NewRetirement Retirement News Digest : About Reverse Mortgages

4 ways to face a cash-strapped retirement

jberman — Sat, 21 Nov 2009 10:30:00 GMT

Bankrate, November 20th, 2009

Dear Debt Adviser,
Help, I'm about $30,000 in debt. I have about $50,000 in my retirement. I will be 59½ years old in January. I had to go on disability from a fall at work. My house is paid for. Should I just take money out and pay off my loan? Could I just hire someone to (advise me)? I don't know what to do and am at my wits' end. I am not behind on any bills.

Dear Doris,
You worry me. You are nearly 60, have saved little and spent much. Now you are out of work and ask me if you should hire someone? My suggestion is that you get rehired as soon as possible and develop a plan for building up your savings, paying down your debts and preparing for retirement.

Before you say, "I don't plan to retire for a long time," consider that many people end up having to retire before they plan to due to illness, injury or job loss. You may be late getting started on a financial plan, but I suggest that you put one together now before it's too late!

Let's start with these four major moves:

Begin by setting some realistic goals, such as when you want to retire and how much you will need to do it.
Put together a budget that will allow you to save the money needed to meet your goals and begin to pay down your debt.
Find a financial planner to do some serious retirement planning.
Consider how you can use the equity in your home for debt repayment and retirement planning.

You can get help with all of these tasks and it shouldn't cost you anything. A credit counselor can help you with goal-setting and budgeting, a financial planner should do a review of your finances and make suggestions and a local banker can help you understand what options you have for tapping the equity in your home.

As you are only three years away from 62, I especially want you to look into how a reverse mortgage might fit into your plans. Simply put, a reverse mortgage provides a monthly payment to you that extends your income while you stay in your home. Most reverse mortgages require you to be at least 62 years old.

You asked if you should use your retirement money to pay off your debt. I don't recommend that you tap into your retirement money at this point. If your disability is permanent, then you need to rebalance your budget to assure that your monthly expenses can be met with your disability income. Should your disability not be permanent, the sooner you can get back to full salary, the better.

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Ask the Experts: Do your homework on reverse mortgages

jberman — Thu, 29 Oct 2009 01:35:00 GMT

Sacremento Bee, October 28th, 2009

Our three new "Ask the Experts" writers have been busily answering financial questions this month from online readers.

Here's a sample of their advice on personal finance, wills/estates and investing.

To see more questions or to get advice from our other financial experts on taxes, banking and investment clubs, go to: www.sacbee.com/ask.

Pamela Christensen, Certified financial planner

I expect to retire in about four years and will have a small Sacramento County retirement. We also have about $150,000 in CDs to live on. My parents got a reverse mortgage a couple years ago for the extra cash to live on and to have no mortgage payment. It seems to be working for them and we are considering it as well. Is this type of mortgage safe?

As with most financial planning, these issues are very individual. I like reverse mortgages in some situations, although it's always wise to get lots of counsel on your particular circumstances and the ramifications. For instance, do you have heirs in line to inherit your house? Do they want or need it? How much equity do you have in the home?

Do your homework and learn as much as you can. Start by going to the federal Department of Housing and Urban Development Web site (www.hud.gov) and search for "Reverse Mortgages." There's also information on the state Department of Real Estate Web site (www.dre. ca.gov). Click on "Consumers", then "Home Buyers/Borrowers," then "DRE Publications and Resources." Talk to your estate planning attorney and other financial professionals to get their opinions. Talk with family and friends only if you know they are well educated in reverse mortgages.

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Understanding a Reverse Mortgage Line of Credit

jberman — Fri, 23 Oct 2009 09:20:00 GMT

San Francisco Examiner, October 22nd, 2009

A HUD reverse mortgage can provide seniors with a sufficient cash flow during their retirement years that can enable them to live more comfortably than they often could otherwise. Options in a new reverse mortgage make it possible to be able to receive the money in the best way for the senior’s situation - including a line of credit.

A Reverse Mortgage Line of Credit Is Different

Cash can be obtained from a HUD reverse mortgage, as a lump sum, in monthly payments, or as a line of credit. These three methods can also be combined to provide a great way to meet your financial needs. A line of credit from a reverse mortgage, however, is different from a line of credit in a regular conventional HELOC.

No Payments Are Made While You Are in the Home

For one thing, the borrower in a reverse mortgage agreement will not make any payments as long as they are still living in the house. This gives them access to their money in the line of credit without having to be concerned about keeping up with any payments.

The Line of Credit Becomes More Valuable

A line of credit in a reverse mortgage also has a growth rate, whereas a traditional line of credit does not. The growth rate fluctuates monthly based on a growing amount of equity which occurs as the home gains in value. The more equity that you have, the more money there is that becomes available in the line of credit.

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Reasons to Refinance Your Reverse Mortgage

jberman — Thu, 22 Oct 2009 09:31:00 GMT

San Francisco Examiner, October 21st, 2009

A government-issued reverse mortgage, or Home Equity Conversion Mortgage (HECM), is a great way to provide a more solid financial future for yourself. Sometimes, though, even better deals can be made possible if you refinance it when economic times become better than they were when you originally closed it. Here are some reasons why you may want to refinance your HECM with a newer HECM.

Lending Limits Increase

One thing that can make refinancing a reverse home mortgage a good deal is if the lending limits in your area have increased. If you have had your reverse mortage for a couple of years or longer, then it is quite possible that the current lending limits could enable you to receive a lot more money than you had before.

About a year ago, the lending limit was raised from $417,000 to $625,500. This meant that whatever your home's value was, you could not have received more than $417,000 for it. Now that it is raised - but only through January 1, 2010, you may be entitled to much larger amounts if your home has a greater value.

Local areas have limits, too, and this figure could have been changed. You would have to check to see if this has happened, but it is quite possible when the economy improves. When it does get raised, it means that you become eligible for increased amounts in a new HECM.

Interest Rates Get Better

Interest rates are always a concern with any kind of loan - even with a reverse mortgage loan. The higher your interest is, the more that your balance will be eaten away - reducing it even faster. When the interest rates on a reverse mortgage decrease, it enables you to have a cash flow even longer, or possibly even a larger one. A decrease in interest rates may even enable you to pass some (or more) of it on to your heirs.

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Fixing Troubled Mortgages for the Elderly

jberman — Thu, 22 Oct 2009 09:25:00 GMT

The Wall Street Journal, October 21st, 2009

A year ago, Pedro Garcia and his terminally ill wife, Julia, were about to be evicted from their home of nearly 40 years after their mortgage lender foreclosed on the loan.

Today, Mr. Garcia is living in his Southern California home nearly payment free. The turn of events came after the lender, Bank of America Corp., employed an unusual tactic that is being used on occasion to help some debt-strapped seniors locked into exotic mortgages known as option ARMs from losing their homes.

"There are a lot of people who lost their houses [in the recession], so I'm fortunate," says Mr. Garcia, a 69-year-old retired corrections officer. "We lived in this house since 1970 and this was our dream." Mrs. Garcia died last November.

Mr. Garcia owed about $490,000 on his home, which a recent appraisal said is now worth only about $150,000. Bank of America wrote down about $405,000 of the loan. To account for the rest, the bank then issued a reverse mortgage for about $85,000. But instead of paying that amount to Mr. Garcia, as is usual with a reverse mortgage, the bank paid the proceeds to itself. A reverse mortgage is a form of equity loan available to older homeowners that generally doesn't need to be repaid until after the homeowner dies.

That means Mr. Garcia can remain in his home without having to make mortgage payments to Bank of America. (Mr. Garcia is making small monthly payments on a second mortgage that was modified by another lender.) When he dies, the house reverts to Bank of America, and his heirs can choose to buy it back for the $85,000 plus interest and fees. Or, if the heirs choose to walk away, the bank can sell the house, and any proceeds above the loan amount would go to Mr. Garcia's family.

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Ways to Ease the Pressure of a Cash Crunch

jberman — Thu, 15 Oct 2009 08:30:00 GMT

The New York Times, October 14th, 2009

MANY retirees are in a cash crunch — with a lower income stream from their investment portfolios, personal expenses that are higher than expected, or both.

While most assets can be used to generate liquidity, deciding what to do requires careful deliberation; there are many pitfalls. Here are the most commonly used approaches for people who find themselves coming up short during retirement, and an analysis of their pros and cons.

CASH FROM YOUR HOME Mortgage rates are so low that many financial planners say the best way to raise money is to take out a conventional mortgage or a home equity line. But reverse mortgages, which allow homeowners who are at least 62 to borrow against the equity in their homes and receive regular monthly payments, are often seen as a last resort. Some financial planners even advise retirees to sell their investment portfolios or cash in their life insurance policies before taking out a reverse mortgage.

Unlike traditional mortgages or home equity lines, a reverse mortgage requires no payments until the borrowers die or no longer use the home as their primary residence. Then the mortgage must be paid in full. Closing costs, fees and interest rates are also generally high, reducing the amount of money that borrowers can leave to their heirs. Yet if retirees have exhausted other options, a reverse mortgage may be worth considering, especially for those with high medical expenses, said Alicia H. Munnell, the director of the Center for Retirement Research at Boston College. “If you’re not planning on leaving your house to a child, then this is an option, rather than depriving yourself during your lifetime,” she said.

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Reverse-mortgage boom raising concerns on potential pitfalls

jberman — Sat, 10 Oct 2009 09:45:00 GMT

Chicago Tribune, October 8th, 2009

A national consumer advocacy organization added its voice Tuesday to a growing chorus of concerns about the rapidly growing popularity of reverse mortgages, comparing the loan product's potential pitfalls to subprime mortgages.

The National Consumer Law Center said the aggressive marketing techniques being used to sell a complicated financial product to potentially vulnerable senior citizens requires the adoption of new consumer safeguards and industry standards.

"These problems are eerily similar to those that drove the subprime boom," said Tara Twomey, an attorney with the Boston-based center. "This market could be another financial fiasco."

In recent years, the popularity of reverse mortgages, particularly the federally backed Home Equity Conversion Mortgage, has jumped as strapped homeowners look for additional financial sources. In an HECM, a homeowner 62 or older can borrow funds against the equity in the home. The loan and the accrued interest do not have to be paid back until the homeowner sells the property, dies or fails to live there for one year.

Last year, more than 112,000 seniors used reverse mortgages to tap more than $17 billion of home equity.

The number of loan providers has swelled as demand for the product has grown. More than 2,700 lenders offer reverse mortgages, including 1,500 lenders who originated their first HECM last year, the center's report found. The top three lenders were Financial Freedom, Wells Fargo Bank and Bank of America.

Twomey acknowledged that most of the center's concerns are based on data that is "anecdotal at this point" and that there were no statistics to quantify how many reverse mortgage loans were made inappropriately.

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Government's reverse-mortgage option for seniors is scaled back

jberman — Sat, 03 Oct 2009 09:22:00 GMT

Chicago Daily Herald, October 2nd, 2009

Declining home values have put a serious squeeze on one of the mortgage market's most popular and fastest-growing financing concepts: the Federal Housing Administration's reverse mortgage program for seniors 62 and older.

In a letter to reverse mortgage lenders Sept. 23, FHA Commissioner David H. Stevens said his agency must reduce the maximum amounts seniors can receive on reverse mortgages because of a $798 million estimated budgetary shortfall for the program in the coming fiscal year.

Mortgage industry sources said the move amounts to a 10 percent cutback for all new FHA reverse mortgage applicants starting Oct. 1. Borrowers who already have FHA reverse loans will not be affected.

Peter Bell, president of the National Reverse Mortgage Lenders Association, says the policy change could prevent more than one out of five applicants from paying off their existing home mortgage debt with the proceeds of a new reverse loan. That, in turn, could leave some senior homeowners in danger of falling into serious delinquency on their current loans, even ending up in foreclosure. The total number of seniors affected could be in the tens of thousands, Bell said, since roughly 130,000 new loans are projected for fiscal 2010.

Dennis Ceizyk Sr., vice president of Heartland Mortgage Inc. in Tucson, Ariz., says the FHA's move immediately impacts two of his company's clients - a Phoenix couple in their late 70s who no longer can afford the monthly payments on their existing mortgage. They had planned to take out a reverse mortgage yielding them $92,500 in cash on a house valued at $125,000. The $92,500 lump sum would pay off their $75,000 home mortgage balance, plus closing and other transaction costs, leaving them approximately $6,000.

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Is a reverse mortgage right for you?

jberman — Thu, 03 Sep 2009 04:37:00 GMT

CNN, September 1st, 2009

On the face of it, a reverse mortgage sounds like a no-lose deal for older homeowners. A lender gives you what amounts to a cash advance on your home equity -- no minimum income or credit score required. And you don't have to pay it back until you move or die, when the proceeds from the house sale typically will be used to close out the loan. But in fact, reverse mortgages have some serious drawbacks. Here's what you need to know.

You may not be able to borrow that much. A provision in the economic stimulus package raised the maximum home value that could be counted for reverse mortgages from $417,000 to $625,500. But you won't be able to tap your home up to its full price. The formula for determining loan amounts takes into account your age (the older you are, the more you can borrow) and current interest rates, as well as your home's value. Anything you owe on your home is subtracted from that amount, as are the loan fees you'll pay. To see how much you might qualify for, use the calculator at revmort.com/nrmla.

Expect to pay some pretty hefty fees. A reverse mortgage is an expensive loan. In addition to regular closing costs, you'll pay an origination fee of 2% on the first $200,000 of the loan balance and 1% thereafter, plus a mortgage insurance premium of about 2% and a monthly service charge as well. Though recent legislation has capped the origination fees at $6,000, by the time you add all the other fees you'll have to pay, the total generally reaches $10,000 to $15,000. So a reverse mortgage doesn't make sense if you expect to move anytime soon, says Dallas financial planner Michael Anderson.

There's more risk than you think. Reverse mortgages are particularly appealing to retirees looking to supplement dwindling income from a battered investment portfolio -- that's one reason these loans are up nearly 50% over the past two years. The big risk, especially for younger borrowers (you have to be at least 62 to get the loan): You'll live longer than you anticipate, run out of money, and won't have any home equity that you can fall back on. Over the past decade the average age of reverse-mortgage borrowers has fallen from 76 to 72. "One of the first questions to ask yourself is whether you can make the money last," says reverse-mortgage counselor Brenda Grauer.

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Reverse mortgages shift gears

jberman — Sat, 22 Aug 2009 09:40:00 GMT

San Jose Mercury-News, August 21st, 2009

Ann Tubbs and Ehtesham Majid left behind their house in Moraga more than two years ago to enjoy the urban lifestyle of San Francisco. The retired couple ended up renting a place in the city but eventually hoped to buy a home, a place they could personalize and make their own. ß Now, a new program made possible by federal legislation passed last year to address the foreclosure-driven housing crisis is also helping seniors use a reverse mortgage to help buy a home, provided they can come up with a large down payment. Before the Home Equity Conversion for Purchase program rolled out in January, seniors 62 years and older could only use reverse mortgage loans to draw out tax-free payments from the equity held in an existing home while continuing to live in it.

Tubbs and Majid used the new program to help purchase a $625,000 two-bedroom condominium located downtown near the city's waterfront.

"We like city living. We like to walk around at night and look in windows," said Tubbs, who retired from a 30-year-career at Planned Parenthood. She and her husband moved into their new home in August.

"It's a great program for people like us. We don't have any children and want the urban lifestyle," said Majid, a retired software engineer.

Many lenders are starting to offer these new loans in addition to traditional reverse mortgage products. But as with traditional reverse mortgages, there are costs involved that can add thousands of dollars to the loan amount, which grows over time and has to be repaid after the last borrower leaves or sells the property or dies and the home is passed on to heirs.

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Forward on Reverse: An assault on fairness ... quash Mortgagee Letter 2008-38 (Part I)

jberman — Thu, 20 Aug 2009 01:48:00 GMT

Editor's note: The article below is extremely technical, and intended for readers already very well versed in the details of reverse mortgage legislation and regulations. For those not yet fully versed in reverse mortgages yet, we recommend examining our articles on the subject.

National Mortgage Professional Magazine, August 18th, 2009

Author’s note: In the dying days of the Bush Administration (Dec. 5, 2008), the Federal Housing Administration (FHA) issued Mortgagee Letter 2008-38 (ML-08-38). ML-08-38 is a raw deal for America’s seniors who have taken, who are taking or who plan to take Home Equity Conversion Mortgage (HECM) reverse mortgages, the dominant program in the U.S. reverse mortgage market. “An Assault on Fairness: Quash Mortgagee Letter 2008-38, Part I” shows why we believe ML-08-38 is a raw deal for seniors and their heirs/estate, and why we are asking the U.S. Department of Housing and Urban Development (HUD) to quash it.

By shifting HECM non-recourse policy to deny seniors and their heirs a key benefit of their expensive mortgage insurance premiums, by imposing arms-length rules which turn off seniors’ heirs and cost taxpayers money, FHA Mortgagee Letter 2008-38 is an assault not only on fairness, but also on a core homeowner right: The right to reclaim the family homestead or the family farm from a creditor without a snag. It should be repealed forthwith.

Since my March 18, op-ed in Origination News, feedback from senior policy-level people at HUD points unmistakably to misguided assumptions behind the flawed mortgagee letter.
Part one of this article examines the assumptions in the HUD feedback. Part two looks at why the new arms-length rules in ML-08-38, when fully understood and fully disclosed to consumers, will turn away seniors and their relatives from HECM. It concludes by showing that ML-08-38 is costly to taxpayers and unjust to seniors and their relatives. Two days after my Origination News op-ed piece, this e-mail, among others from senior policy-level people at HUD, came in:

“Yes, well, I would agree that it’s of concern that we’ve closed the one loophole that existed—that is, heirs could buy the properties from the estate to keep the home, but not pay off the full loan balance. Other than that, you’re actually offering up some inaccurate statements about the program’s history. Although many people said, ‘Neither the borrower nor the heirs will ever owe more than the value of the home,’ that’s an inaccurate statement on their part and our guidance has never said as much.

Our policy position has always been: Upon sale, the borrower or heirs will not owe more than the value … This distinction is very clear in our regulations. So the Mortgagee Letter (ML) does not represent any change in policy position on this matter. Therefore, the ML [2008-38] that has been charged is appropriate and consistent with historical policy. And, the definition of non-recourse is just as we said it was—so that doesn’t represent a change. So, the only change presented in this new ML is that that the heirs cannot buy the property from the estate to avoid paying off the full loan balance.”

A major insurance benefit or a loophole?
Assumption number one: The 20-year-old language and industry-wide understanding in pre-ML-08-38 paragraph 1-3C of the HECM Handbook contain a loophole. ML-08-38 is a regulatory loophole plug 20 years after the fact. Again, let’s review the language of chapter one, paragraph 3C (1-3C) of the HUD HECM Handbook 4235.1 Rev.-1:

“The HECM is a ‘non-recourse’ loan. This means that the HECM borrower (or his or her estate) will never [emphasis added] owe more than the loan balance or the value of the property, whichever is less [emphasis added]; and no assets other than the home must be used to repay the debt.”

Far from being a loophole, the above language expressly affirms and codifies a major benefit for which every HECM borrower is required to pay mortgage insurance premiums. Those premiums cover both crossover risk (protecting lender from property value decline at loan termination) and the recourse risk (protecting borrower from paying more than home’s market value at loan termination).

The above language was itself a 1994 explanation of non-recourse in the original HUD HECM Handbook 4235.1 of Aug. 24, 1989. Here is the original non-recourse language (read: historical policy):

“The lender’s recovery from the borrower will be limited to the value of the home. There will be no deficiency judgment taken against the borrower or the estate.” [Section 1-12-B, p. 1-6]

So where is the appropriateness of ML-08-38? Where is the consistency of ML-08-38 with historical policy? And where is the policy foundation for the formulators of ML-08-38? There is none.

And sadly, with ML-08-38, lender-investor (and successors) benefit/right is unimpaired, but borrower-heirs/estate benefit/right is arbitrarily taken away by administrative fiat without an Act of Congress. This is an imbalance. For the party paying the hefty mortgage insurance premiums, this is a grave injustice.

Is ML-08-38 a change in HECM Non-Recourse Policy?
While I leave you, the reader, to judge the inaccuracies in my March 18 op-ed, let’s look at the second premise in the HUD e-mail: Public and industry understanding and interpretation of paragraph 1-3C is wrong:

“Although many people said, ‘Neither the borrower nor the heirs will ever owe more than the value of the home,’ that’s an inaccurate statement on their part and our guidance has never said as much. Our policy position has always been: Upon sale, the borrower or heirs will not owe more than the value … This distinction is very clear in our regulations. So the Mortgagee Letter (ML) does not represent any change in policy position on this matter.”

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Reverse Mortgages Come to the Rescue

jberman — Thu, 13 Aug 2009 08:46:00 GMT

The Washington Post, August 9th, 2009

Reverse mortgages have been around for nearly 20 years, but it wasn't until the current financial crisis that they caught on. Seniors are turning to these loans to tap the equity in their homes and generate tax-free income to help them ride out hard times.

You can take it with you. A reverse mortgage can be a good option for people who want to relocate or move to a smaller home but don't want to sink all of their cash into a new house or might not qualify for a traditional mortgage.

New rules that took effect in January allow seniors to use a reverse mortgage to buy a new home. Say you own a house in Massachusetts worth $500,000 and you want to buy a $400,000 house in Florida. If you were to sell your house and pay cash for your new home, you'd have just $100,000 left to add to your savings. But if you took a $100,000 reverse mortgage on the Florida house, you'd have twice the amount left -- $200,000 -- to add to your savings.

How it works. You must be at least age 62 to take out a reverse mortgage. Plus, your house (current or future) must be your primary residence, and your mortgage must be either paid off or have a small balance. Unlike a traditional loan, there are no income or credit-score requirements, and you may use the money as you wish. The older you are, the higher the appraised value of your home (up to the maximum federal loan limit) and the lower the interest rate, the more you can borrow.

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Making Cents: Creative uses for reverse mortgages

jberman — Thu, 13 Aug 2009 08:42:00 GMT

Norwich Bulletin, July 20th, 2009

Typically used for income during retirement, reverse mortgages are finding their way into the affluent marketplace as a vehicle for advanced planning.

Paul Savery, a reverse mortgage consultant with Wells Fargo Home Mortgage in Sandwich, says some people have used reverse mortgages to buy or improve a second home. With the substantial slide in real estate prices throughout the Sun Belt, some wealthy homeowners are going bargain-hunting with their reverse mortgage line available to quickly close on beautiful second homes being sold by distressed sellers.

Reverse mortgages can be used as an estate-planning tool. When working with retirees about reducing their estates and the subsequent estate tax, retirees are often reluctant to part with their hard-earned cash.

Whether it is fear of running out of money or thinking that they'll spend their way down to an untaxable level for their estate – this reluctance to make gifts is common even for the very wealthy.

The concept is that making gifts reduces your gross estate, which, in turn, will reduce any estate or death taxes that may be due. One of the most utilized techniques with estate reduction gifts is the purchase of life insurance in an irrevocable trust.

This later creates a very large amount of cash from the ultimate death benefit that can be received by beneficiaries both income-and estate-tax free. Using the proceeds from a reverse mortgage to pay life insurance premiums is in effect using double leverage for a very low-risk move. The biggest risk here is the policy itself - make sure that you buy a policy that is guaranteed for life from a highly rated life insurance company.

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Reverse Mortgages Come to the Rescue

jberman — Tue, 11 Aug 2009 09:07:00 GMT

Washington Post, August 10th, 2009

As part of the economic-stimulus package, Congress raised the reverse-mortgage loan limit to $625,500 through the end of 2009. After that, the lending limit reverts to $417,000, unless Congress intervenes.

Read more of this article.

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Should You Carry a Mortgage into Retirement?

jberman — Wed, 22 Jul 2009 01:36:00 GMT

Center for Retirement Research at Boston College, July 21st, 2009

Although it remains the goal of many households to repay their mortgage by retirement, an increasing proportion now enters retirement with a mortgage. At the same time, households are increasingly likely to hold substantial amounts of financial assets, as a result of the growth of 401(k) and similar plans. Among households aged 60 to 69 in 2007, 41 percent had a mortgage. Of these, 51 percent had sufficient assets to repay their mortgage. These households could, if they wanted, be mortgage-free simply by selling some of their investments and mailing a check to the lender.

This Issue in Brief considers whether households should use retirement or non-retirement wealth to pay down their mortgage. It first shows that it is unlikely that many retired households will be able to earn a return on risk-free investments such as bank certificates of deposit, Treasury bills, and Treasury bonds that will exceed the cost of their mortgage. Liquidity considerations aside, households holding such assets will generally be better off using them to pay down their mortgage. It then considers and (for most households) rejects the argument that households should retain their mortgage because they can earn a higher expected return in stocks and other risky assets. It concludes with practical advice for most households.

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