House Rich, Cash Poor?

Meeting Seniors Financial Challenges

Many people look forward to retirement as a time of leisure, when they can finally relax and do what they wish: take a trip, play golf, or embrace a lifelong passion such as music or art.

But if they’re hurting for money, none of these dreams will be easily realized. A recent study from Banker’s Life & Casualty found 14 percent of Baby Boomers have no retirement savings, while 55 percent of middle-income Boomers’ retirement accounts have balances under $100,000. The good news: many of these soon-to-be-retirees have significant equity in their homes.

The evolution of the reverse mortgage industry can serve the new Baby Boom seniors, who may be bewildered to suddenly find themselves house rich, yet cash poor.

Here are three key elements of reverse mortgages, then and now:

  • 1961: The first reverse mortgage is created by a savings and loan executive as an act of kindness, to help a struggling widow make ends meet;
  • 1989: Reverse mortgages become a federally insured program through the Housing and Community Development Act, signed into law by President Reagan;
  • 2000: HUD begins requiring third-party reverse mortgage counseling as a consumer safeguard. Shortly thereafter, telephone counseling (in addition to in-person counseling) becomes available.

Today, with reverse mortgage information available through AARP and HUD, and backed by FHA insurance, reverse mortgages are a viable way for qualified seniors to tap their home’s equity to meet living expenses in later years.

Two common concerns you may also want to address at the outset:

  • A homeowner can’t “outlive” the life of the loan. As longevity spirals upward, this has become a frequent misperception. There is no reason for a client to fear losing their home with a reverse mortgage, as long as at least one borrower remains on the property, and pays the property taxes and insurance on time.
  • The reverse mortgage never has to be repaid by the aging homeowner, unless and until the property owner decides to move or sell, or vacates the home for more than one year.

5 comments

The_Critic October 18, 2011 at 9:21 am

Explaining this mortgage is tricky. It has terms and covenants that are not easily boiled down to two short reassuring paragraphs. There are reasons why your stated reassurances are just flat out wrong. Here are a few:

Your last bullet point is false. The loan is in default if the home is not the principal residence of at least one borrower in any twelve month period that means living in the home at least six months plus one day out of that twelve month period. The one year absence rule is an exception for health and mental care only.

As to your bullet point just above the last one, if the home is not being maintained as required, the loan can be called due and payable. Living in the home is not the only issue. At least one surviving borrower must remain a homeowner. In other words, there cannot be a sales leaseback with the expectation that the HECM will stay in place despite the fact the borrower still lives in the home. The truth is the note terminates on the 150th birthday of the youngest borrower.

Reply
Joe Peay October 18, 2011 at 10:33 am

It amazes me why ” the_critic” would bother to comment, because no substantive issues are brought to light that should deter a senior from obtaining a reverse mortgage. It is obvious the borrower has to be on title, not sale the home, and I don`t know of anyone who has lived long enough to challenge the 150 year term.

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The_Critic October 18, 2011 at 3:19 pm

Joe,

I have little problem with criticizing my own work. We can all get a rousing chuckle out of the age 150 for the next decade or more.

Now let us go to a comment you make: “It is obvious the borrower has to be on title, not sale the home….” Since when does the borrower have to be on title? There is no such requirement.

Borrowers can be lessees as long as the lease meets HUD requirements. It is perfectly permissible for a borrower to go from a homeowner to a lessee in a sales-leaseback agreement as long as it is approved by the servicer/lender or HUD (depending on the assignment issue) as meeting HUD property control requirements. The sale would not trigger the loss of the HECM; it is an improper (or unapproved) form of HUD sanctioned property control by at least one borrower thereafter which would. Just continued living in the home is not the correct standard but it is the one promoted in the article above.

But you fail to cover the first and most critical point which I called false which is that the one year rule controls the term “principal residence.” Tom Kelly not long ago wrote an article in which he described how a borrower got a HECM and used the proceeds in part to finish paying off timeshares which the borrower had acquired over many years. The remaining proceeds would be used to travel to the various timeshare properties. The couple had planned it so that 7 (not including travel time) out of every 12 months over the following ten years they would be enjoying life in their timeshares. BUT their plans would result in the collateral on the HECM qualifying as a principal home but would not meet the required standard of being the principal residence of at least one of the borrowers thus resulting in default on the HECM. The one year rule is an exception to the principal residence mandate and can only be utilized if the reason for the absence is required residence in a health or mental facility.

Our trade association magazine promoted the following example of how seniors were enjoying their proceeds in one whole magazine issue dedicated to that subject. A single woman (the sole HECM borrower) had started her education in jolly ol’ England decades before. She was using her HECM proceeds to return to England and live there for 18 of the next 24 months so that she could finish her degree. In this situation, the home might not even be a principal home let alone the required principal residence.

So it seems not only did Tom Kelly, a very pro HECM newspaper columnist offer a poor illustration but so did the industry trade association magazine. Both failed to recognize the violation of the principal residence rule before publishing the story. Then along comes the article above followed by your comment. It seems this issue needs to be pounded home since so many ignore it.

You also failed to remark about the maintenance issue. Yet it is one of the very reasons why HUD lowered the PLFs for older seniors across the board on the PLF tables which went into effect on 10/4/2010. That is becoming an issue HUD is more concerned about than ever before.

Perhaps rather than the barb of “It amazes me why ” the_critic” would bother to comment” it should have read “it amazes me why I, Joe Peay, would bother….” Even The_Critic could get a little chuckle out of that.

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CLIFF RIDDLE October 18, 2011 at 2:54 pm

when are we going to get together and push for age 59 or 60 for a R, M, canada is at age 55 what the hell is the matter with us????? of course it would only free up about a million jobs that just maybe somebody can use??? cliff riddle

Reply
The_Cynic October 19, 2011 at 1:34 pm

Cliff,

Hell is one region I have tried to stay away from. What source are you citing for the million jobs?

World Alliance Financial Corp (formerly known as Vertical Lend, Inc.) tried it once and it failed.

If you are proposing that the HECM qualifying age be lowered, your evidence on 1,000,000 jobs had better be much stronger than your opinion or a hunch. While the PLFs for that group may not quite reach the region you spoke of, it nevertheless could be very unattractive to the group you want to reach. Can you cite exactly what HUD believes the PLFs for the ages you propose to cover would look like?

Other than getting everyone to agree with your position, the second biggest need is to provide the verified information which makes the idea have the prospect for success. Wishing you the best of luck getting the verified information together.

Reply

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