Is it Equity or Value? That is the Question

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Common explanations that may create confusion

A wise person once said, “Words are free. It’s how you use them that may cost you.”At some point in our careers, most of us have been guilty misusing keywords when describing the features and benefits of the federally-insured reverse mortgage. I most certainly have done so, even on this show. As our collective gasp fades let ’s examine some of the common HECM vocabulary that is often used freely but is inaccurate. After all this helps each of us communicate clearly and accurately without eroding the trust of borrowers and other professionals.

It’s all about value. The most misused term in our industry is equity. After all, the formal and proper name for the federally-insured reverse mortgage is the Home Equity Conversion Mortgage. Seems straightforward enough but is it accurate?

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Returning to Our Core Mission


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Despite HECM changes & cutbacks, more seniors stand to benefit eliminating their mortgage payments

To say that today’s retiree is not prepared to retire is an understatement. More American’s approaching retirement have little or no savings to fund their non-working years. Not surprising in light of fewer pensions, higher inflation and rising healthcare costs. Many find themselves unable to adequately invest for retirement struggling to cover their daily living expenses. However, one of those expenses can be a forced retirement savings plan- the home mortgage.

Since the post-depression era, American homeowners dutifully paid their mortgage throughout their working years while raising a family or paying for their child’s college education. Years later, many were able to participate in the rite of passage transitioning from work to retirement paying off their mortgage. The elimination of their largest expense allowed them to enjoy a modest but comfortable retirement. At this moment more seniors are waking to the reality of just how fragile their finances truly are. Much of this can be attributed to the shift away from company pensions to workers funding their own retirement accounts such as 401(k)s and IRAs, two recessions and higher costs of living. Many older Americans find themselves forced to work well into their golden years. In 2017 it was reported that over 9 million seniors 65 and older continue to work compared to 4 million in 2000. For older Americans, the fear of death often pales in comparison to outliving their money.

The good news is despite numerous product changes, millions of seniors stand to benefit using a reverse mortgage to…

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Economist Claims Annuities ‘Safer” than HECM

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Syndicated Columnist Recommends Cross-Selling Strategy…with a Twist

 

reverse mortgage newsJust as the reverse mortgage suffered much negative media coverage and hand-wringing from financial pundits, so have annuities. If an annuity sounds familiar to reverse mortgage professionals, it should. Annuities were the financial product most often associated with what many considered a questionable and unethical practice- the cross-selling of financial products investing the proceeds into annuities.Surprisingly, one columnist and economist recommends taking out a traditional mortgage and investing in an annuity.

An annuity is a contractual agreement between an investor and typically an insurance company. A lump sum is invested and then can be ‘annuitized’ or paid out over a period of time, deferred until a later date for full withdrawal, or rolled over into another investment. There are four basic types: immediate, fixed, indexed and variable. An immediate annuity converts a lump sum premium investment into an immediate stream of payments over a specified period of time, usually over one’s lifetime. This is often referred to as a Single Premium Immediate Annuity (SPIA). A fixed annuity guarantees a declared interest rate. The indexed annuity is a variant of the fixed but credits interest based on the percentage growth tied to marked indices such as the S&P500 or the Dow Jones Industrial Average (DJIA). Variable annuities invest funds into mutual funds or other market investments that can be subject to loss of principle in many instances.

Syndicated columnist Laurence Kotlikoff opens his column with the statement, “HUD fails to mention a clear-cut and, to me, far safer way, at least for older people, to tap home equity.” But is Kotlikoff’s ‘way’ truly a safer option? Let’s examine his suggestion more closely.

“HUD fails to mention a clear-cut and, to me, far safer way, at least for older people, to tap home equity. This entails taking out a long-term fixed mortgage on your home and using the proceeds to purchase a fixed annuity payment.

Properly Explaining the HECM Line of Credit

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Many get it wrong- are you correctly explaining the line of credit

reverse mortgage newsSolid product knowledge brings sales confidence. How accurate is your description of how the HECM line of credit (principal limit growth rate) works?  Join Norcom Mortgage today and let them help get you started!

About John Luddy: John has trained reverse mortgage professionals how to be successful when sitting face-to-face at the kitchen table with prospective HECM borrowers. Norcom is looking for qualified loan officer candidates. To learn more call 1-860-507-2582 or email John Luddy here

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Some See the HECM Financial Assessment As A Benefit

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Two Years Later the Financial Assessment Receives Mixed Reviews

The implementation of the HECM Financial Assessment was met with mixed reviews when it was launched in April 2015. While many industry professionals have remained critical of the new underwriting guidelines some welcome the assessment as see it as a net benefit.

reverse mortgage news‘Every loan is a problem loan’

The seismic shift of the Financial Assessment’s restrictive and complex underwriting guidelines have many feeling that the reverse mortgage underwriting has now matched or surpassed traditional mortgage underwriting guidelines. Bill Smith with Reverse Mortgage west told Reverse Mortgage Daily, “Tighter regulations have resulted in tougher underwriting standards that have made most HECM loans far less routine. Complaints from my colleagues that ‘every loan is a problem loan’ are much too frequent and clearly not what used to be when I started.” Not only is the sales cycle prolonged but the assessment has limited the number of qualified applicants carving out many who would have been previously eligible for the loan.

The Paper Chase

The complexities of the reverse mortgage are difficult enough for many to communicate to a borrower. Now many find themselves spending considerable time gathering the required documentation needed for the assessment which reduces their time spent originating loans…

 

The HECM’s State of Affairs

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Irrelevant HECM endorsements and recent developments

The Irrelevancy of Historical Volumes

A sense of frustration can set in for those expecting rapid expansion of loan volume back to our pre-recession levels.   After several years of rapid expansion culminating in 2009’s record endorsement tally of 114,629 loans, last year’s endorsements were a sum total of 48,000 endorsements. Such comparisons are suspect for a number of reasons- a simpler product offering, rapid home appreciation, generous underwriting guidelines, increased loan complexity, lending ratio reductions, and the post-recession and housing crash.

Considering the headwinds the HECM has endured we can claim both a modicum of success and a measured optimism for future market expansion. However, fixating on the apple and oranges comparison of historic volumes ignores larger macroeconomic forces and serves only to distract us from more pressing matters.
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Too good to be true?

One hurdle to increased consumer adoption of the HECM is the fear that if it sounds too good to be true, it probably is. The ability to leverage an illiquid asset and transform it into a potential source of predictable cash-flow is an attractive yet counterintuitive proposition for many Americans wanting to age in place. Sweetening the deal is the fact that the HECM’s unused available funds, or principal limit, grows each year based on the current interest rate plus the MIP. Caution must be exercised when making claims as to just how large

 

HECM Changes Coming This Fall

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change-pillDespite executive order, more HECM Changes coming this fall

One would think our industry may catch it’s collective breath from the rapid nonstop pace of new rules and regulations for the Home Equity Conversion Mortgage. Such hopes were bolstered with the February announcement of President Trump’s Executive Order curbing federal regulations. However, it appears that HUD’s final rules will in fact be implemented this fall. What do such changes hold in store for the reverse mortgage industry?

Perhaps it is fitting that HUD’s final HECM rule will arrive just days before the fall season officially begins on September 19th. The rollout will come in three phases: self-implementation, changes to the Single Family Housing Policy Handbook, and future mortgagee letters. During the National Reverse Mortgage Lenders Association meeting last week in New York City, the association’s president and CEO Peter Bell expressed their comfort on the direction of the coming rules changes.

Some additional changes are welcomed by industry participants. These include ….

The Trump Administration & Reverse Mortgages

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How will the Trump administration approach reverse mortgages?

reverse mortgage newsDoes one of the first decisions made by the Trump administration foreshadow the future of the reverse mortgage program? The administration’s decision to rescind a recent FHA mortgage insurance premium reduction was swift- within one hour after President Donald Trump took the oath of office. How will a business-minded administration approach the Home Equity Conversion Mortgage program?

Mortgage lenders should brace themselves for change. The Trump administration team made it clear they intend to dismantle the Dodd-Frank Act, a complex set of banking and lending regulations that have been criticized for their complexity and hurdles for middle class borrowers in obtaining credit. In addition the Consumer Financial Protection Bureau faces a substantial makeover. While both parties agree that consumer protections are needed, they disagree as to how that goal should be achieved.

Does this mean the Trump administration will be anti-reverse mortgage? By no means. However the ambition to reduce spending and waste should deliberate on the unintended consequences inherent in policy changes, specifically for today’s aging homeowners. With most retirees having less than $50,000 in savings the need to finance one’s longevity using their home has never been greater. Housing has become the lynchpin upon which the majority of American’s wealth is built.

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