TheMReport — News and strategies for the evolving mortgage marketplace.
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16 | M R EP O RT FEATURE ments, and you need to show that you've made your last two years of mortgage payments on time. However, the HECM is a non- recourse loan—which means that after the borrower passes away, if the home's value is less than the loan, no one can come after the borrower's estate for the differ- ence. However, most of the time, there is ample equity left due to normal home price apprecia- tion. In most cases—except for unusual downturns such as the one the market saw in 2008—the home's value increases faster than the negative amortizing interest on the reverse mortgage loan. In other words, there is usually more equity left at the end of the life of the loan than there was at the time the loan was originated. Let's Talk About Buckets I 've found a good way to talk about reverse mortgages is to picture the average homeowner as having three buckets of wealth: • Bucket #1: Income • Bucket #2: Nest Egg—sav- ings and investments, including a 401(k) or IRA • Bucket #3: Home equity Up until retirement, people take money from Bucket #1, their income, and place into Buckets #2 and #3. If they're good savers, most people are putting away as much as 10% or 20% of their income into Bucket #2. However, they place 30% to 40% of their income into Bucket #3, their home, and often they never consider that equity for cash flow again. When people retire and Bucket #1 decreases to only social security, and perhaps part- time income, they go to Bucket #2. They call their financial planner and start drawing out money for retirement, which is perfectly normal. If they're lucky, they'll have enough money for the rest of their lives. But given that people are living quite a bit longer these days, many will deplete Bucket #2 before they die. Recently, researchers have discovered something interesting. They found it can be better for people to pull money from Bucket #3—their home—as a loan of first resort, in the form of a reverse mortgage and continue to let Bucket #2 grow. For example, re- search compiled by Wade D. Pfau, Ph.D., a professor of retirement income at The American College, and published in The Journal of Financial Planning, found that incorporating a reverse mortgage line of credit can help borrowers increase their income longevity. By the time they truly need their retirement savings, they may have a higher net worth, more cash flow, and more money to eventually leave to their kids. In fact, Pfau's research found that heirs are likely to end up in a better financial situation if a reverse mortgage was taken out early in their parents' retirement. Understanding the Obstacles S o, why aren't more people taking out a reverse mortgage? Frankly, our industry has done a very poor job of tackling conver- sations about them. People are still afraid of getting reverse mortgages because they are afraid of losing their home. Others say they want to give their house to their kids— even though, more often than not, the kids don't want the house. Another barrier is fear. People are afraid of what they don't understand. They know what a 30-year fixed mortgage is, and they understand monthly mort- gage payments. When they think reverse mortgages, all they see is their loan balance going up. It's counter-intuitive, so it can be dif- ficult to comprehend. People don't understand that with a reverse mortgage, they can continue to make as many payments as they want or as little as they want—it's completely optional. Of course, there are some people who shouldn't get a reverse mortgage. For example, it's not a good idea if you can't afford to pay your property taxes. Other people have the wrong house to retire in—they have a two-story house that was great for raising kids, but the costs of keeping and maintaining it are too burden- some. Still other people aren't a good fit for reverse mortgages be- cause they are what I call "wast- ers"—they blow all their money. But the majority of homeowners over 62 would make great candi- dates for reverse mortgages—and it's in their best interest to get one even when they don't need to. The Time Is Now S omeday in the future, reverse mortgages are going to be a normal and prudent vehicle to help with retirement. To get there, it's going to take all of us to do things in a different way. It's about making sure everyone in our industry understands the benefits of reverse mortgages and when to recommend them. It's also about ensuring the partners we work with know it as well, including real estate partners, financial planners, and attor- neys. The equity that sits in the homes of seniors represents one of the largest asset classes in the country—over $8 trillion. Yet, unfortunately, misconceptions and the lack of knowledge about reverse mortgages are preventing people from accessing it. Tapping into that equity could drastically change the way retirement is planned for thousands of people. If you don't know what reverse mortgages are or how they work, now is the time to learn. Lenders should strongly consider creat- ing reverse mortgage divisions or partnering with companies that specialize in them. We have a long way to go to change the conversation. And with some people, including the media and financial advisors, con- tinuing to spread fear about re- verse mortgages, it won't be easy. The bottom line is if we don't do this, our children and grand- children are going to be in real trouble. The pending retirement crisis is going to affect everything and everyone, from the national economy to the long-term care in- dustry. We have another 20 to 30 years to change the conversation, but it can be done. As I see it, we really don't have a choice. . HARLAN ACCOLA is the National Reverse Mortgage Director at Fairway Independent Mortgage Corporation. He has been in the mortgage industry for over 20 years and has worked with all types of loans, but his specialty has always been working with the 62+ age group and reverse mortgages. Harlan has originated over 1,000 reverse mortgages and is the author of Home Equity and Reverse Mortgages: The Cinderella of the Baby Boomer Retirement. Accola may be reached at HarlanA@fairwaymc.com. If you don't know what reverse mortgages are or how they work, now is the time to learn.