What happened to mainstreaming reverse mortgages into retirement plans?
have been retirement researchers advance the idea For years, arguing that despite the high cost, financial planners need to consider the benefits of reverse loans as a way to harness home equity in retirement.
But credit activity remains flat. According to Reverse Market Insight, volumes for home equity conversion mortgages (HECMs) ended 2021 at 53,020 loans — an 18.7% bump from 2020, but still in the range where originations have boomed since 2012. And, loan volumes are well below the peak year of 2008, when 115,000 loans were originated.
From a market penetration perspective, HECM is hardly a blip. “If you look at the current loans by the number of eligible households, it works out to a penetration rate of a little over 2%,” said John Lunde, president of Reverse Market Insight.
HECM is administered and regulated by the US Department of Housing and Urban Development (HUD). The federal government has introduced a number of reforms during the past decade aimed at cracking down on abusive lending practices. The lapses in the industry had become a problem—especially when newspapers began publishing stories about senior citizens losing their homes. Although there is no repayment of the loan, borrowers must keep their homeowner’s insurance and property taxes current and maintain the property.
The changes reduced the total available loan amount, raised fees and, importantly, introduced a required financial assessment to ensure that borrowers have the ability to meet their obligations and conditions under the HECM.
Almost all reverse mortgages are generated under the HECM program. Fixed rate and variable rate HECM loans are available, but fixed rate loans are uncommon and require that the borrower take the entire permitted credit upfront as a one-time payment. More often, a HECM is structured as a line of credit that can be used for any number of purposes.
Since distributions are loans, they are not included in the adjusted gross income reported on the tax return — meaning they do not trigger the taxation of higher income Medicare premiums or Social Security benefits. Government insurance is provided through the Federal Housing Administration (FHA), which is part of HUD. This backstop provides vital assurance to both the borrower and the lender.
For the lender, the assurance is that the loan will be repaid even if the amount owed exceeds the proceeds from the sale of the home. The borrower gets assurance that he will receive the money promised, that the heir will not be paid more than the value of the house at the time of repayment of HECM and the security afforded by stringent government regulation of a very complex financial product.
Reverse mortgages are only available to homeowners who are 62 years of age or older. As the name implies, they are in contrast to a traditional “forward” mortgage, where the borrower makes regular payments to the bank to pay off the loan and increase equity. A reverse mortgage pays out equity in the home in the form of cash, with no payments to the lender until it moves, the property is sold or dies.
Repayment of the HECM loan balance can be deferred until the end borrower or non-borrowing spouse dies, moves or sells the home. When final repayment is due, title to the household remains with family members or heirs; They can choose to either keep the home by paying off the loan or refinance it with a traditional mortgage. If they sell the house, they retain any profit on the loan repayment amount. If the loan balance exceeds the value of the home, the heirs can simply hand the keys over to the lender and walk away.
Retirement researchers have been advocating for the use of HECM for some time now. Recently, Wade Pfau, professor of retirement income at The American College of Financial Services, explored the benefits in his encyclopedic new book, Retirement Planning Guidebook: Navigating the Critical Decisions for Retirement Success, In an interview, he argued that it is important for advisors to understand how the income from HECM can be integrated into a scheme.
“If you can either reduce your withdrawal rate slightly from your investments, or avoid distributions after a market downturn, it has such a huge positive impact on subsequent portfolio value,” he said. “This is really the secret sauce of reverse mortgages. You cannot look at reverse mortgages in isolation, you need to consider the overall plan and its impact on the investment portfolio in particular.
And Pfau sees some signs of interest, particularly among registered investment advisors. “I think at least, there’s more willingness to consider when they might have a role in planning. So, you’ll see more RIAs using them.”
Steve Rasch, vice president of retirement strategies at Finance of America Reverse, says it’s disappointing to see FHA product volumes remain in low gear. “In a trust environment, you’re looking at all kinds of things that might be right for a client. And so how do you look at someone’s situation and think, ‘Well, home equity is really good for them. might work,’ but shouldn’t they mention it?
But he sees RIA’s growing interest in using HECM for various retirement planning purposes. One challenge many clients face as they approach retirement is the need to transfer a portion of assets from tax-deferred accounts to a Roth to manage tax liability — and that can be costly from a tax standpoint. could. “We are seeing some advisors using lines of credit to fund those tax liabilities,” he says.
Resch also sees a growing interest from advisors in proprietary reverse mortgages, which have higher credit limits. These are not part of the HECM program, and are not federally insured, but they are also non-insured. That’s a very small part of the overall market, but it’s growing more quickly, he says.
“Loan to value ratios are not as generous as you would find with FHA products because they are insured, and the lender here is taking all the risk. But they are still non-debt loans, and the borrower, or their family, is the owner of the property. Not liable for any loan balance in excess of the value,” he added.
Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to Morningstar and AARP magazine.
