Reverse Loans and the Last Resort?
No, they aren’t the mortgage of “last resort” as more and more professionals are beginning to understand. They are a very valuable tool that can be used to extend retirement funds and avoid taxation under certain circumstances.
Here is the remainder of an article that discusses the enlightened understanding of one Financial Planner in regards to the benefits that are to be had, by using a Reverse mortgage for retirement planning.
Kitces: Reverse Mortgages Don’t Have to be Loan of Last Resort
Posted By Alyssa Gerace On September 19, 2013 @ 6:11 pm In News,Reverse Mortgage | No
Reverse mortgage loans have remained relatively unpopular, he says, due in part to high upfront fees, and are often viewed as a loan of last resort.
“The reality is that the lack of any cash flow obligations for a reverse mortgage actually allows it to eliminate the sequence risk from the mortgage-in-retirement strategy,” says Kitces.
However, there are still some caveats to going the reverse mortgage route, writes the financial planner, including the ongoing borrowing costs, lending limits that may reduce the loan’s usefulness for more affluent clients, and upcoming changes soon to be implemented by the Department of Housing and Urban Development that will substantially change the program.
Caveats aside, reverse mortgages can alleviate sequence risks associated with traditional amortizing mortgages, he says, which can make them especially appealing to retirees with certain risk preferences.
“Thus, while reverse mortgages have typically been viewed primarily as a ‘loan of last resort’ for those who have entirely depleted their other assets,” he concludes, “the reality is that reverse mortgage strategies should perhaps receive much greater consideration in the earlier stages of an affluent retirement plan.”
Financial Advisor Recommends Reverse Mortgages
In my previous posts I have been sharing and discussing the change of attitude in some Financial Advisors opinions about Reverse loans. In the course of the past 11 years since I have been a Reverse loan Consultant, I have not been encouraged by their lack of understanding about the federal loan program and in general they have been very negative about it.
But there seems to be a trend within their industry and many are becoming more open about using a Reverse loan for retirement planning. Following is an article that discusses this development.
Financial Advisor Leans on Reverse Mortgages for Retirement Planning
Posted By Alyssa Gerace/ September 16, 2013 Reverse Mortgage Daily
“A certified financial planner has been routinely recommending reverse mortgages to his baby boomer clients following the economic downturn as a way to more safely meet retirement goals.
Baby boomers are the worst group of savers in the U.S. advisor Brian Rezny, who has offices in Naperville, Ill. and Naples, Fla. told Financial Planning.
He’s been turning potential clients away who aren’t likely to make significant lifestyle changes in retirement and ‘simply don’t have enough money’ to maintain current living standards, says the article.
‘People just don’t have the money’, he told Financial Planning. ‘They lost a lot in 2008 and the horror stories were mounting, one after another: flipper homes; other poor investments, overspending and drawing down their principal, so they have much less to live on now than they did 5 years ago.’
A reverse mortgage can be a way out for clients with not enough savings but a substantial amount of home equity, he believes. While Rezny says he didn’t need to recommend the product five years ago and wouldn’t have discuss it with his clients, he routinely recommends it now, to as much as 90% of his client base.
The loan can be a way to meet retirement goals more safely as it can give investment portfolios another 5-10 years to grow, says Rezny, who advises clients to short-sell properties they may have bought so they can clear up their debt and then get a reverse mortgage.”
Retirement Planning and Reverse Loans
In my previous post, I shared an article about a Financial Planner who understands the importance of Reverse mortgages and how it’s use can make a positive addition to someone’s retirement plans. Financial advisors have typically not considered a Reverse loan to be part of the tool box when it comes to planning for retirement.
This has been due to an enormous misunderstanding about the federal loan program and the unwillingness to educated themselves about it. But the current times are now changing and it seems that more of the financial planning community is finally recognizing the value that a Reverse loan can have for their clients in extending their retirement funds and protecting them from taxation in the event they withdraw funds from their investments.
The following article discusses the intelligent approach that a Financial advisor is utilizing when he discusses financial concerns with his older clients.
Kitces: Reverse Mortgages Don’t Have to be Loan of Last Resort
Posted By Alyssa Gerace On September 19, 2013 @ 6:11 pm In News,Reverse Mortgage | No Comments
The use of reverse mortgages as a retirement planning tool should receive much more consideration earlier on in planning processes rather than as a loan of last resort, writes  a financial planner after comparing the loan to traditional amortizing mortgages kept in retirement.
With low interest rates suppressing both retirement portfolio yields and borrowing costs, some borrowers may be tempted to keep their amortizing mortgages in retirement, Michael Kitces writes on his financial planning new blog.
The decision to keep a forward mortgage in retirement is not without risk, however, Kitces cautions, outlining potential dangers including equities that don’t perform as expected and failure to generate a return in excess of the borrowing cost during a relevant time period.
Even when returns do add up, he continues, ongoing monthly payments on traditional mortgages create a “sequence of returns” risk for retirees, as withdrawals to fulfill mortgage repayment obligations could deplete retirement portfolios during an extended period of bad returns to the extent there isn’t enough money left over for when good returns arrive.
“From this perspective,” he writes, “retirees should perhaps consider the reverse mortgage instead.”
The remainder of the article will be in my next post to this site.
The Changes to Reverse Loans
As I mentioned in the previous post, effective on September 30th. the Reverse loan program will immediately undergo some major changes. Primarily, less money to the applicant and possibly an increase in the MIP premium. There are several changes that will take place at the end of the month, with the remaining one effective in January 2014.
The following article concerns a panel of experts in the Reverse mortgage industry that recently met, to discuss these changes and what they mean overall, for the industry.
Reverse Mortgage Industry Faces New Challenge
Posted By Alyssa Gerace On September 12, 2013 @ 5:07 pm In News,Reverse Mortgage | 13 Comments
“Upcoming changes to federally-guaranteed home equity conversion mortgage program will change not just the product itself, but the type of borrower using it, said panelists during a Wednesday webinar on the topic, and there are opportunities amid the overhaul.
“The reality is, we need to change how we do this business,” said John Lunde, founder and president of Reverse Market Insight, during the webinar, hosted by ReverseFocus. “There are several big opportunities out there that our industry has not really attacked, and effectively gotten a lot of volume out of. The HECM for Purchase is probably one of the biggest ones… Financial planners [present] an enormous opportunity, even bigger than Purchase.”
Pursuing those opportunities will be imperative, he said, considering how the new HECM rules could affect future loan volume.
RMI took a look at funding activity from July and August to see how those loans would have been impacted had the new rules already been in place.
For the July/August book of funding, the total impact from the upcoming October changes—lower principal limit factors and restrictions on initial utilization—but ignoring the January financial assessment implementation would have seen a 49% unpaid principal balance reduction.
“That’s a shocking number,” said Lunde. “It’s bigger than any other changes we’ve seen. This underlines that we need to go out and change everything, from marketing to how we approach business. It’s going to be a different business going forward. That’s the bottom line.”
This is a long article that I will continue to post over the next few days.