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Are Reverse Mortgages a Good Idea?

are-reverse-mortgage-a-good-idea

I get asked whether reverse mortgages are a good idea all the time.

Here’s a better question for you:

Why aren’t more seniors taking out reverse mortgages?

Check out the following 3 headlines.

All of them missed the mark, big time.

Headline Miss #1 – Harry Truman holds the paper declaring his defeat.

reverse-mortgage-misconceptions

Headline Miss #2 – 8 people claim Elvis is alive…

are-reverse-mortgages-bad

Headline Miss #3 – Reverse Mortgages: Why They’re Growing

Once controversial, reverse products are gaining popularity

From Scotsman Guide Residential Edition   |   December 2006

 This is an excerpt of the article following that headline:

“The popularity of reverse mortgages is growing. In 1990, there were 157 Home Equity Conversion Mortgage (HECM) reverse-mortgage loans closed in this country, according to HUD. In 2005, 43,131 HECM loans closed. And in the first nine months of fiscal year 2006, HUD counted 55,659 new HECM loans — an 83-percent increase over the same period in fiscal year 2005.

Less than 1 percent of seniors ages 65 or older have reverse mortgages. Demand is expected to double annually, however, and to grow to 5 percent of senior households by 2010.”

Now let’s look at what actually happened…

annual-reverse-mortgage-chartgrowth-senior-population

The total number of Reverse Mortgage loans never exceeded 1% of total senior households…

…but annual originations did grow at about the same rate as the senior population growth rate – until 2009.

The chart above shows reverse mortgage originations peaking in 2009 at just over 114,000 loans followed bya  a steep decline. 

By 2015 the number of originations dropped to a little over 52,757 loans.  Keep in mind that during that time the senior population grew 15%.

In other words, if we had the same acceptance rate per capita in 2015 as we did in 2009 we should have originated 130,000 loans or 146% more than we actually did.  

What Happened?

  • Did seniors suddenly decide that reverse mortgages were a bad idea?
  • Did seniors suddenly gain some kind of financial windfall eliminating the need for reverse mortgages?
  • Did the real estate downturn suddenly wipe out the majority of seniors home equity making a reverse mortgage unavailable for most seniors?

No, no, and no.

The first two questions are rhetorical and need not be explained but the last question is important. 

Remember that the crash happened beginning in 2006 and bottomed out in 2008. Still, 2009 was the strongest year for reverse mortgage originations indicating that seniors still had plenty of equity. 

Here’s the truth:

In 2010, Uncle Sam decided to take the product away from the very people that needed it the most. 

(People who were truly house rich and cash poor).

From the beginning the HECM program was based on the premise that most seniors had the majority of their net worth tied up in equity in their homes.  They “needed” to liquefy that equity while remaining in the home and so this was a product that was created to solve that need. 

However, during the crash when houses prices were low the liabilities of the insurance on FHA homes was greater than the total market value of the homes insured.

That meant on paper it looked like the program was underwater. 

In other words…

If every home owner holding a reverse mortgage all suddenly died at that same time and FHA had to pay off the all the loans at once the total payout would be more than the total value of homes. 

That ‘s totally ridiculous, right?

It made the bean counters nervous and so they changed the program.

If you’re an insomniac and want some exhilarating bed time reading check out the entire mathematical analysis at: http://portal.hud.gov/hudportal/documents/huddoc?id=AR2014MMIHECMRpt.pdf

But let me warn you, below is an example of what you will see, so try to stay awake:

hecm-actuarial-review

Keep in mind that these are the same Einsteins who used similar math to justify the use of subprime mortgages and determined in 2005 that real estate values would continue to climb forever.

Yeah…look how well that worked out… 

Isn’t it amazing that whatever argument that they are making by using their mathematical formula it usually turns out wrong?

The equation looks so complicated it’s perceived by those of us mere mortals that the creator is a genius and should be followed and so we do. 

(That is, until it’s proven to be wrong and then the pendulum swings to the opposite extreme..)

That overreaction is what has happened since 2010 and why 77,243 seniors that could have originated a reverse mortgage in 2009 were unable to in 2010. 

A Solution looking for a problem:

From 1989 to 2009 the HECM was what we call a “needs based” product.

It was a solution to the need many seniors had related to being house rich and cash poor. 

If liberating some of the equity in your home was “needed” to improve your living standards this product was tailor-made for you.

However after 2010 those people no longer qualified so it became a “convenience-based” product.

That means, “I don’t really need it and I can afford life’s necessities without it but it might be convenient to have should I need financial options in the future…”

No wonder there are some many fewer loans… But,

4 reasons, if you do quality, you should consider choosing the convenience of a Reverse Mortgage. 

1. Using a reverse mortgage line of credit to pay housing expenses

Let me tell you about my personal situation. 

Like many seniors I’ve paid off my home and set up investments to generate a comfortable income in retirement. 

Still, even with no mortgage my home expenses – taxes, insurance, HOA, maintenance and utilities still cost about $2,000 per month. 

Now ,I have no intention of taking that $2,000 from my monthly retirement income to support my home.

Instead I intend to let the home pay for itself by taking a HECM line of credit and using it to pay the expenses. 

That frees up and extra $24,000 per year to spend on enjoying my retirement and I can’t think of a better use of my homes equity.

2. Give to the grandkids before you die:

I have a friend that planned to leave her grandkids the equity in her home as an inheritance to pay for part of their college expenses.

The problem was they were ready to go to college long before she was ready to die.  The solution was to take out a reverse mortgage and grant gifts while she was still alive. 

Not only was she around to enjoy witnessing how her gifts enhanced her grandkids lives, but also she could now relax at Sunday family dinners knowing they weren’t hugging her just to check for promising signs of cardiac distress.

3. Avoid drawing down principal at the wrong time:

All of us know that the fastest way to deplete a nest egg is to draw out principal during a time when the market is not performing well. 

Market downturns usually lead to lower dividends or interest paid and that can lead to a withdraw of principal in order to make up for the shortfall.

That’s what we all “circling the bowl” because while you haven’t gone down the toilet yet it’s just a matter of time.  One solution is to use a reverses mortgage line of credit to make up the short fall during the downturns and paying it off during the corrections. 

A great advantage of the reverse mortgage is that if the correction takes longer than expected you’re still covered with no monthly payment further depleting cash.

4. Monthly expenses are greater than your monthly income:

The most obvious use of a reverse mortgage is making up the difference between expenses and income. 

In many cases the difference can be as simple as just eliminating a monthly mortgage payment. 

Over the years that I originated reverse mortgages I saw where just eliminating a $500 monthly mortgage payment meant the difference between having sufficient groceries for the month or skipping meals.

This is what the program was originally designed for and anyone that can qualify under today’s conditions but refuses to take advantage of the program is in my opinion two bottles short of a six pack.

If there’s more month left at the end of your money you need to apply for a reverse mortgage today.     

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