Waiting for the surge in reverse mortgages
What happened to the integration of reverse mortgages into pension plans?
Retirement researchers have been push the idea for years, arguing that despite the high costs, financial planners should consider the benefits of reverse loans as a way to tap into home equity in retirement.
But lending activity remains stable. Home equity conversion mortgage (HECM) volume ended 2021 at 53,020 loans, an 18.7% increase from 2020, but still within the range where originations have rebounded since 2012, according to Reverse Market Insight. And the volume of loans is well below the record year of 2008, when 115,000 loans were issued.
From a market penetration perspective, HECMs are hardly a blow. “If you look at current lending measured against the number of eligible households, that equates to a penetration rate of just over 2%,” notes John Lunde, president of Reverse Market Insight.
HECMs are administered and regulated by the U.S. Department of Housing and Urban Development (HUD). The federal government has made several reforms over the past decade aimed at cracking down on predatory lending practices. Defaults had become a problem in the industry, especially when newspapers began to run stories about seniors losing their homes. Although the loans do not involve any payment, borrowers must keep their home insurance and property taxes up to date and maintain the property.
The changes reduced the total amount of loans available, increased fees and, most importantly, introduced a financial assessment required to ensure borrowers had the ability to meet their obligations and conditions under the HECM.
Almost all reverse mortgages are originated under the HECM program. Fixed rate and variable rate HECM loans are available, but fixed rate loans are unusual and require the borrower to draw down all authorized credit up front as a lump sum payment. Most often, a HECM is structured as a line of credit that can be used for any purpose.
Because distributions are loans, they are not included in adjusted gross income reported on tax returns, which means they do not trigger high-income health insurance premiums or income tax. social security benefits. Government insurance is provided by the Federal Housing Administration (FHA), which is part of HUD. This safety net provides essential assurances to both the borrower and the lender.
For the lender, the assurance is that the loans will be repaid even if the amount owed exceeds the proceeds from the sale of the home. The borrower receives the assurance that she will receive the promised funds, that the heirs will never owe more than the value of the house at the time they repay the HECM and the protections offered by strict government regulation of a financial product very complicated.
Reverse mortgages are only available to homeowners age 62 or older. As their name suggests, they are the opposite of a traditional “term” mortgage, where the borrower makes regular payments to the bank to pay off debt and increase equity. A reverse mortgage pays out the equity in the home in cash, with no payments due to the lender until he moves out, sells the property, or dies.
Repayment of the balance of a HECM loan can be deferred until the death, move or sale of the last borrower or non-borrowing spouse. When final repayment is due, title to the home belongs to family members or heirs; they can choose to keep the house by paying off the loan or refinance it with a conventional mortgage. If they sell the house, they keep any profit on the loan repayment amount. If the loan balance exceeds the value of the home, the heirs can simply hand over the keys to the lender and walk away.
Retirement researchers have been advocating the use of HECMs for some time now. More recently, Wade Pfau, professor of retirement income at the American College of Financial Services, explores the benefits in his new encyclopedic book, Retirement Planning Guide: Navigating Important Decisions for a Successful Retirement. In an interview, he argued that it is critical that advisors understand how revenues from a HECM can be incorporated into a plan.
“If you can either just lower your withdrawal rate a bit from your investments or avoid distributions after a market downturn, that has a huge positive impact on the subsequent value of the portfolio,” he said. “It really is the secret sauce of the reverse mortgage. You can’t look at the reverse mortgage in isolation, you need to consider its impact on the overall plan, and specifically on the investment portfolio.
And Pfau is seeing signs of interest, particularly among registered investment advisers. “I think there is, at least, more willingness to consider when they might have a role in a plan. So you will see more RIAs using them.
Steve Resch, vice president of retirement strategies at Finance of America Reverse, says it’s frustrating to see the volume of FHA products stuck in low gear. “In a fiduciary environment, you look at all kinds of things that might be suitable for a client. So how do you look at someone’s situation and think, “well, their home equity could work really well for them,” but not tell them about it?
But he sees growing interest from RIAs in using HECMs for a variety of retirement planning purposes. A challenge that many clients face as they approach retirement is the need to transfer a portion of assets from tax-deferred accounts to Roths to manage tax liabilities, which can be costly from a financial point of view. tax. “We see some advisors using lines of credit to fund these tax debts,” he says.
Resch is also seeing growing interest from advisors in proprietary reverse mortgages, which have higher loan limits. These are not part of the HECM program and are not federally insured, but they are also non-recourse. It’s a much smaller share of the overall market, but it’s growing faster, he says.
“The loan-to-value ratios aren’t as generous as you’d get with FHA products because those are insured, and here the lenders take all the risk. But these are still non-recourse loans, and the borrowers, or their families, are not responsible for any loan balance that exceeds the value of the property,” he adds.
Mark Miller is a journalist and author who writes about retirement and aging trends. He is a columnist for Reuters and also contributes to Morningstar and AARP magazine.