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NRMLA Issues Ethics Advisory on Planned Prepayment HECM Loans
It’s not often discussed or quite frankly on the radar of most reverse mortgage professionals, structuring HECM loans for higher initial payouts followed by an immediate pay-down.
It’s a tricky strategy that is unfortunately employed by a few reverse mortgage lenders or brokers, strategic prepayments following a large initial loan payout at closing. In its most egregious form, it works like this: Broker A is working with the Smiths who have a very low mortgage payoff or mandatory obligations. Approaching the loan closing date said broker encourages the Smiths to take a lump sum distribution up to the 60% first-year distribution limit keeping their upfront FHA insurance premium at one-half of a percent telling them they can repay the excess withdrawals in the first month to avoid the interest charges. Consequently, the broker benefits with a higher UPB or Unpaid Principal Balance which may increase his loan pricing or commission while the borrower is convinced they are unaffected. Isn’t this a win-win scenario?
If there’s one thing history has taught us it is that ethical guidelines are born from questionable business practices…
Download a transcript of this episode here.
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In an ideal world, the government and housing agencies would not have to protect people from themselves. The truth is that is not the world we live in, especially when it comes to reverse mortgage borrowers. A recent survey by the American College shows a widespread lack of financial literacy for both retirement and reverse mortgages with the vast majority of respondents receiving a failing score. It should come as no surprise that some senior homeowners who lacked basic knowledge of both are facing foreclosure today.
To use a political analogy, reverse mortgages are the anti-establishment candidate. Long viewed as a loan of last resort, criticized for high costs and maligned by many consumer groups as being fraught with pitfalls the new reverse mortgage continues to push against the financial establishment for its place at the table of retirement options.
Perhaps it is laughable to some to even consider hedging against falling home values. After all homes across the nation have appreciated nearly to their pre-housing crash levels. How quickly many homeowners forget the harsh lesson learned in 2009 that what comes up may come down. The truth is beyond being a source of cash flow or a retirement planning option, reverse mortgages can help older homeowners hedge against the risk of falling home values. Even worse, those who wait for their homes to appreciate could end up losing a substantial portion of their borrowing power when interest rates increase.
The new expanded definition of a fiduciary for financial advisers could expand the required discussion of assets to be considered in a comprehensive retirement strategy. Good news considering the fact that the baby boomer generation is largely unprepared for retirement. In 
It is a game-changer for financial professionals and possibly for reverse mortgage professionals alike. An expected change of the fiduciary rule by the Department of Labor will place many previously exempt financial professionals under the obligation to act in the best interest of their clients, presenting all possible and prudent options.
The Korean Financial Services Commission announced last month that they will introduce a new set of policies in the effort to spur reverse mortgage adoption to help the elderly prepare for retirement. Facing a rapidly expanding aging population and fewer prepared retirees the South Korean government has taken proactive steps to promote reverse mortgages while seeking to change the perception that the home is an asset to be passed on versus a pension product. The question is why doesn’t the U.S. government do the same?
Well known industry pundit and financial professional Wade Pfau addressed the tax complexities of reverse mortgages in his March 10th column in Forbe’s Retirement. First proceeds from a reverse mortgage are typically not counted as taxable income. A notable advantage for those seeking other sources of cash flow without incurring the typical tax burdens associated with withdrawals from retirement savings and investment accounts such as 401(k)s, IRAs and event annuities. Higher net worth individuals may employ such a strategy to avoid slipping into a higher tax bracket.
