The Three Horsemen of the Retirement Apocalypse

[ad#Network Funding]

The Three Pillars of Retirement are Crumbling

[vimeo id=”76712566″ width=”625″ height=”352″]

Reverse Mortagage News

The Three Horsemen of the Retirement Apocalypse. It’s no secret. The retirement system in America is broken. The financial shortcomings of individuals have and will become OUR collective problem…Taxpayers will find themselves paying more and working longer already. The question is how to stop the bleeding. Barbara Novice, vice chairman of the asset manager BlackRock painted a dire picture in the firms latest retirement report. So just who are the three horseman of the retirement apocalypse? Social Security, Employer-Sponsored savings plans and personal savings…

6 comments

James E. Veale, CPA, MBT October 14, 2013 at 9:19 am

Why was the home ignored? Not every retiree who has a 401(k) account, personal savings, and/or Social Security retirement benefits is a homeowner. Also note that no new reforms on personal savings were proposed.

The reforms listed are typical for a less traditional Democratic Administration. Forced 401(k) employee contributions are nonsense. Here we have a shift further away from a solely employer contribution system embodied in defined benefit and defined contribution plans to a solely employee contribution system. Solely employer contributions were created because of employer consciousness in the 40s, 50s and 60s that employers had a social responsibility to their employees to provide retirement benefits. 401(k) accounts are not plans but rather addendum to either defined benefit or defined contribution retirement plans so that employees could voluntarily save more than employers provided, not so that employers could provide less. The real question should be where is that sense of social responsibility to employees today?

As a partner in a CPA firm with union clerical staff, we saw our younger staff become more and more dissatisfied with their benefits. In a number of cases our raises exceeded union requirements. Our clients were unions and their collectively bargained employee benefit plans. So when our clerical staff came to us and told us that they demanded less benefits and more pay, we told them they had to go to the union first. Upon returning to us they pleaded that the union would not allow them to negotiate their benefits down for more more pay. We told them that our hands were tied. Among the choices the union told them they had was decertification. They chose to decertify even though we would have liked a different result but in the end, they got exactly what they had demanded.

By the time of union decertification, we had had a 401(k) plan for some time but participation was marginal until we opened up the profit sharing side of the plan and began making matching contributions along with employer contributions for all eligible employees and employee participation swelled. Perhaps instead of minimal mandatory employee contributions alone in the suggestions presented by Mr. Hicks, there should be mandatory employer contributions as well. Of course as the cost of retirement benefits goes up, expect employers to drop other benefits which a less traditional Democratic Administration might find as difficult to swallow. The political damage might “simply be too hard for them to bear.”

When it comes to HECMs, we need to get over the marketing nonsense about using the equity in the home. It is using the entire home as collateral on a mortgage. A HECM is not a home equity mortgage!! Yes, the name has home equity in it but that is because of the concept of equity conversion embodied in shared appreciation rights which are no longer offered as part of a HECM. A HECM must be both a first and second mortgage and cannot be placed behind any debt which would have a higher priority in foreclosure which is not true with home equity mortgages. Until we see HECMs as mortgages instead of some form of equity release, our ideas sound rather illogical, irrational, flimflam, and feeble. When a senior gets a HECM they are not releasing equity but are simply using their home as collateral for debt known as a mortgage.

Reply
Jerry Hanley October 15, 2013 at 6:11 am

Shannon, good video, per usual.

James, you make some good points, but what would you call a HECM? Just mortgage? How would you market the product? What handle would you give it? Isn’t a HECM LOC similar to a HELOC, on steroids? Don’t you only payback what you use, which isn’t always using all the value? Are you suggesting every time a HECM is closed the borrower is kissing all of their equity bye? The latest mods to HECM lend even less of the equity than before. You lost me!

Reply
James E. Veale, CPA, MBT October 16, 2013 at 11:29 am

Mr. Hanley,

No, a HECM is not a HELOC on steroids. What mortgage can have a priority higher than a HECM at funding? The correct answer is NONE. But a HELOC is not restricted by existing mortgages; existing mortgages do not necessarily have to be paid off with a HELOC as they do with a HECM. That is because a HELOC can be a true home equity loan.

What makes you think that the entire home is not at risk with a HECM? Even if the borrower only takes 40% of the principal limit, the balance due at payoff could equal or exceed the value of the home at that time.

When a person takes a HECM, it is the whole value of the home which is at risk, not just “the equity.” With a HELOC, it is the equity after any other mortgages with a higher priority is at risk if it is nonrecourse.

You seem to view equity as static but it changes very day with a HECM. It can go up or down depending on how the value increases or decreases and how fast the balance due on the HECM is growing. This is basic HECM 101 so if I lost you then I recommend you go to someone who understands basic mortgage principles including HECMs.

As I always tell seniors, a HECM is first and foremost a nonrecourse home mortgage with some unusual and very favorable features just for seniors. So, yes, in the world of finance a HECM is a mortgage.

And, by the way, a HECM borrower does “not only payback what you use;” there is also accrued interest and MIP to be paid but at all times, the whole home is at risk until final settlement at the time of payoff. The nonrecourse aspect of a HECM means that only the home is at risk and no other assets but the home is always at risk as long as the HECM has not been paid off to the extent required on its standard nonrecourse provision.

Reply
Clyde October 17, 2013 at 7:09 am

I love how you literally took one sentence out of Mr Hanley’s whole paragraph and misconstrued what he was saying. Then you proceed to elaborate on it.

A HECM is a hybrid of all mortgage products. The HECM product most closely resembles the Home Equity product, which is why it falls under a Home Equities Umbrella.

In order to obtain a HECM, you need to have paid a considerable amount of your mortgage down (Equity). This equity is then used to fund your HECM product which is typically a line of credit or monthly payments.

Reply
James E. Veale, CPA, MBT October 18, 2013 at 4:11 pm

Clyde,

Your explanation makes no sense.

Equity does not fund a HECM; lender cash resources fund HECMs with the secondary market ultimately funding most HECMs. This is a loan secured by the full value of the home. The home is simply the sole collateral for a HECM. That is simple Mortgage 101. Reverse mortgage marketing on using equity to fund a HECM is one of the most strained and nonsensical explanations ever used in the mortgage industry.

HECMs are not home equity mortgages since all of the value of the home must be at risk at all times with a HECM. The same is not true with actual home equity loans which can be secured by the equity in the home after all other liens with a higher priority in foreclosure. With true home equity mortgages all of the prior liens can stay in place which is just the opposite of a HECM which requires that either be paid off or be subordinated to the HECM.

A HECM is not a hybrid. It is a unique mortgage designed solely for those over 62 years old. It is also insured by FHA. I know of no other mortgages other than reverse mortgages which do not require periodic partial repayments. What other mortgage including proprietary reverse mortgages have ever allowed the line of credit to grow? Putting just these four concepts [ 1) over those 62 and older qualify, 2) FHA insured, 3) no required periodic partial repayments of interest, principal, or FHA MIP, and 4) a possible growing line of credit) together makes a HECM,unique in all mortgage lending, not some kind of hybrid of all mortgage products.

The term “Home Equity Conversion Mortgage” is composed of two concepts, a home mortgage and equity conversion. The equity conversion of a HECM is related to the original concept of allowing seniors to sell a portion of their appreciation as part of this mortgage. Because of the problems with measuring appreciation and other issues, no lender offers this feature with a HECM today. You can read about shared appreciation rights in HUD HECM Handbook 4235.1.

As a real estate broker who has taken several courses in real estate financing and has been involved in the mortgage industry in form or another since the late 1970s, I advise you to take a basic college course in residential financing.

Reply
The_Cynic October 18, 2013 at 4:21 pm

Clyde,

I do not know where you have been but the typical HECM in the last four years has been a required full lump sum payout mortgage. It has only been April of this year that the picture has changed. With the changes we just experienced it could be HECMs could now return to a required single lump sum payout mortgage. No one is really sure how much seniors will value cash in the future versus getting a fixed rate product. Time will tell.

Reply

Leave a Comment

HECMWorld.com uses cookies to improve user-experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Cookies View Policy

DON'T MISS OUT!
Subscribe To Our Newsletter
Be the first to get latest Reverse Industry updates and exclusive HECMWorld.com content straight to your email inbox.
Your information will never be shared.
close-link