The Perfect Storm

long-term care insurance crisis retirement reverse mortgage



The Perfect Storm: Long Term Care premiums skyrocket while fewer qualify

Long-term-care premiums are skyrocketing and many who apply are turned down. Where can older Americans turn to secure their future?

“Right now, if you’re in your mid-50s and healthy, a typical individual long-term care policy would cost around $3,000 a year. Even without premium increases, that would be close to $100,000 over 30 years”. Those are the words of columnist Howard Gold in his September 16th MarketWatch column.

Countless middle-aged workers decided to protect their financial future against costly long-term care in their elder years by purchasing a long-term care insurance policy. A move many financial advisors actively encouraged. Today these policyholders are seeing huge premium increases as payouts for care increased and individuals kept the policies longer than anticipated. Some of the 8 million-plus Americans who have such a policy are facing a financial Sofie’s Choice having to absorb the cost of continued premium hikes or cancel their policies losing the future benefit that years of payments were to secure- all at a significant financial loss. Those wishing to apply for coverage will find getting approved more difficult. “According to the American Association for Long-Term Care Insurance, 44% to 51.5% of people over 70 who apply for a long-term care policy are declined by insurers”, writes Gold. The percentage of those declined coverage drops to about 20% for those in their 50’s. [read more]

 

Outside of purchasing a life insurance policy or annuity with a long-term care rider, those seeking coverage will have to tap into existing assets such as cash savings or investments. Where else can one turn to find the means to pay for future care in old age should they need it? Homeowners 60 and older could tap into what is likely their largest financial assets- their home’s value with a federally-insured HECM or proprietary reverse mortgage. In his recent interview with Reverse Mortgage Daily, Lance Canada recounted, “I encountered many seniors who wanted to purchase LTC policies but could not afford them. So, I started to research if there was a product that could help senior homeowners to be able to afford the kinds of LTC products that they wanted. This is what led me to the reverse mortgage product.”

We reached out to Lance for further comment. He shared the following. “1 out of 2 people will need LTC. Unfortunately, many folks ‘under-save’, yet I never ran into anybody who didn’t want long-term care coverage because many had friends who went through their money trying to take care of long-term care expenses. The safest approach is to ask ‘what other financial planning have you done to prepare for aging in place?’ If they express a concern you can refer them to your trusted long-term care specialist.”

So what can be done? Older homeowners could certainly use the proceeds from their reverse mortgage to finance a robust long-term care policy, however, they risk facing increasing premiums. Another option would be to partially ‘self-insure’ utilizing proceeds from the loan. In this scenario, the homeowner would set up an open ‘line of credit’ or leave all available funds in the remaining

Such a strategy requires considerable financial discipline from the borrower to avoid the temptation of taking withdrawals for other wants and needs. However, the fiscally-conservative borrower could set aside a portion of their previous mortgage payment into a separate interest-bearing account while the available credit line continues to grow until long term care and medical expenses are to be met.  The pros are no expensive premium payments are required that further strain monthly cash flow and no underwriting is required.  The cons are that reverse mortgages consume a portion of the home’s equity each month as the loan balance grows and long term care expenses could exceed the funds available in the line of credit. Either way, many find themselves in a proverbial catch-22 to finance long-term care who could utilize a reverse mortgage to soften the financial shock of future care.

Read the Market Watch column  [/read]

Are Google Ads Dead?



Without audience targeting are Google Ads Dead? Think again…

Early this month Google announced new restrictions for targeting specific audiences. The restrictions apply to content related to housing, employment, credit, and those who are disproportionately affected by societal biases. The news of these restrictions created quite a stir among industry brokers and lenders who heavily rely upon targeted Google ad campaigns.  All which may have you asking if these changes will kill future reverse mortgage advertising on the world’s most popular search engine. In just a moment we’ll hear from our online SEO expert Josh Johnson to find out.

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Google’s restrictions are not necessarily novel nor unexpected. It was just over two years ago Facebook faced scrutiny from federal regulators for allowing those offering credit or housing finance to restrict ad audiences by race or religion among other questionable metrics that would violate HUD’s fair housing rules. An investigation by ProPublica broke this news in October 2016. It was nearly two years later in August 2018 that HUD filed a formal complaint against the social media giant for discriminatory advertising practices. Seven months after HUD’s complaint Facebook announced sweeping changes. Both Facebook and later Google, took a blunt approach much to the chagrin of lenders and service providers.

What ad filters are going away? In its official release Google revealed, “credit products or services can no longer be targeted to audiences based on gender, age, parental status, marital status, or ZIP code.”

Is this the end of Google ads for reverse mortgages? To answer that question I reached out to Josh Johnson who heads up Reverse Focus’ Online Dominance SEO program and Google marketing. Here’s his explanation.

Here’s what makes Google unique from other platforms and why reverse mortgage Google ads will continue to reach the intended audience.

To summarize, older homeowners are intentionally seeking out reverse mortgage information on Google which means, yes-your ads will be seen by your target audience, even though you can no longer target specific age groups.

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What you need to know about RM HMDA data



5 Take-aways from the CFPB’s recent HMDA report

The CFPB’s or Consumer Financial Protection Bureau’s most recent release of data from the 2019 Home Mortgage Disclosure Act or HMDA submissions is both enlightening and perplexing. If you’re unfamiliar with the Home Mortgage Disclosure Act it was created in 1975 to gather loan-level data from lending institutions to ensure lenders are serving the housing finance needs of their communities. Late last month the watchdog agency released its updated review including new data points that were captured in HMDA data collected in the calendar year 2019. With reverse mortgages being a niche of the larger mortgage market much of the data is focused on traditional mortgage lending. However, the reported reverse mortgage data provides insight into our market’s demographics, applicant’s financial health, and more. [read more]

Before we dive in keep these two things in mind as we proceed. First, the report counts applications, endorsements. Second, the data is reported for the 2019 calendar year. This makes any comparisons to the 2019 fiscal year data somewhat problematic.  Second terminology: the mean value is the sum of a set of numbers divided by the number of numbers. For example, the mean value of 10 entries of numerical entries totaling 100 is ten. A median number is stuck in the middle of a long data set. Think of it as the middle value.

Let’s begin our review of the HMDA data with demographics. Nationally 74% percent of all reported reverse mortgage applications were for non-Hispanic white applicants, 7.2% for black applicants, 4.4% for Hispanic whites, 1.7% for Asians, and approximately 10% were missing an ethnicity on the application or listed ‘other’.  Of course, the distribution of different races differs widely based on location.


Net, some have long argued that reverse mortgages are a loan of last resort for the house-rich and cash-poor. HMDA data would appear to conflict with such an assumption showing 37% of all reverse mortgages are originated in high-income neighborhoods. Middle-income neighborhoods account for 44% of all applications, while low or moderate areas only account for 18.7% of all reverse mortgage loan activity. With 80% of reverse mortgage applications coming from middle & higher-income neighborhoods, perhaps it’s time to put the ‘loan of last resort’ myth to rest.

However, we cannot overlook the remarkable difference in the median or middle incomes of a traditional HELOC and reverse mortgage applicants.  For example, the median income of HELOC applicants is $107,000 versus a modest $28,000 for reverse mortgage applicants. The report adds “which are the lowest among borrowers of all enhanced loan types, perhaps reflecting the unique design of reverse mortgages to help income-constrained seniors convert home equity into cash income”.  The percentage of reverse mortgages that are fixed versus adjustable is somewhat skewed when compared to recent CFPB reports on reverse mortgage lending. The report states that 2019 data shows 48% of all reverse mortgages were fixed-rate loans. Contrast that with HUD’s 2019 report to Congress on FHA’s insurance fund which reveals 94% of all endorsements were adjustable-rate HECM loans. This disparity would seem to indicate either reporting errors or challenges in how the data is submitted.

And while the financial assessment has been worrisome for some originators the average or mean credit score of 749 would seem to indicate most reverse applicants have a strong history of on-time payments and few delinquent accounts. But there’s one big caveat…of the 32,000 plus reported loans, only 2,100 reported a credit score in the HMDA data. A small sample size representing 6% of all applications.  More complete data would be quite illuminating.

Next are interest rates. Critics continue to decry reverse mortgage loans as exorbitantly expensive, however, the median interest rate charged in 2019 was 4.48%. As the reported median traditional Home Equity Line of Credit loan interest rate is 5.34% a Home Equity Conversion Mortgage’s line of credit is a legitimate competitor to HELOCs, if not a better choice when payment terms are considered.

In conclusion, how can you benefit from this data? Perhaps you’re edified being more informed of the unique borrower profiles, incomes, and loan types being chosen in the marketplace today. All of the information you put into a 1003 uniform residential loan application goes far far beyond your processor and underwriters. What are your thoughts on this data? Leave your thoughts in the comment section below.

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Home Values? 4 Factors to Watch



These are the 4 factors that will change home values this year

1. DEMOGRAPHICS–

Demographics are the data that describes the composition of a population, such as age, race, gender, income, migration patterns, and population growth. These statistics are an often overlooked but significant factor that affects how real estate is priced and what types of properties are in demand

Urban flight in the wake of COVID-19 lockdowns, closed businesses, widespread civil unrest, riots, and increasing tax burdens in our largest cities. For example, since July 2019 rents are down 10% in Manhattan as former downtown residents move to the surrounding boroughs, to the suburbs,  or out of the state.

 

2. INTEREST RATES-

Today’s average interest rate on an adjustable-rate HECM range from… [read more]

…2.9% to 3.5% depending on the margins offered by the lender. For a 72-year-old man with a $350,000 home, a 3.125% rate would give him a gross principal limit (that’s the funds available before liens, fees, and set-asides) of $202,300… Before the pandemic and central banks slashing rates that the same individual would only qualify for $180,000 with a 4.125% interest rate. That’s a 12 percent reduction in loan proceeds.

Last Thursday Federal Reserve Chairman Jerome Powell announced a policy shift saying the Fed will focus on ‘average inflation targeting’. in essence, this means the prior target of 2% inflation which would typically trigger a rate hike is being abandoned for a higher inflationary tolerance. This means interest rates are expected to remain low for the foreseeable future- the Dow Jones spiked up 300 points in the hours following this announcement.

3. ECONOMIC PERFORMANCE & OUTLOOK. The US. GDP dropped by over 30% in response to the nationwide shutdown to slow the spread of the coronavirus.  The GDP is not expected to dramatically improve as today marks Day 168 from the original 15 Days to Slow the Spread which was enacted on March 16th.

4. GOVERNMENT INTERVENTION.  Tax credits- stimulus measures. Unemployment may rise when some employers find that some if not all of their forgivable Paycheck Protection Program monies received may be taxable. After 20 interim rule changes to the CARES Act, it’s quite apparent the program is literally evolving before our eyes. The IRS took that position in Notice 2020-32, stating that expenses otherwise deductible in a borrower’s trade or business are not deductible if they result in loan forgiveness under a PPP loan. This could lead to further layoffs for cash-strapped employers who took a PPP loan.

All which leads us to the conclusion that at this very moment, despite the pandemic and economic uncertainty, we are in an ideal lending environment to qualify the greatest possible number of potential homeowners for a reverse mortgage.

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Pairing an Annuity with a Reverse Mortgage

reverse mortgage news



Annuities & Reverse Mortgages:
The Good, the Bad and the Ugly

Annuities and reverse mortgages don’t go together! If you’re a seasoned reverse mortgage professional- that concept has been chiseled into your mind like the 10 commandments Moses carried down from Mt. Sinai. After all, we’ve been warned against what regulators call cross-selling. That’s where a commission-motivated insurance agent invests a reverse mortgage borrower’s loan proceeds into an annuity contract. This practice is strictly verboten and in fact, is directly spelled out in the 2008 HERA (Housing & Economic Recovery Act) legislation which prohibits a lender from requiring a borrower to purchase an annuity as a condition of obtaining the loan.

Jack Guttentag, also known as The Mortgage Professor turns the conventional wisdom of annuities and reverse mortgages on its head in his recent column “Why Annuities Are Underutilized (And What Could Be Done About It)”. He argues that annuities should be part of most retiree’s financial plans yet those who stand to benefit the most rarely use them. [read more]

For those of you unfamiliar with annuities, they are basically a contract between the policyholder and insurance company. Generally, there are two types: deferred annuities in which interest earnings or credits compound over time and single-premium immediate annuities which pay the policyholder a series of regular payments for a specified period of time. If an immediate annuity sounds a lot like a Home Equity Conversion Mortgage’s tenure payments, you’re not wrong as tenure payments are annuitized (paid out) based on the borrower’s age and life expectancy. The older you are the higher the payout of a HECM tenure payment plan or an immediate annuity for that matter.

Guttentag promotes what I would call a split annuity concept. Instead of the borrower simply converting their loan proceeds into a HECM tenure payment a portion of the HECM’s line of credit (or principal limit) would be used to purchase a deferred annuity. The homeowner would take regular distributions from their available line of credit to meet their monthly cash flow needs while the deferred annuity continues to grow in value. This, Guttentag argues, provides significantly more funds over simple fixed tenure payments alone.

This example shows the projected payouts of a tenure-only and combination plan based on the best and worst quotes Guttentag received from competing HECM lenders. While the specifics of his hybrid payout plan structure are not spelled out they appear to be strikingly similar to a strategy many insurance agents called an annuity ladder plan. One example entails taking a portion of funds to purchase a 5-year deferred annuity that locks up the premium paid during that time while earning a more competitive interest rate and then funding an immediate annuity that pays out for a period-certain term of 5 years. At the end of the five-year payout from the immediate annuity, the deferred annuity would be annuitized into monthly lifetime payments boosted by the accrued interest earned and the policyholder’s age providing a higher monthly payout. The options and variety of annuity ladder plans are too numerous to discuss today, but suffice it to say they all have the goal of increasing interest earnings that outpace inflation while boosting monthly payouts.

Any purchase of an annuity in essence shifts more risk onto the shoulders of FHA as the borrower would be taking a partial lump-sum payment. One could argue since the funds are separated the borrower benefits no longer have the risk of discontinued payments should they violate the terms or the loan or cease to occupy the property. However there are significant challenges remain such as HUD’s opposition to using HECM funds to purchase an annuity, the acceleration of the HECM’s loan balance due to large distributions of loan proceeds, and insurance companies that typically do not accept premium payments that come from home equity.

In conclusion, while industry professionals continue to steer clear from the complications and risks that annuities entail, Guttentag maintains that there are in fact tangible benefits to an ethical, regulated, and well thought out plan that incorporates an annuity into the structuring of a reverse mortgage loan. If there’s one take away we can apply today it is this. How a reverse mortgage is structured is just as important as the proceeds of the loan itself.

Jack Guttentag's recent column in Forbes addresses the taboo subject of combining annuities with a reverse mortgage
Jack Guttentag’s recent column in Forbes addresses the taboo subject of combining annuities with a reverse mortgage
An annuity is a contract between a policy holder and an insurance company. The policy holder invests a sum of money in return for future earnings and/or withdrawals.
An annuity is a contract between a policyholder and an insurance company. The policy holder invests a sum of money in return for future earnings and/or withdrawals.
A split strategy would have the borrower taking withdrawals from their HECM line of credit and investing the rest into a deferred annuity.
A split strategy would have the borrower taking withdrawals from their HECM line of credit and investing the rest into a deferred annuity.

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Involuntary Retirement

reverse mortgage news



Older workers face ‘involuntary retirement’.
Are we reaching these homeowners?

  • In January 2020 the unemployment rate for those 55 and older was 2.6% [MarketWatch]
  • By April 2020 the unemployment rate spiked to 13.6% for those 55 and older [MarketWatch]
  • After the last recession (2008) those between the ages of 51-60 waited for an average of 9 months before finding new employment while those 25-34 were working within 6 months. [Urban Institute]

Many older Americans are still working, or at least recently were. Either way, they must meet their daily living expenses. This demographic while not completely forgotten is rarely mentioned. Even on this show I typically say a reverse mortgage may help those in their non-working years or retirees. However, a recent column caught my attention.

“Dear Liz”, writes one reader to LA Times columnist Liz Weston, “I read with interest the letter from the person who was a tour guide and lost their job due to the virus. I kept reading, expecting you to suggest a reverse mortgage. Are these a bad idea?”.  Weston replies, “not necessarily” and then goes on to explain if there’s sufficient equity in the home a reverse mortgage could pay off the existing mortgage and “might be worth the effort”. In May MarketWatch noted Americans 55 and older have been clobbered by the coronavirus’ economic fallout…

[read more]In January of this year, MarketWatch notes the unemployment rate for those 55 and older was 2.6%. By April that unemployment number jumped to 13.6%. While our youngest workers have a higher rate of unemployment, older unemployed workers face unique challenges. The Urban Institute found that after the last recession of 2008 those between the ages of 51-60 waited an average of 9 months to find a new job while those 25-34 were working again within 6 months.  Age discrimination is easier to recognize on the job but is much more subtle during the hiring process. All which leads us to the undeniable fact that millions of older homeowners are facing a forced retirement and financial crisis. 

The good is many may find their solution literally right above their heads and in the walls that surround them. Where unemployment benefits and a loss of income create a cashflow crisis reverse mortgages will increasingly become the logical solution.

So let’s step back for a moment and consider our marketing. What is our message? Are we using the term retiree repeatedly? Do our mailers, emails, and online ads ASSUME that the homeowner is retired? It may be time to tweak our approach to appeal to the unemployed worker over the age of 62 who owns a home.  So, practically how could YOU reach this target audience? One possible approach is to host workshops on the subject of ‘INVOLUNTARY RETIREMENT’ -for older workers who were laid off. These sessions could include short presentations from key senior service providers or experts and of course feature how homeowners may leverage their home to replace lost income with a reverse mortgage’s loan proceeds. CPAs and financial advisors may want to begin to inquire about their client’s employment status which may have changed as a result of the pandemic. Another tactic is to reach out to your local television and radio stations to pitch an interview on the impacts of unemployment for older residents and realistic solutions.

On August 6th PlanSponsor-dot-com wrote that The New School’s Retirement Equity Lab expects another 1.1 million older workers will leave the labor force in the next three months. The need to fund retirement is ever-present but the more immediate and pressing challenge of INVOLUNTARY RETIREMENT or unemployment of older Americans should spur our specific and strategic efforts. In summary, the solution remains the same while our approach should evolve to adapt to the specific pitfalls our present economy presents.

many older Americans have been laid off facing an 'involuntary retirement'
many older Americans have been laid off facing an ‘involuntary retirement’
Many investment and reverse mortgage ads focus on the affluent retiree. The truth is many are struggling, especially those who've lost their jobs.
Many investment and reverse mortgage ads focus on the affluent retiree. The truth is many are struggling, especially those who’ve lost their jobs.
One LA Times columnist sees potential value in a reverse mortgage, especially for those who have been laid off.
One LA Times columnist sees potential value in a reverse mortgage, especially for those who have been laid off.
MarketWatch noted Americans 55 and older have been clobbered by the coronavirus’ economic fallout. In January of this year MarketWatch notes the unemployment rate for those 55 and older was 2.6%. By April that unemployment number jumped to 13.6%.
MarketWatch noted Americans 55 and older have been clobbered by the coronavirus’ economic fallout. In January of this year MarketWatch notes the unemployment rate for those 55 and older was 2.6%. By April that unemployment number jumped to 13.6%.

The good is many older homeowners may find their solution literally right above their heads and in the walls that surround them. Where unemployment benefits and a loss of income create a cashflow crisis reverse mortgages may increasingly become the logical solution
The good is many older homeowners may find their solution literally right above their heads and in the walls that surround them. Where unemployment benefits and a loss of income create a cashflow crisis reverse mortgages may increasingly become the logical solution

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Listen to this episode here:

What comes AFTER the Coronavirus?

life after coronavirus covid-19 economy stagflation



A look at our industry’s growth and the potential economic repercussions of the COVID-19 pandemic

Sheltering in place took on a new meaning for HECM lenders in the first weeks of the coronavirus pandemic. Not only did employees and originators shelter at home, but many also hunkered down slowing their loan production as loan profitability collapsed in the secondary markets.

So what may we expect after the coronavirus or COVID-19 crisis is behind us? Our first indicators may be found in the proverbial eye of the storm that lies between the control of the virus’ spread and the anticipated long-term economic fallout in the decade that follows.

Today we examine 3 possible outcomes:

  • Fewer property tax deferral programs for seniors
  • Economic stagflation
  • Technological innovation and adaptation

New Jersey Governor Phil Murphy’s plan would ax property tax aid for seniors

 

Wealth disparity and home equity



Wealth inequality, economic chaos & the role of home equity

Wealth and income inequality. Pulling back from the distasteful political debates that continue to rage on about the haves and have nots it is a clear and present reality. The Pew Research Center made these startling findings. “The wealth gap between upper-income and lower- and middle-income families has grown wider this century. Upper-income families were the only income tier able to build on their wealth from 2001 to 2016, adding 33% at the median.” Why such a disparity? Good question. “The reason for this is that middle-income families are more dependent on home equity as a source of wealth than upper-income families.” With home equity playing a crucial role for middle-income Americans reverse mortgages and equity-extraction loans will become even more essential.

Pew Research Center Paper

CNBC: 2nd Quarter GDP Plunged 32.9%

Here’s what’s wrong with retirement planning



Where traditional retirement planning falls short

It’s easy to cast stones but to be fair retirement planning while common is perhaps one of the most challenging services provided by financial professionals. Here’s what two experts have to say…

The One Question You Should Always Ask



The 1 question Tom O’Donoghue asks on every single sales appointment

A silver bullet? More like a golden one. Here’s the one question Tom asks on every appointment that you should ask as well…