value) was greater as often as three-fourths of the time. In other words, you can eat cake and still pass some on to your kids or favorite charity, too.
Curious about how this can be? Well, I think there is an explanation. Just as John Ameriks and others found a decade ago that converting a portion of your retirement assets into a life annuity could increase the probability of portfolio survival, using a reverse mortgage early in retirement works to reduce the impact of bad markets in the early years of retirement — what some call "the sequence-of-returns problem."
Just as the high cash flow from a life annuity can work to reduce portfolio withdrawals early in retirement, a reverse mortgage — taken early — does the same thing.
Sadly, both Wells Fargo and Bank of America decided to withdraw from the reverse mortgage market last year, and they accounted for 43 percent of all reverse mortgages written. They withdrew because some reverse mortgage customers liked the lack of mortgage payments so much that they also failed to pay the home insurance and real estate tax bills.
This left the banks exposed and vulnerable on one hand, but faced with a nasty PR problem — foreclosing on ancient homeowners — on the other.
If the mortgages had been given early to people with other assets rather than late to people with no other assets, the big banks might never have left the market.
Questions about personal finance and investments may be sent by e-mail to scott@ scottburns.com or by fax to 505-424-0938. Check the Web site: www.scottburns.com . Questions of general interest will be answered in future columns.
Senior homeowners face more difficult challenges with the financial pressures throughout the economy. Today there is wisdom in looking at ways in which home equity can be put to work. Reverse Mortgage loans were designed specifically for senior-aged homeowners to access the money that has built up over the years as equity.
What you may not realize is that there is now a way for seniors to use a reverse mortgage to purchase a new primary residence. If a senior wants to downsize, upgrade, move closer to the family, move to a warmer climate, need single story home or just make a change, a reverse mortgage for purchase can help make that happen. The senior does not need to currently own a home to make this happen.
From a dollar standpoint there are two pieces to the purchase transaction: (1) the amount of money available through the reverse mortgage and (2) the remaining dollar investment the homeowner brings to purchase the home. You are required to make a monetary investment with your own funds (most often from the sale of an existing residence) and the HECM (FHA Home Equity Conversion Mortgage) is used for the remainder of the purchase.
This could enable you to make your move without having to tap into your savings and potentially have extra cash when the purchase is complete.
Since you are not making monthly mortgage payments, interest accrues monthly based on the current amount borrowed. HECM borrowers can choose an adjustable interest rate or a fixed rate. Interest is due at the point in time when the loan is repaid. The amount of money you can receive from a reverse mortgage is determined by your home value, the number and age of the homeowner(s) and the current interest rate.
Borrowers must continue to pay homeowner's insurance and property taxes during the loan period and keep up with repairs. Repayment typically is not required until the end of the loan which occurs when the borrowers pass way, the home is sold or the borrowers move out.
When the loan must be repaid, you or your heirs can either pay the balance due on the reverse mortgage or sell the home and use the proceeds to pay off the reverse mortgage. Remaining equity belongs to the borrower or the borrower's estate and not the bank. Down the road, if you wanted to leave your house to your children and they wished to live in it, they would have to repay the reverse mortgage with either cash or through refinancing with another mortgage.
This is an FHA-insured loan; it is a non-recourse loan; senior retains title; has just one set of closing costs at purchase and potentially allows the senior to have additional savings and/or cash flow for retirement needs.
Vivian Dye can be reached at Altantic Residential Mortgage 203-227-7100,vdye@atlanticresidential.net
Senior homeowners face more difficult challenges with the financial pressures throughout the economy. Today there is wisdom in looking at ways in which home equity can be put to work. Reverse Mortgage loans were designed specifically for senior-aged homeowners to access the money that has built up over the years as equity.
What you may not realize is that there is now a way for seniors to use a reverse mortgage to purchase a new primary residence. If a senior wants to downsize, upgrade, move closer to the family, move to a warmer climate, need single story home or just make a change, a reverse mortgage for purchase can help make that happen. The senior does not need to currently own a home to make this happen.
From a dollar standpoint there are two pieces to the purchase transaction: (1) the amount of money available through the reverse mortgage and (2) the remaining dollar investment the homeowner brings to purchase the home. You are required to make a monetary investment with your own funds (most often from the sale of an existing residence) and the HECM (FHA Home Equity Conversion Mortgage) is used for the remainder of the purchase.
This could enable you to make your move without having to tap into your savings and potentially have extra cash when the purchase is complete.
Since you are not making monthly mortgage payments, interest accrues monthly based on the current amount borrowed. HECM borrowers can choose an adjustable interest rate or a fixed rate. Interest is due at the point in time when the loan is repaid. The amount of money you can receive from a reverse mortgage is determined by your home value, the number and age of the homeowner(s) and the current interest rate.
Borrowers must continue to pay homeowner's insurance and property taxes during the loan period and keep up with repairs. Repayment typically is not required until the end of the loan which occurs when the borrowers pass way, the home is sold or the borrowers move out.
When the loan must be repaid, you or your heirs can either pay the balance due on the reverse mortgage or sell the home and use the proceeds to pay off the reverse mortgage. Remaining equity belongs to the borrower or the borrower's estate and not the bank. Down the road, if you wanted to leave your house to your children and they wished to live in it, they would have to repay the reverse mortgage with either cash or through refinancing with another mortgage.
This is an FHA-insured loan; it is a non-recourse loan; senior retains title; has just one set of closing costs at purchase and potentially allows the senior to have additional savings and/or cash flow for retirement needs.
Vivian Dye can be reached at Altantic Residential Mortgage 203-227-7100,vdye@atlanticresidential.net
So, Whats Your Problem with Reverse Mortgages? Industry Leader Has Answers
A leader in the reverse mortgage industry debunks myths and criticisms of the
government program for older Americans
By Michael
Branson, All Reverse Mortgage Company
April 17, 2012 - Reverse mortgages are a financial product that has received a lot of bad press over the years, leaving many people who
could potentially benefit from this type of loan with negative associations and a bad taste in their mouth.
But whats so wrong with this federally-insured Home Equity Conversion Mortgage (HECM) program? Is it really as bad as
some media outlets would have you believe?
The short answer is no, but dont just take our word for it - well prove it, too.
For starters, reverse mortgages are becoming more common among borrowers of all ages, with nearly half of homeowners
considering a reverse mortgage under the age of 70, according to a
2012 MetLife Mature Market Institute study on the changing attitudes and motives
of reverse mortgage borrowers.
The study revealed that homeowners looking into getting a reverse mortgage are interested for a variety of reasons,
including reducing household debt, enhance lifestyle, and plan for the future.
Do you have a problem with reverse mortgages? If so, lets take a look at a few issues commonly raised about this type of
loanmaybe we can debunk some myths for you.
Common Reverse Mortgage Myths
Claim: Reverse mortgages are a last resort.
Response: Not necessarily. Reverse mortgages have often been considered a loan of last resort for borrowers who
simply have no other options. And while they can be a great choice for individuals who are cash poor, house rich, this loan doesnt have to
be kept as a last-ditch effort to stay afloat.
Using home equity as more than a last resort can help to keep cash shortfalls from becoming big problems, says
MetLife in the study we mentioned above. For example, homeowners may choose to use these funds to provide more choice and control in their
lives; pay for home repairs, tax bills, and other choices which allow them to stay in their homes. In some situations, a reverse mortgage may
stabilize a difficult financial situation such as forestall a foreclosure and allow time for the homeowners to find more effective solutions
to their cash flow problems.
Claim:The bank takes your home.
Response: False! When you take out a reverse mortgage, you retain the title of your home. You are not transferring
ownership to the bank; rather, the bank is allowing you to tap into your homes equity in the form of a loan. The loan is generally repaid
when borrowers sell their homes, but the bank does not automatically take your home unless you choose that method to repay your mortgage.
Claim: If you get a reverse mortgage, you wont qualify for any benefits programs.
Response: Thats not entirely true. Reverse mortgage borrowers will still qualify for Medicare and Social
Securityprograms that are available through age and entitlement qualifications, not on a needs basis.
Needs-based programs such as Medicaid and Supplemental Security Income (SSI)
may be affected by reverse mortgage proceeds, however, because these programs
consider an individuals assets when determining if they qualify to receive benefits. These considerations vary state by state, so if you
currently are a Medicaid or SSI beneficiary, check your states requirements to find out if a reverse mortgage would affect your eligibility.
Problem #1:
Reverse Mortgages are Too Expensive
One common warning financial planners may give on the topic of reverse mortgages is that theyre too expensive.
Fortunately, they dont have to be.
There are fees associated with taking out a reverse mortgage, yes. But theres also a federally-insured productthe
HECM Saverwhich substantially reduces the amount it costs to originate a loan.
The traditional reverse mortgage program (the HECM Standard) requires borrowers to pay an upfront Mortgage Insurance
Premium (MIP) of 2% of the loans value, along with an annual premium of 1.25% of the loan balance.
However, the HECM Saver program, for borrowers who dont need or want as large of a loan, charges a .01% upfront MIP,
along with the yearly premium of 1.25% of the loan balance. Thats right, just .01%a fraction of the HECM Standard, which can represent
significant cost savings.
Another thing to consider is that many of the origination fees can be paid for with reverse mortgage proceeds, so you
dont necessarily have to pay all of the costs out-of-pocket. Depending on secondary market conditions you may even find some
No-Cost options.
Problem #2:
Ill Drain All My Equity
Some detractors have used an argument that reverse mortgages use up all of a homeowners equity. While this can occur in
some cases, it doesnt have to happen.
Reverse mortgage borrowers can control how much equity they use. As we mentioned above, if you only want or need a
smaller loan, a HECM Saver could be the right option for you. Not only would you benefit from smaller upfront fees, but it automatically
limits the amount of equity you can draw down.
Another option is for borrowers to
make interest payments on their loan to preserve the amount of equity in their
homes. This is a 100% voluntary option, meaning you dont HAVE to make interest payments during the loans term. But if youre concerned about
how much interest is being added to your loan, this could help you manage the size of your mortgage.
All Reverse Mortgage has developed the first ever
amortization calculator that can show you how to keep your reverse mortgage
balance from rising by applying a monthly payment option.
An added perk in paying interest on your loan is that you can
deduct it from your taxes, so if youre interested in pursuing this option, talk
to your tax advisor.
Problem #3:
Ill be Stuck in My Home
Reverse mortgages allow you to stay in your homethey dont trap you there. Borrowers are able to repay their loans at
any time if they so choose. And if they need to leave their house to enter any sort of care facility, they can, although they will be required
to repay the mortgage (usually by selling the home).
For borrowers who are nervous to pay the upfront fees of a reverse mortgage if theyre not sure how long theyll be able
to remain in their home, consider a HECM Saver.
If your homes value has gone up significantly after you took out a reverse mortgage, and you think the amount of equity
youve been able to access is too small, you can even refinance your reverse mortgage for a higher loan amount, or to take advantage of better
interest rates.
So, Whats Your Problem with Reverse Mortgages?
Now that weve debunked some myths and cleared up some problems, do you have any more questions about reverse mortgages?
If you do, well be happy to help.
Note: The
author,Michael Branson, is CEO of
All Reverse Mortgage Company, and an occasional contributor to SeniorJournal.com. His company
is a regular advertiser in SeniorJournal.com.
This material was originally posted on his blog: Reverse Mortgage Problems by Mike Branson.
His latest posting is "Variable Rate Reverse Mortgages Explained."
Go to the Reverse Mortgage Blog for updates and comments.
Branson can be reached at 800-565-1722.
Links to More
Information
●
Frequently Asked Questions About HUD's Reverse Mortgages
●
Federal Trade Commission: Get the Facts Before Cashing in on Your Homes
Equity
●
National Reverse Mortgage Lenders Association Information for consumers interested in learning more about reverse
mortgages.
●
National Reverse Mortgage Lenders Association Q&A
●
AARP on Reverse Mortgages
Read the latest news and articles on reverse mortgages including reverse
mortgage financial information, tools, calculators, and advice from
financial
Keep up with the latest news for senior citizens, baby
boomers
John LaRose took a struggling company from its early days as a data entry shop and turned it into the largest reverse mortgage-only subservicer in the country. From his first NRMLA meeting in 2004 to today, where he holds a seat on NRMLA's board, LaRose has seen the reverse mortgage industry take shape as a group of professionals with a common goal.
John sat down with RMD to share some of his experiences from working with family to addressing some of the tough questions it will take in order for this industry to grow.
RMD: How did you first come to Celink? What has changed?
JL: I first came to work for Celink in 1985. At that time, it was a large data entry shop that did a little bit of loan servicing for the Federal Housing Administration and state housing finance. My job was to decide which direction to take the company. I quickly determined data entry was dying and that loan servicing was growing.
Then in 1999, the markets basically collapsed for our business as a mainstream subservicer and by 2004 we were pretty much looking at liquidating the company. What made you look to reverse mortgages?
I was invited by Peter Bell to attend the Atlanta NRMLA conference in 2004. There, I met industry leaders from Fannie Mae, as well as Jeff Taylor, Paul Franklin and Shawna James. What I heard and what I saw was the caliber of people in this industry and the needs they were fulfilling. It really struck me, almost like it was a calling, that this—this is what I want to do.
It was something I knew I could build a company around and design not only to support client needs but also the needs of seniors.
Tell us about the early days.
We were approved by FNMA in July 2005 and began subservicing in September. Now we have 70,000 reverse mortgages we are subservicing and we should be around 200,000 by the end of this year.
And the forward business… is history?
As of December 31, we have stopped servicing forward loans.
We are proud to be a one-trick pony. We don't do anything but subservice reverse mortgages. We have not interest in being an investor and we are content where we are.
How did you build the reverse mortgage team?
It started with [my son] Ryan, who is now company president. When we received approval from FNMA, we were asked to take over a portfolio from Wendover, which was going out of business at the time. Ryan started the reverse business with two other people in 2005. Sure, we had some support from the company, but it was really just a team of three people.
Right now, we're a little over 100 employees and are hiring on a regular basis. We aim to be around 175 in the near future.
Our recent growth is a result of Nation Star selecting us to be their subservicer and the business transferred from Bank of America.
What has kept you in this business?
An across-the-board, passion for the product. A passion for helping and providing a product that helps seniors live a better or more comfortable life. Everyone I talk to from NRMLA's board of directors to brokers and correspondent lenders seems to really feel good about what they are doing.
I'm very optimistic about the future of this product.
Is there any other good news?
A year ago, we were under siege with misinformation. Today, there's more talk about how reverse mortgages are becoming mainstream. Take Florida for example. You're dealing with a demographic that pays attention to this product and the knowledge base is exponential. In the Midwest [where Celink is headquartered], people seem to have a more cynical eye, but they're starting to say, "hey, this concept is pretty cool. Who can I call to find out more?"
Where do you see the growth opportunity?
That is a question I don't have an answer to. We need a stronger secondary market execution. The market now is driven by six or eight GNMA issuers. If the product does go mainstream, we are going to need more.
Speaking of one-trick ponies, without a propriety product and market for it, it's a pretty fragile state of the industry and I don't know how anybody can change that, but it's the biggest hurdle for the industry going mainstream.
Looking back, what would you have done differently?
It has been everything and more than what I'd hoped for. It has been a joy and a pleasure to work with my son and to watch Ryan and his team develop a corporate culture that I requested from the beginning based on the idea that every customer should be treated as though it is our own grandmother we're working with. That's the culture I've always wanted, and he and his team have done a wonderful job achieving that.
April 12th, 2012 |
by Elizabeth Ecker
Published in
News, Reverse Mortgage
Two new property valuation products from Landmark Network are gaining traction in the market for loan pools as well as loan servicing, and for originators of forward and reverse mortgage loans.
Some real estate investors as well as individual originators are increasingly using Landmark's TrimergeBPO™ (broker price opinion) launched in late 2011 to value distressed properties in particular.
The service provides three separate broker price opinions, with high confidence comparables. It lends itself to servicing companies and those in the loan pool marketplace, but Landmark is seeing some originators use it as well.
Used more readily by originators, however, is Landmark's relatively new MarkIt Value report.
"The marketplace has been hungry for valuation estimators for a while now," says Erik Richard, Landmark CEO. "Now we have a product out there that's superior to free resources like Zillow that tend not to be very accurate. Here, you're getting the professional opinion of someone in that marketplace."
Comparables are the essential component.
"The real benefit is being able to access comparable data," says Richard. "This way the client can look at what's happening in that particular market."
NBC's The Today Show this morning devoted a four minute segment to the topic of reverse mortgages, spelling out the details of the loans for the increasing number of people who are interested.
Seeing more questions and more interest lately from those who qualify, Today's financial editor Jean Chatzky answered questions on reverse mortgages, how they work, and whom they are right for.
Visit msnbc.com for breaking news, world news, and news about the economy
"You can stay in your home until you die or until you've moved out for 12 months," Chatzky says. "Even if you drain almost all the equity from the home, the bank can't force you to move."
The segment does address reverse mortgage fees, which Chatzky says can range from $2,000 to $10,000.
She also touches on the issue of home inheritance, urging potential borrowers to ask the question: why are they so attached to their homes?
"Sometimes people think their kids will be just devastated if they don't get the house and in reality, that's not the case. So talk about it," she says.
"Overall, is this something that's going to give someone who's going into retirement some peace of mind?" asks Carl Quintanilla. "Or is this something for someone who says, 'You know what? I always wanted that dream house in Florida, as well.'?"
When an article was published last month in the Journal of Financial Planning that touted the use of reverse mortgages as an important retirement tool, many reverse mortgage professionals saw the value in speaking directly to the financial planning community—a population that has traditionally been reluctant to advise their clients on the use of reverse mortgages.
But another benefit of the research conducted by brothers Barry Sacks, a tax attorney and Stephen Sacks, an economist, is identifying a new "sweet spot" for reverse mortgage borrowers.
"I saw 401(k)s and IRAs as a way to accumulate wealth in retirement, but have also looked to home equity as a roughly parallel way of accumulating wealth. We saw the reverse mortgage not as income but as a wealth accumulation device."
Rather than the "conventional wisdom" around reverse mortgages, which means often using the reverse mortgage as a last-ditch effort to remain in a long-term home while eliminating payments on the home when cash flow is at its lowest, Sacks and Sacks advise using the reverse mortgage much sooner, and as an alternative to drawing down on investments that may be under-performing.
"The constant flow of cash removes what would have been volatile," Barry Sacks told RMD of the strategy. "If you draw on stocks and bonds when they are down, you're removing what would be there to recover."
Reversing this conventional thinking about reverse mortgage products has revealed what Sacks calls a new "sweet spot" for borrowers. This borrower has accumulated wealth, perhaps in the range of $500,000 to $1.5 million in securities investments, and a home valued near the FHA HECM lending limit of $625,500.
The new thinking could help change the conversation with financial planners, which have had several hesitations about reverse mortgages, Sacks says.
"It's bred into them this notion that they're in the business of wealth accumulation and preservation. They tend to hit on the notion of the upfront fee, even though it doesn't impact cash flow. They don't like the idea of debt accumulating so early," he says.
Sacks received some response to the article, he says, but is also exploring the possibility of obtaining a patent for the formula that determines cash flow survival.
A separate report by Texas Tech researchers is also expected to be published in a forthcoming edition of the Journal of Financial Planning.
April 12th, 2012 |
by Elizabeth Ecker
Published in
Generation Mortgage, News, Reverse Mortgage
Generation Mortgage has expanded into the Midwest region.
The launch of a new office, located in Madison, Wisconsin, will expand the lender's presence from its Atlanta-based headquarters and additional branches nationwide.
"Our Wisconsin office will help to solidify Generation Mortgage's status as a national market leader in the reverse mortgage industry, supporting our top-five lender rank," said Kimberly Kerrigan Smith, Generation executive vice president in a press release. "We're looking forward to better serving seniors seeking financial independence and looking to stay in their homes longer by expanding our retail outreach in the nation's Midwest region."
Generation's Steve Kalscheur, who has been with the company since 2009, will lead the new branch.
"Reverse mortgages are sound financial tools for seniors looking to stay in their homes and meet their financial needs," he said. "I'm eager to put my experience and background to work for our customers and to help them learn the benefits a reverse mortgage can provide for them."
The expansion comes following a new TV ad campaign launched by Generation last week and currently being tested in four markets nationally. The company remains the fourth-largest reverse mortgage lender in terms of current volume, having closed 6,276 loans in the 12 months ended February 29, based on the most recent data from Reverse Market Insight.
Published Sunday, April 15, 2012 12:11 AM By SCOTT BURNS
Reverse mortgages are the Rodney Dangerfield of financial planning tools. Long thought of as something retirees used in last-ditch efforts to stay in their house, they were seen more as leaky lifeboats than as financial planning tools. They were badges for people soon to be broke.
I should confess that I shared that view. Based on reader mail, reverse mortgages were great examples of too little, too late. The vast majority of the people who wrote in asking about reverse mortgages really needed to rethink where they lived, not draw down what was usually their last asset.
But all that may be changing.
If a recent Journal of Financial Planning paper gets traction, the use of reverse mortgages will move from people who are desperate to practical people who have both home equity and some financial assets. This will happen for a totally unexpected reason: Retirees can use a reverse mortgage as a tool for increasing the probability they won't outlive their assets while increasing their retirement spending. In other words, if reverse mortgages are used early, rather than late, they can be as important in the retirement planning toolbox as life annuities.
Barry H. Sacks, a San Francisco tax attorney and Stephen R. Sacks, a professor emeritus of economics at the University of Connecticut (and the brother of Barry Sacks), made this discovery by thinking differently about financing retirement. Rather than wait until all financial assets were exhausted and then taking out a reverse mortgage, they asked how things would turn out if retirees took out a reverse mortgage first or early. This would allow them to use withdrawals from the reverse mortgage to delay or reduce withdrawals from financial assets.
None of this matters, they found, if the retirement income withdrawal rate was set at an initial 4 percent, with the amount adjusted upward for inflation in each succeeding year. In that case, there was a 90 percent chance that investment money alone would last through 30 years of retirement. Things change, however, when you up the withdrawal rate, as many retirees need to do. When the withdrawal rate is increased, they found that using a reverse mortgage increased the odds of remaining solvent throughout life.
Taking a 6 percent withdrawal rate and using a reverse mortgage first or early, for instance, provided an 80 percent probability of "cash flow survival" for 30 years, while using a reverse mortgage last provided only a 50 percent probability of cash flow survival. Similarly, taking a 6.5 percent withdrawal rate and using a reverse mortgage first or early provided a 70 percent probability of cash flow survival for 30 years, while using a reverse mortgage last provided only a 40 percent probability of cash flow survival.
Surprisingly, this enormous increase in retirement income seldom comes at the expense of net estate value. In a majority of cases, they found net worth at the end of 30 years (remaining home equity and remaining retirement assets value) was greater as often as three-fourths of the time. In other words, you can eat cake and still pass some on to your kids or favorite charity, too.
Curious about how this can be? Well, I think there is an explanation. Just as John Ameriks and others found a decade ago that converting a portion of your retirement assets into a life annuity could increase the probability of portfolio survival, using a reverse mortgage early in retirement works to reduce the impact of bad markets in the early years of retirement -- what some call "the sequence-of-returns problem." Just as the high cash flow from a life annuity can work to reduce portfolio withdrawals early in retirement, a reverse mortgage -- taken early -- does the same thing.
Sadly, both Wells Fargo and Bank of America decided to withdraw from the reverse mortgage market last year, and they accounted for 43 percent of all reverse mortgages written. They withdrew because some reverse mortgage customers liked the lack of mortgage payments so much that they also failed to pay the home insurance and real estate tax bills. This left the banks exposed and vulnerable on one hand, but faced with a nasty PR problem -- foreclosing on ancient homeowners -- on the other.
If the mortgages had been given early to people with other assets rather than late to people with no other assets, the big banks might never have left the market.
*Questions about personal finance and investments may be emailed to scott@scottburns.com or visit scottburns.com.
New FHA Forward Mortgage Insurance Premiums Take Effect Reverse Mortgage Daily The changes were made, FHA officials said in February, to help protect the stability of the mutual mortgage insurance fund. Reverse mortgages were not included in the changes and HUD officials told RMD upon the announcement that there weren't any ... Legislative: Update from Capitol HillThe Reverse Review | Daily Reverse Mortgage News (press release)
Reverse mortgages are the Rodney Dangerfield of financial planning tools. Long thought of as something retirees used in last-ditch efforts to stay in their home, they were seen more as leaky lifeboats than as financial planning tools. They were badges for people soon to be broke.
But all that might be changing.
If a recent Journal of Financial Planning paper gets traction, the use of reverse mortgages will move from people who are desperate to practical people who have both home equity and some financial assets.
This will happen for a totally unexpected reason: Retirees can use a reverse mortgage as a tool for increasing the probability that they won't outlive their assets while increasing their retirement spending.
In other words, if reverse mortgages are used early, rather than late, they can be as important in the retirement planning toolbox as life annuities.
Barry Sacks, a San Francisco tax attorney and Stephen Sacks, a professor emeritus of economics at the University of Connecticut (and brother of Barry Sacks), made this discovery by thinking differently about financing retirement.
Rather than waiting until assets were exhausted and then taking a reverse mortgage, they asked: What if retirees took out a reverse mortgage first. This would let them to use withdrawals from the reverse mortgage to delay or reduce withdrawals from financial assets.
None of this matters, they found, if the retirement income withdrawal rate was set at an initial 4 percent, with the amount adjusted upward for inflation in each succeeding year. In that case, there was a 90 percent chance that investment money alone would last through 30 years of retirement.
Things change, however, when you up the withdrawal rate, as many retirees need to do.
Taking a 6 percent withdrawal rate and using a reverse mortgage first or early, for instance, provided an 80 percent probability of "cash flow survival" for 30 years, while using a reverse mortgage last provided only a 50 percent probability of cash flow survival.
Similarly, taking a 6.5 percent withdrawal rate and using a reverse mortgage first or early provided a 70 percent probability of cash flow survival for 30 years, while using a reverse mortgage last provided only a 40 percent probability of cash flow survival.
Surprisingly, this enormous increase in retirement income seldom comes at the expense of net estate value. In a majority of cases, the Sacks brothers found that net worth at the end of 30 years (remaining home equity and remaining retirement assets value) was greater as often as three-fourths of the time.
In other words, you can eat cake and still pass some on to your kids or favorite charity, too.
Scott Burns is a nationally syndicated columnist who has been writing about personal finance since 1977. Send questions to business@statesman.com.
A majority of Australians are supportive of the use of reverse mortgages in retirement if provided as a government program, according to a national study conducted by a senior advocacy non-profit. However, the population is not supportive of the mandatory use of home equity to pay for long term care.
The results of a survey conducted by the Combined Pensioners and Superannuants Association (CPSA) in Australia were released by the organization Wednesday, and shed some light on the national preferences surrounding reverse mortgages and the use of home equity to pay for long-term care costs.
According to the survey, 13% of Australians "strongly support" the notion of a government-backed reverse mortgage while 46% "somewhat support" it. Of those opposed to the idea, 21% say they somewhat oppose it and 20% say they are strongly opposed.
When it comes to requiring a reverse mortgage, however, the vast majority expressed opposition.
"[The survey] has found that two-in-three Australians reject the notion that anyone should be forced to sell or reverse mortgage the family home to access aged care, as proposed by the Productivity Commission report 'Caring for Older Australians," said CPSA Senior Policy/Research Officer, Antoine Mangion.
CPSA used the results to oppose a federal proposal that would require older australians to sell their home or use a reverse mortgage to pay for care.
"Clearly, the Federal Government must steer clear of compulsory sale or reverse mortgage of the family home to fund aged care," CSPA said.
In case you missed it, here's what happened in reverse mortgage news this week.
HUD said it's still committed to a reverse mortgage financial assessment. The rule is forthcoming, although might not come until later in 2012, a HUD official told attendees of NMRLA's eastern regional conference in late March. Read the story.
RMS reported success in its efforts to mitigate T&I defaults. The company, which stopped buying closed loans meeting certain characteristics, has also tested its version of "financial assessment" in its retail channel, finding promising results.
A new study showed reverse mortgages help retirees more than other solutions. The study, released by the Retirement Research Center at Boston College, examines several options retirees can use to delay retirement shortfall. The findings? Reverse mortgages delay that point longer than reducing spending or changing investment strategies.
With the help of Reverse Market Insight… we took a look at year-over-year reverse mortgage volume in the context of big bank exits. RMI shows industry combined volume is down just over 25%, having recouped about a quarter of the retail volume lost in the wake of the Wells Fargo and Bank of America exits. RMI provides a look into possible reasons why.
Brokers pick up the slack… The latest industry report from Reverse Market Insight shows wholesale reverse mortgage volume grew 15% in February, far outpacing retail volume (which fell 2%). Read more.
Generation launched a new reverse mortgage commercial. It doesn't feature a celebrity spokesperson, but it does spotlight an average, American family. Click below to view the video.
The Consumer Financial Protection Bureau was established in response to the mortgage meltdown and series of abuses against consumers. The agency wants to hear from consumers on everything from financial products to mortgages, credit cards and student loans.
Have a question about a reverse mortgage or a credit card? You can now go to the Consumer Financial Protection Bureau's website and ask. The agency has posted about 350 entries and you can submit your own question as well.
"So we're talking about all the ways people borrow and access money to live their lives; mortgages, credit cards, student loans, basic banking, savings accounts, debit cards. Could be pay day loans; other types of transactions. Debt collection is in our authority," CFPB Director Richard Cordray said.
The CFPB is an oversight bureau and is currently coming up with new rules for home loan services, including requiring statements that are easier to understand and warnings before interest rates change. The CFPB wants to force mortgage services to provide direct and easy access for troubled borrowers.
"They can expect continuity of contact so they don't call once and send in paperwork and no one remembers they ever talked with them and paperwork has been lost. It's happened repeatedly to many people across this country and it's poor customer service and it's something that the mortgage services need to clean up and under our authority, we'll be able to make them clean it up," Cordray said.
The CFPB says it needs consumers' help to find out where problems are in the financial industry and it's asking people to file complaints online.
"They can bring those to us and we will work with financial institutions to try to get those complaints rectified. That's an important think we're going to be able to do for Americans across the country and that's something that I think will make a difference, already is making a difference for people from what I hear from them about problems we've helped them resolve," Cordray said.
The agency will take input from consumers and the financial industry on the new rules for mortgage services over the summer and finalize then in January.
UNDERESTIMATING life expectancy could add 50 per cent to the cost of providing for retirement in Australia with the International Monetary Fund calling for government action to reduce this long-term threat to the budget.
The fund's review of global financial stability says that as well as increasing the retirement age, governments should help people to insure against their savings running out by supporting the development of annuities and reverse mortgages.
The recommendations mirror calls by the Henry tax review and the superannuation industry.
The IMF says countries around the world have consistently underestimated improvements in longevity by about three years every 20 years. Authorities expect the rate of improvement to slow down, but advances in medical technology mean it does not.
The Australian Bureau of Statistics shows that since 1990, life expectancy for a man aged 60 has increased by 4.1 years while for a woman it has risen by three years. The fund estimates that a three-year increase in life expectancy adds between 1 and 2 per cent of GDP a year to the cost of an ageing population.
By 2050, advanced countries would have to set aside an additional 50 per cent of GDP to cover pension liabilities.
"On a global scale, that increase amounts to tens of trillions of US dollars, boosting the already recognised costs of ageing substantially," it says.
The fund estimates that Australia households need to increase their savings by at least 73 per cent of GDP if they are to finance a retirement at 60 per cent of their working income. If their life expectancy increased by another three years, this gap would rise by a minimum of another 36 per cent of GDP.
The fund says governments should tie the retirement age to longevity. The Australian government is increasing the pension age from 65 to 67 years between 2017 and 2023, but has ruled out any matching increase in the superannuation preservation age.
While several lenders have publicly explored the use of a financial assessment to reduce the instance of tax and insurance default among borrowers with any long-term measurement of success, Reverse Mortgage Solutions has implemented its own plan to monitor the instance of those defaults as well as an effort to prevent them.
So far, it is starting to show success.
Last year, RMS told its partners that it would no longer buy closed loans that had certain characteristics: either a new homeowner's insurance policy, or past incidence of tax default meeting certain characteristics.
Current RMS data indicates that the change was warranted.
"We found 75% of our tax and insurance defaults began as defaults at closing, meaning they either had delinquent taxes or a new insurance policy," says Mike Kent, president of mortgage lending at Spring, Texas-based RMS. "It was a good place to start. The end game is: how do we help mitigate tax and insurance defaults, but also, how do we mitigate a situation where a senior ends up in foreclosure?"
The question led RMS to begin testing its own version of a financial assessment, without additional underwriting, in its retail call center.
"We took our data and used it to determine financial assessment," Kent says. "We could have chosen the way the others did it, but we said, 'Here's another way.'"
Coupled with the results of its borrowers currently on repayment plans, which is around 50% of those in default who are now making payments as they come due, RMS began to look at the question of willingness versus ability to make tax and insurance payments.
"We would never require of our partners and customers something we wouldn't require ourselves, so we implemented it as a beta test in December," Kent says. Four months later, RMS is beginning to see results with a the rough conclusion that between four and six out of 10 loans that would be denied, actually can be made without immediate default danger.
RMS's multiple business channels from sub-servicing to correspondent lending and retail origination allow for the depth of analysis.
"One nice thing about having all of these channels is we have a lot of data and know how our decisions on the front end are going to effect processes down the road," Kent says.
As for RMS's future financial assessment plans, full implementation is pending.
"We have it, it's written up, it's good. Our plan is to run in the call center and then tweak it however we need to, then put it out to our partners for their input and comment," he says.
April 12th, 2012 |
by Elizabeth Ecker
Published in
News, Reverse Mortgage, Reverse Mortgage Jobs
On the job search? The ever-changing reverse mortgage industry is looking for new talent. For originators seeking new homes or operations professionals looking to make a change, there are open opportunities across the country with lenders large and small. From coast to coast and from retail to wholesale and operations, check out the following job openings. For a complete list of jobs, visit Reverse Mortgage Jobs Online.
The concept of a hybrid product is a welcome addition from the viewpoint of many reverse mortgage originators. It would offer the borrower a greater range of options besides just fixed rate and adjustable rate products—a discrepancy between which has grown over the course of the last two years.
The exact terms of such a product have yet to be outlined, but National Reverse Mortgage Lenders Association executives told attendees of the association's eastern regional conference in March that the industry had brought the idea to a meeting with White House officials in order to gauge interest in moving forward with such a reverse mortgage that would allow for an upfront, fixed-rate draw, followed by subsequent draws under an adjustable rate.
"Any time you expand the range of product offerings, it allows more choice for a consumer and the burden of learning the product, understanding how it works and properly educating the client falls to the lender, which it should. As an industry, we should embrace additional products, not fear them," says Paul Fiore, vice president of sales for American Advisors Group. "I look forward to additional product offerings that could potentially help more borrowers, however, without seeing a product matrix and truly understanding the loan terms, it is hard to determine what kind of impact it could have in the market."
Increasing options for the borrower is an upside, many originators agree, in a market where upwards of 65% of new borrowers opt for the fixed rate option.
"We would welcome a hybrid program," says Mike Wyrostek of MSI Mortgage Services. "The more flexibility we can give a reverse mortgage borrower, the better. I am not the biggest fan of the fixed rate, because the borrower only has one choice and that is to take all the money out at once."
Providing options, especially for those borrowers who currently have a mortgage that must be paid off, is the main upside originators see.
"The hybrid would top any reverse mortgage product available today," says Brian Cook, reverse mortgage advisor with Seattle-based Pinnacle Mortgage Planning. "For a senior borrower who has a mortgage and wants access to their equity through a line-of-credit, it would add a significant amount of peace-of-mind to those that are worried about future interest rates. The hybrid product could be a game changer that the industry hasn't seen since the introduction the Saver product. "
The details, however, will become essential, if the product does gain interest from the Department of Housing and Urban Development, a hope that NRMLA expressed at the March meeting.
Then there is the question of selling it to investors.
"If it makes sense for the consumer, there will be acceptance in the capital markets and it will be priced according to anticipated prepayment behavior," says Darren Stumberger, managing director at Knight Capital Group. "Typically the market likes to sift through performance data before new products trade in line with their fundamental or inherent value"
The most recent new product, the Saver, has taken many months to gain traction, but investor demand is increasing, he says.
"The gap between Standard and Saver is beginning to meaningfully narrow given 12-14 months of observable data."
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April 17, 2012 - Reverse mortgages are a financial product that has received a lot of bad press over the years, leaving many people who
could potentially benefit from this type of loan with negative associations and a bad taste in their mouth.
