Mutual of Omaha adds RMF talent to reverse division

James E. Veale, MBT

January 25, 2023 at 8:54 am

Mr. Holmgren

I guess you did not hear the podcast correctly. Shannon referred to a SF Gate article not any article in the SF Chronicle.

The title of the 1/10/2023 SF Gate article in question is “Reverse Mortgage Replaces Retirement Fund Withdrawals.” The implication is that an RM (reverse mortgage) can replace ALL retirement plan withdrawals (or more correctly distributions). But is that true for this borrower? The title implies that when you get a RM there are no RMDs!! But unless the retirement plan is a Roth IRA or Roth 401(k), how is that possible unless the borrower is not yet the RMD required minimum age to begin taking RMDs? Where in the article is this clarified? Without appropriate caveats, the claim in the article title is very misleading.

The article claims that the home is in Carmel, CA with a value of $2.75 million resulting in a PRM LOC (line of credit) of over $1.5 million. Are the facts in the article accurate? What is the growth rate on the PRM LOC anyway, 1.5% for some number of years? Most adjustable rate PRMs I am familiar with have LTVs (or principal limit percentages) of 50%. So was the PRM with a private party and not a NMLS regulated or licensed lender? You claim that there was at least a significant UPB (unpaid principal balance) on the existing mortgage that was paid off by PRM proceeds at the PRM closing. So how is the PRM LOC (line of credit) over $1.5 million with that kind of starting UPB on a home appraised at $2.75 million? That just seems highly questionable, doesn’t it?

Even if the interest rate drops on the PRM as you imply it will, will the average effective PRM interest rate over the life of the PRM be lower than the average effective rate of return on the assets in the retirement plan or assets in other portfolios over the life of the PRM? It seems you are not only trying to be the loan officer but also the de facto financial advisor as well. There is an old adage telling us to stay in our own lane when providing professional opinions and services. If you were acting as both, did your clients sign off giving you permission to act in both capacities since you lacked any independence on the transaction?

On what authority do you believe that the coordinated strategy will work with an average effective PRM interest rate of 7% or more? You are only looking at the cost side of the transactions when discussing the interest rate so on what basis do you believe that the rate of return on the investments will exceed the average effective interest rate on the PRM? Here I am asking for your source for making this speculation? What was plausible in 2012 is not so plausible today. So if you are relying on returns that were applicable in 1972 to 2002, that plausibility has already sailed.

You do not mention any request for corrections to the SF Gate story. It seems the potential errors demand corrections. If you made that request, I find no reference to it in the SF Gate after it was posted on 1/10/2023. With all of the detailed info in the article, its source could only be you, the borrowers, or someone that either party provided this info to. You are the most likely candidate since I found an article in the SF Chronicle touting that you provided a RM that resulted in income for the life of a son, which on its face seems misleading. Even with an adjustable rate HECM, there is no guarantee that tenure payouts will continue for the life of a borrower. The longest that even HECM tenure payouts can last is the life of the loan which may or may not end with the life of the borrower.

I read that your branch is located just east of downtown Oakland, CA. This explains the number of articles covering your originations in the SF Bay area. A lot of the info in the articles about your originations seem private, such as the purpose of the loan. Seniors generally do not want such info about their personal affairs so public. Perhaps these publicized loans had unusual borrowers who signed waivers to allow such disclosures to be made to the press…. In small cities like Seaside, CA and Carmel, CA, it would be very easy to pin down who these borrowers are….

I am not confident that a word of caution will be all that effective. Although not an attorney, your published stories seem to have the potential to result in problems for the industry.

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2 Comments

John Holmgren
January 23, 2023 at 9:59 am
Hi Shannon. I noted your reference to my article in the San Francisco Chronicle in which you talk about proprietary product higher interest rate relative to HECM products. In this case the borrowers first mortgage balance was high enough that a HECM would have provided very few funds after payoff of that loan. As noted in the article one of their objectives was to obtain access to more funds for future use. As you know, they do not incur interest on unused line of credit funds. Also, with regard to the higher rate issue, because the loan in question was a variable rate loan, and with the likelihood that rates will fall in coming years once inflation is under control, their return on other invested assets may compare favorably with the reverse mortgage rate.
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- James E. Veale, MBT
  January 25, 2023 at 8:54 am
  Mr. Holmgren
  
  I guess you did not hear the podcast correctly. Shannon referred to a SF Gate article not any article in the SF Chronicle.
  
  The title of the 1/10/2023 SF Gate article in question is “Reverse Mortgage Replaces Retirement Fund Withdrawals.” The implication is that an RM (reverse mortgage) can replace ALL retirement plan withdrawals (or more correctly distributions). But is that true for this borrower? The title implies that when you get a RM there are no RMDs!! But unless the retirement plan is a Roth IRA or Roth 401(k), how is that possible unless the borrower is not yet the RMD required minimum age to begin taking RMDs? Where in the article is this clarified? Without appropriate caveats, the claim in the article title is very misleading.
  
  The article claims that the home is in Carmel, CA with a value of $2.75 million resulting in a PRM LOC (line of credit) of over $1.5 million. Are the facts in the article accurate? What is the growth rate on the PRM LOC anyway, 1.5% for some number of years? Most adjustable rate PRMs I am familiar with have LTVs (or principal limit percentages) of 50%. So was the PRM with a private party and not a NMLS regulated or licensed lender? You claim that there was at least a significant UPB (unpaid principal balance) on the existing mortgage that was paid off by PRM proceeds at the PRM closing. So how is the PRM LOC (line of credit) over $1.5 million with that kind of starting UPB on a home appraised at $2.75 million? That just seems highly questionable, doesn’t it?
  
  Even if the interest rate drops on the PRM as you imply it will, will the average effective PRM interest rate over the life of the PRM be lower than the average effective rate of return on the assets in the retirement plan or assets in other portfolios over the life of the PRM? It seems you are not only trying to be the loan officer but also the de facto financial advisor as well. There is an old adage telling us to stay in our own lane when providing professional opinions and services. If you were acting as both, did your clients sign off giving you permission to act in both capacities since you lacked any independence on the transaction?
  
  On what authority do you believe that the coordinated strategy will work with an average effective PRM interest rate of 7% or more? You are only looking at the cost side of the transactions when discussing the interest rate so on what basis do you believe that the rate of return on the investments will exceed the average effective interest rate on the PRM? Here I am asking for your source for making this speculation? What was plausible in 2012 is not so plausible today. So if you are relying on returns that were applicable in 1972 to 2002, that plausibility has already sailed.
  
  You do not mention any request for corrections to the SF Gate story. It seems the potential errors demand corrections. If you made that request, I find no reference to it in the SF Gate after it was posted on 1/10/2023. With all of the detailed info in the article, its source could only be you, the borrowers, or someone that either party provided this info to. You are the most likely candidate since I found an article in the SF Chronicle touting that you provided a RM that resulted in income for the life of a son, which on its face seems misleading. Even with an adjustable rate HECM, there is no guarantee that tenure payouts will continue for the life of a borrower. The longest that even HECM tenure payouts can last is the life of the loan which may or may not end with the life of the borrower.
  
  I read that your branch is located just east of downtown Oakland, CA. This explains the number of articles covering your originations in the SF Bay area. A lot of the info in the articles about your originations seem private, such as the purpose of the loan. Seniors generally do not want such info about their personal affairs so public. Perhaps these publicized loans had unusual borrowers who signed waivers to allow such disclosures to be made to the press…. In small cities like Seaside, CA and Carmel, CA, it would be very easy to pin down who these borrowers are….
  
  I am not confident that a word of caution will be all that effective. Although not an attorney, your published stories seem to have the potential to result in problems for the industry.