Should they take their winnings off the table?

Taking their winnings off the table:
Are seniors over-invested in their home?

Let’s say in January 80% of your assets were invested in hotel and entertainment stocks that made you a healthy chunk of change. For sake of argument, let’s say these stocks consistently out-performed your expectations. Then came March and the arrival of the novel coronavirus. If you found yourself holding these positions after the pandemic broke you probably got clobbered in the market.

Much like being over-invested in one or two companies, many are over-invested in their home. That’s a point Hometap Equity Partners CEO & Cofounder Jeffrey Glass made in a last month’s RMD virtual event HEQ- the future of home equity in retirement. If the bulk of a client’s wealth was tied up in one stock a financial professional is likely to strongly recommend diversification. “If that were a stock, and you had 60-90% of your net worth tied up in one stock, no matter how much you love that stock, any financial advisor would tell you you’re over-concentrated, particularly since you’re over-concentrated in an asset that’s illiquid,” While Glass’ was speaking in the context of alternate equity products, his analogy nevertheless rings true.

So what about housing wealth?

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HECM Risks: A Balancing Act

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FHA is addressing risks on both sides

The federally-insured reverse mortgage or Home Equity Conversion Mortgage while holding tremendous value has been challenged with continued losses paid from the FHA’s insurance fund. In the wake of the housing bubble and economic crisis the program, several changes were enacted. The repeal of the standard fixed-rate HECM, the introduction of the HECM Saver, increases in mortgage insurance premiums, the financial assessment, first-year distribution limits, repeated principal limit factor reductions, and most recently, the enactment of the second appraisal rule as part of the Collateral Risk Assessment. The pace of these changes increased with the passage of the Reverse Mortgage Stabilization Act of 2013 which allows HUD to establish new rules via mortgagee letter rather the previous protracted rule-making process. The intention was to allow the agency to act quickly to slow the mounting losses incurred by the program.

When it comes to HECM risks there are basically two types: front end and back end. Front-end risks would include the valuation of the home, lending ratios or principal limit factors, and product design.

Download the video transcript here