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Interview with Dr. John Salter: HECM as a tool (Part 1)

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Exclusive Interview: When it comes to the financial planning community, Dr John Salter of Texas Tech University has opened the door to using the HECM Saver as a legitimate financial planning tool. Part 1 of 2 of our exclusive interview. The concept of the “Standby Reverse” and its impact on the longevity of a retiree’s profile is a concept Dr. Salter put forth in a recent series of articles…

 

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8 Comments

  1. I love the Saver. I need to check my numbers, but I was doing about 50% Saver when I was at MetLife and am still recommending to all of customers now that have equity available. Customers love it when they understand it, financial planners love it and I love it. I can’t wait to be 62 to set up my “Standby Reverse Mortgage”. I actually had a CFP call me about 2 weeks ago to inquire about a “Standby Reverse Mortgage”. His house is about $975,000 (paid for) and he is ready to move forward immediately. He loves loves loves the LOC and how it grows each year. The Saver solidifies the HECM as a strong and stable “Leg” in the Retirement Planning diagram, which goes from being the “3 Legged Bench” to the 4 Legged Stool” when you factor in your home equity.

    • Ms. Crook,

      It is great to read about the responses you are getting from the financial planning community. Despite the bad news we are seeing in lower Saver endorsement numbers, many of us believe the Saver has yet “to see its day in the sun.”

      The downward trend as reflected in the annualized conversion rate and the four month inventory to start off this fiscal year (about 7.4% lower than last fiscal year) are not good signs for endorsement volume during fiscal year 2013. Even Savers came in at 8 fewer (or 0.2% less) endorsements at 3,820 for fiscal year 2012 when compared to fiscal year 2011. BUT considering that overall endorsements for fiscal year 2012 were over 25% lower than fiscal year 2011, Savers did better than simply holding their own.

      I hope many originators are like you, looking for opportunities to meet and work with financial planners in an effort to see Saver endorsements rise. They are not just a great product for MMI preservation fund purposes but they can be a great tool for retirees with a significant asset base when it comes to providing cash flow.

  2. Hi, I guess my main question is why the saver when all the closing costs and upfront MIP can be paid within the loan? If it is a standby reverse, do the standard LIBOR with the pricing today and pay all closing costs to get the maximum amount out if only using it as a life preserve? Thanks.

    • Robin,

      In speaking with Dr. Salter he explained advisors are attracted to the Saver because of the lower costs and the fact the client is only paying FHA insurance (except small upfront charge) on the money borrowed. The HECM Saver line of credit is borrowed from and then repaid in the future as the portfolio rebalances to avoid selling depreciated (down stocks) assets. They are not so much looking for maximum proceeds (like traditional borrowers) but lower ’employment cost’ of the money borrowed.

      • Shannon,

        Many originators are asking the very same questions Ms. Faison asks. While they are very experienced at helping the financially desperate, their career has exposed them far less to the slightly more affluent.

        What Ms. Faison is not looking at is an actual dead asset called cash. Dr. Salter makes it clear that up 2 years of needed cash has traditionally been held in a bucket. For some seniors that is $240,000 to $500,000 in cash lying around earning very, very little. This type of retiree generally does not need the cash from these reserves for very long, just long enough to find the opportune time to sell assets acquired to hold for a long period. So a slightly higher interest rate is not a concern since the retiree really does not know if the Standby HECM LOC will even be accessed as long the Saver is active. If it will be accessed, the borrowings are expected to be so short that the biggest cost barrier becomes known costs not the ongoing costs of borrowing.

        So say the Saver provides $250,000 to a retiree and the costs are $1,600 (MetLife model). Thus the retiree feels comfortable taking $250,000 of cash held in reserve and investing it in a reasonably safe investment returning 2% after tax. In one year, the retiree who invested $1,600 in upfront accrued but unpaid costs has earned $5,000, more than offsetting the initial cost plus accrued ongoing mortgage costs on the $1,600 of say $70 (i.e., costs of $1,670 for that one year). Since there are no other costs to the Saver itself except ongoing mortgage costs and with a balance due of say $1,670 in financed upfront costs and accrued interest and MIP, the net earnings for the next fiscal year will be about $5,100 (compounding at 2%) and the ongoing mortgage costs will be about $75. Had the senior kept the cash in a FDIC insured account, earnings before tax might have been $5,100 and only $3,000 after both federal and state income taxes.

        So by using the Standby HECM strategy the senior saw increased cash flow of $7,100 over the two year period at an accrued cost of just $1,745. Of course where the money is invested changes the dynamics of this example as would any origination fee.

  3. Savers were introduced on October 4, 2010. In the 24 month period they have been with us, their endorsement numbers have been erratic.

    It took until February 2011 to get to 296 endorsements in a single month but during the last three months of fiscal year 2012 not one month exceeded a 247 endorsement total. During the same time period last fiscal year not one month was less than 496 endorsements. That means during the same three month period, fiscal 2011 had over twice as many HECM endorsements as during fiscal 2012.

    While the potential for Savers is great (and much greater than for HECMs for Purchase where proceeds are generally used in the transaction and are due for several years, if not decades, resulting in significant ongoing mortgage costs), our industry has failed in properly promoting them.

    Part of the problem is we simply do not have the necessary core of originators to open the minds and properly service the financial planning community. We still have a traditional market segment who need the core of originators we already have. That core is trained and very experienced at what they do; most do it well.

    To expect that same core of salespeople to sell to financial advisers is like expecting the same life insurance producer (salesperson) to be able to sell life insurance through estate and trust attorneys to their clients as to sell directly to the consumer in a community dominated by union employees raising small children. While a few can do both, most cannot. The most successful life insurance companies do not expect that of their salespeople, why do we?

  4. Thank you Shannon this is very clarifying. This helps considerably and cuts to the guts of it.

    My brain must have skipped a beat on the closing cost paid scenario with the LIBOR. If the PL is high enough this might work for a traditional reverse LOC.

    When my logic goes in a circle, I know I am missing something. I will let you know when the circle stops and update you on the results. 🙂

    I appreciate your insight, knowledge and communication.

    You and your program have been very helpful for myself and others I am very sure. Sincerely. Robin

    • Thank you for the kind words Robin. Yes, it is a new concept indeed but you’re right on track. Glad you find value in these interviews and blog posts. That’s what makes me wake up motivated each day.


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