“Clients for life” is an expression that mortgage originators use a lot. It means you have strong, long-term relationships with your clients. Maybe you helped them finance the purchase of their first home and then a move-up purchase. When their children needed braces or university tuition, you helped them with a refinance to cover these expenses.
Over the years, you’ve helped them build equity — a valuable asset they can now convert into cash if needed. What happens when these same clients are in their 60s or 70s, and they’ve stopped working or maybe are only working part time? How do you help them then?
Many of these clients are on a fixed income, but their expenses aren’t fixed. Indeed, their expenses often are going up: groceries, utilities, health care, property taxes, insurance — the list goes on. It doesn’t make a lot of sense for these clients to do another traditional refinance or a line of credit that requires them to make monthly payments.
Where does that leave them? They need something better or more targeted at this phase of their lives, giving them the cash flow that they need to maintain their lifestyle and quality of life. For these clients, a reverse mortgage — particularly a federally insured Home Equity Conversion Mortgage (HECM) — may make a lot of sense.
Past reluctance
Given the historically low interest rate environment that has existed for quite some time, it’s been smooth sailing for mortgage originators. They’ve had all the purchase and refi business they can handle, so it may not be obvious why they should add a reverse mortgage product.
But what happens when rates tick up? That’s a very real scenario as the federal government scales back bond purchases and the economy roars back, as it’s expected to do, putting upward pressure on interest rates. The tailwinds that mortgage brokers and bankers have enjoyed can suddenly become headwinds. You need to prepare for this situation.
If the climate for traditional originators changes or slows down, adding a reverse mortgage to your suite of products can help sustain or even grow your business. Reverse mortgages make up a very small percentage of all loan transactions. That’s puzzling, given that reverse mortgages have been around for 60 years and have continued to improve over time, with many new safeguards that didn’t exist in the beginning.
Right solution
A reverse mortgage has to be the right product solution for the client. So, the criteria for making the loan has to include whether it can give the client a higher quality of life, because each client may have different needs, goals and motivations for selecting a reverse mortgage.
From a cash-flow standpoint, a reverse mortgage is pretty hard to beat. If you still have a traditional forward mortgage, a reverse mortgage will pay it off. Of course, the client has a new mortgage — the reverse mortgage — but they don’t have to pay it off until they permanently leave their home, sell the home or die. So, the client no longer has any monthly mortgage payments, but they still have to pay for property taxes, homeowners insurance and upkeep. That’s the same for any mortgage.
If the house is paid off, this simply means the homeowner will be able to convert more of their home equity into cash. How they put the cash to work — cash that’s tax-free, by the way — is up to them. They can pay off higher-interest debt, make home improvements, stash the money away in a rainy-day fund or cover health care expenses. Retirees are once again in control of their financial decisions.
When reverse mortgages were introduced, there were stumbles. If people didn’t pay their property taxes and homeowners insurance, they were in danger of losing their homes through foreclosure. Also, many borrowers at the time chose to receive their money in a lump sum without restrictions. If they didn’t use the money responsibly, they could quickly go through their proceeds. A lottery winner serves as a close analogy: Despite their winnings, they went broke a year or two later because they never thought to budget or manage their money wisely.
Emergency backstop
With today’s reverse mortgage, there are limits on the amount of cash a client can access during the first year. Borrowers have several ways to collect proceeds from a reverse mortgage, including a lump sum, a term payment (a certain amount for a set number of years) or a tenure payment (a certain amount for as long as the client lives in the home). Let’s compare a reverse mortgage line of credit with a traditional home equity line of credit (HELOC).
With a HELOC, it’s not long before the client must begin paying back the loan — or at least the interest portion. The line of credit also could be frozen, reduced or even withdrawn. This could happen if the value of the home dropped or the lender determined the borrower has a higher credit risk than when they first took out the loan. Maybe the lender is reassessing its overall risk-management profile — meaning it has nothing to do with the client.
With a reverse mortgage line of credit, even if the value of the client’s home fell to zero — an exaggeration, of course — the client will always have the same credit line for which they were approved. (This is contingent on living up to the loan agreement, meaning that they’re keeping up the home and paying their property taxes and homeowners insurance on time.)
Whatever portion of their reverse mortgage credit line they don’t use also has the ability to grow. The growth rate is the combination of the interest rate and the annual insurance rate paid on the loan. For example, if the client’s interest rate was 3.5% and their annual insurance premium was 0.5% of the loan amount, their reverse mortgage credit line could grow at a 4% annual clip.
Think of what this could mean for a retiree who doesn’t have a long-term care policy, which most seniors don’t have simply because of the high expense. Instead, they could use their line of credit like a long-term health insurance policy. It’s a backstop for them to cover the “just in case.”
Enhancing life
Reverse mortgages have largely been thought of as products of last resort, but they should be considered as a means to promote longevity, liquidity and legacy. These loans can literally enhance longevity to help cover both short- and long-term health care needs.
Reverse mortgages help older Americans retain their independence. They can use the money to pay everyday expenses without relying on family if they can’t make ends meet. This is good for everybody. It may relieve anxiety for their kids, for example, who wonder if mom and dad have enough to get by.
You also hear that if people take out a reverse mortgage, they won’t be leaving an inheritance for their heirs. This is more perception than reality.
First off, borrowers get a payout based on their age, the value of their home, existing equity and the prevailing interest rate, among other factors, including a maximum HECM loan amount of $822,375 in 2021. They’re not going to cash out for the full amount. They’ll get a portion, so right away, they still have home equity. Second, as the lender pays the borrower, the amount of home equity is reduced, but at the same time, there’s a good chance the home continues to appreciate.
Preserving wealth
Reverse mortgages also can help preserve investments in retirement accounts, which is another way for borrowers to leave heirs with a bigger nest egg. It’s been well-documented that if a new retiree starts drawing down their investments in a bear market, this ill timing can have a substantially negative impact on the funds that were supposed to carry them through retirement.
This is a phenomenon known as sequence of returns risk. If these same retirees had used proceeds from a reverse mortgage to get through the current downturn — giving their investments time to rebound — their lifelong savings would last much longer.
All kinds of statistics about the baby-boomer generation are bandied about, including the estimate that 10,000 people per day are turning 65. By 2050, the 65-and-over population is projected to be 83.7 million, almost double its estimated population of 43.1 million in 2012, according to the U.S. Census Bureau.
Many in this demographic will need financial solutions to maintain their quality of life at a time when traditional pensions have largely gone away and their 401(k) plans have been underfunded. The outlook for Social Security also is problematic.
Seizing opportunity
What’s it going to take for borrowers and lenders to seize this opportunity? In a word, education. You have to keep your eyes on the facts.
It’s often the case that it will be easier for a homeowner to qualify for a reverse mortgage than a traditional mortgage. Reverse mortgage borrowers still have to qualify on the basis of income and credit, among other things, but these qualifiers are for the purpose of ensuring that they’ll be able to comfortably maintain the property while keeping up with the tax and insurance obligations. This isn’t as difficult as verifying income and credit to ensure they can pay the monthly interest and principal on a forward mortgage.
Another common complaint is that reverse mortgages take longer to move through the pipeline. Any government-insured product will likely have to jump through a few more hoops to get to the finish line, but that’s not a bad trade-off for the added protection the client receives. At the same time, the reverse mortgage process continues to be streamlined through e-signings and other technological upgrades.
Older Americans, believe it or not, aren’t sitting at home shuffling papers. They are on their computers and mobile devices, like everyone else, and making things happen. For lenders, originators and borrowers, there’s probably never been a better time to explore reverse mortgages. ●
