Making Sense of Reverse Mortgages Information you need to make a good decision!

October 22, 2013

Reverse mortgages as a financial planning tool

What’s the first thing you think of when your hear the term “reverse mortgage”

Bad?  ripoff?  Wow, Fonzi has gotten old…

What you should start thinking of is financial planning…

The Wall Street Journal recently published an article highlighting a use of a reverse mortgage that I have been recommending for years.  As we learned from the financial crisis, even though you may need money, it is not always the best time to sell your assets. Whether it is stocks or real-estate, the markets move independently of your needs.

For a wealthy, or even not so wealthy, retired borrower, this can obviously present a problem.  Your assets need to last as long as possible and you would like to wait for the market to recover before selling your assets…

You are 62 and you were just laid off.  Social Security is available to you but you know that if you can wait until age 65 that your social security will be substantially higher…

You don’t mind selling the assets, but you want to shift the tax burden of that transaction into next year…

You want to balance out your interest payments with the sale of an asset without harming your cash flow

These are all examples of where a reverse mortgage can be used as a financial planning tool to help buffer the winds of financial change.  Setting up the reverse as a line of credit allows a senior to make a choice of where to draw the assets they need, without impacting their cash flow.

“Retirement is really about cash flow,” says Martin James, a certified public accountant in Mooresville, Ind. in the WSJ article

Traditionally financial planners recommended a home equity line of credit for this purpose, but many homeowners were taught a hard lesson when their credit lines were cancelled by the bank, in spite of perfect payment records, or even though they carried no balance!  One of the benefits of a reverse mortgage is that the line of credit cannot be cancelled.  Then add an additional benefit of no payments being required and you have an incredible planning tool.

This has been studied by financial planners at Texas Tech University.

The researchers used what they called a “standby” reverse-mortgage strategy, meaning the reverse-mortgage line of credit served as a source of readily available cash when retirees’ portfolio values dropped below the level where they could meet their goals.

Using a portfolio worth $500,000 and a home value of $250,000, among other assumptions, the researchers found that using a reverse mortgage’s line of credit significantly improved the chances the portfolio would last through the retiree’s lifetime, because it reduced the risk of having to sell investments when they had fallen in value.

We’ll cover this more later, but maybe now the first thing that crosses your mind when you hear reverse mortgage is… Maybe I should learn more…

To read the WSJ article click here

 

February 24, 2010

Annuities

Filed under: Annuity,Reverse Mortgage — Tags: , , , — Scott Larson @ 4:41 pm

Annuities are in the news again after President Obama has suggested that an annuity might be an appropriate choice for some people.  As with any financial investment when they are appropriate they work well. As I was working with a Fidelity account today they had an article that showed how an annuity can be a way to accomplish some more complex financial goals such as replacing savings that you would like to be able to pass on to your heirs.But as the Fidelity/Wall Street Journal states

Buying an annuity confronts families with a dilemma: Should a parent take smaller monthly payments so that their surviving spouse or children can get some sort of inheritance?

Most people opt for the smaller payment. But in some cases, there are better strategies to help the heirs come out ahead, including pairing an annuity with an insurance policy.

But annuities come with complex features and fees that you won’t often find in investments like mutual funds. You can purchase riders to guarantee payments for your heirs, for example, or to adjust your monthly payment for inflation. It takes careful analysis to figure out if an annuity makes sense for you and, if so, which features to purchase.

Many states, including California, have laws which provide a “financial  fire wall” between reverse mortgage lenders and annuity providers.  These are designed to keep an aggressive salesperson from overwhelming a senior and making large commissions from selling inappropriate products. 

To read the whole article click here

February 16, 2010

THROW THE BOOK AT HIM!

Filed under: Reverse Mortgage,Uncategorized — Tags: , , , — Scott Larson @ 3:58 pm

This is a story that will probably be reported as a problem with reverse mortgages, but the only connection is that some of the money was generated from a reverse mortgage.  From SFGate.com

A 25-year-old former customer service representative with a San Francisco branch of Bank of America has been charged with swindling $61,000 from a 96-year-old woman who entrusted him with her finances…

Saul Cornejo of Daly City was being held on $50,000 bail after pleading not guilty Thursday to charges of felony elder abuse and grand theft.

This is actually a banking problem, but it highlights some of the dangers that seniors and their relatives face from people that are in a trusted position.  Thank goodness for her niece!

The niece did some checking and discovered that her name had been removed from some of the accounts and that statements had stopped coming to her aunt, prosecutors said.

She then went to Bank of America officials and San Francisco police, who found a total of $61,000 missing from her aunt’s accounts and from the proceeds of a reverse mortgage

Elder abuse can take many forms and should be watched for carefully.  People that abuse our seniors, regardless of the form it takes, should be prosecuted to the fullest extent of the law!  Hardly a controversial position, but it absolutely needs to be stated over and over again. 

This also points out that going to the “big  bank” is not a guarantee of safety.  Please make sure that you check out the people you are working with and that they are open and honest in their dealings with you.  That is part of what this site is about, to give clear, unbiased information to help you see if your originator passes the “smell test.”

February 8, 2010

Reverse Mortgage Alternative!

Filed under: Reverse Mortgage — Tags: , , — Scott Larson @ 7:07 pm

In the Wall Street Journal this weekend in the Family Values section, Kelly Greene writes a good article on private reverse mortgages. 

Families where at least one adult child has amassed a nest egg have another option—buying the house outright, or using some of that money to set up a private reverse mortgage. Either way, the family avoids paying lending fees and may even get a few tax breaks

When Wayne Tew, a credit-union president in Las Vegas, realized that his parents needed money, he bought their house and leased it back to them, freeing up their cash for a new car and travel.

The kicker of course is having a son, daughter, or wealthy relative that has the ability to do this. 

To read more, click here

“Mortgage Professor”

Filed under: Uncategorized — Tags: , , — Scott Larson @ 12:31 pm

Jack Guttentag – the “Mortgage Professor” has weighed in on the claim that reverse mortgage are the next subprime.  He doesn’t believe it and neither do I. 

For reasons not clear to me, reverse mortgages are being bad-mouthed by an unlikely source: consumer groups that are supposed to represent the interest of consumers in general, and seniors in particular.

I have to say that most of the “negative information” I have come across has been from people that do not know about the product and/or are comparing today’s reverse mortgage to the original round of reverse mortgages put together in the infancy of the business.  Today’s reverse mortgages are highly regulated and very safe.

In a 2006 survey of borrowers by AARP, 93 percent said their reverse mortgage had had a mostly positive effect on their lives, compared with 3 percent who said the effect was mostly negative. Some 93 percent of borrowers reported that they were satisfied with their experiences with lenders, and 95 percent reported that they were satisfied with their counselors. (All HECM borrowers must undergo counseling prior to the deal.) 

What we have seen is bad information, presented by otherwise reputable sources.  Mr. Gutentag provides an example

What is not useful is needlessly and gratuitously fanning the flames of senior anxiety about losing their homes. In its September issue of Consumer Reports magazine, Consumers Union warned: “The Next Financial Fiasco? It Could Be Reverse Mortgages.” The centerpiece of its story is a homeowner who is “likely to be evicted” because of an HECM balance he can’t pay off. How is that possible?

It was his wife’s HECM, not his, and when she died, ownership of the house reverted to the lender because the husband was not an owner. At the outset of the HECM transaction, he was too young to qualify, so he had his name removed from the deed so his wife could qualify on her own. She could have lived in the house forever, but as a roomer in her house, he had no right to remain.

We’ll take on this article point by point in a future post, but while it does have some good points (don’t buy the rosy scenarios painted by ads or flyers – find out what you are doing!) overall it feels like an article where the reporter had their minds made up before they started.  You can read the consumer report article here

Back to the Washington Post

This was painted as a reverse-mortgage horror story, but it was nothing of the sort. HECMs are for owner-occupants, not roomers, which was what the husband had made himself into. The correct moral is that the program should not be misused.

Even less useful are spurious claims that growth of the reverse-mortgage market has major similarities to the growth of the subprime market, and could lead to the same kind of “financial fiasco.” The major source of this nonsense is an October monograph by Tara Twomey of the National Consumer Law Center titled “Subprime Revisited: How Reverse Mortgage Lenders Put Older Homeowners’ Equity at Risk.”

In fact, the two programs could hardly be more different, and there is no chance of a similar fiasco.

He goes on to point out major difference, including the fact that there are no payments, and therefore no foreclosure due to defulting on payments – a rather big difference wouldn’t you think? 

To read the Washington Post article – click here

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