American Fidelity Mortgage Services Inc.

The following articles were written by Richard Glover,director of the Reverse Mortgage Division of American Fidelity Mortgage Services, Inc. He can be reached via email to rglover@afmsi.com.

All Things HECM: August 2017

As we review our summer series of actual HECM borrowers it is a good idea to add a HECM even if it is not necessarily needed today.   What a couple should consider as we all realize we are not going to live forever is that one spouse is going to precede the other in death and this can create a financial nightmare for the surviving spouse.  If a HECM was in place that situation could be avoided.  


We had a client whose husband had passed away and it resulted in her income being cut back to $1650.00/month because she lost her social security income and chose her husband's because his was the higher amount.  The result was that she was forced to rely on her retirement savings and they eventually ran out.


It's pretty typical for most people to think a Reverse Mortgage is a product of "last resort" but had they established the HECM and not used it the available credit line would exceed the amount she qualifies for by a lot.    At age 77 the client was able to establish a payment of $1500.00 per month for 10 years and still had access to another $76,000.00 of her equity in a Line of Credit.  
What happens in 10 years when the payments are scheduled to end?  By then her line will have grown to at least $124,000.00 that she can then allocate back to herself in any manner including another $1500.00 per month.  Actually by drawing money monthly she accumulates less interest along the way, too.


The other feature is she can change the amount or draw money any way she wants to at any time.  The decision is the borrowers and it is not set in stone.  She could increase her monthly payment, she could reduce it and if she had an unexpected expense she'd be able to draw funds from the Line of Credit, too.  


The end result here was a person who lost income and ran out of money was able to leverage her home of 40 years as a way to keep her in her home for the rest of her life which is the intent of the HECM program.   However, if you plan ahead and put it in place now for future use you could potentially prevent the situation that drew this person into the HECM because the probability of NOT running out of money in retirement is proven to be much better with the presence of the HECM.  Next month:  What the focus groups are saying!

All Things HECM: July 2017

The uses of the Home Equity Conversion Mortgage in retirement are multiple.   As part of our series outlining how people have used the loan for their benefit we'll look at what is referred to in our industry as the "mass affluent" borrower.   CNBC recently reported that you don't have to be desperate, broke and stupid to do a Reverse Mortgage.   Our multi-millionaire client with a $1mm house couldn't agree more.  This person owns two houses and decided if they could eliminate the payment on one of them they could retire permanently.   


As we discussed the way the HECM Line of Credit worked there was a realization that there are other investments in the portfolio that do not offer a return of 5-6%.   And as those matured he could pay them into his mortgage and realize a growth on his line of credit of at least that much.  The important thing to note is you never want to pay the balance to zero but this line with a guaranteed growth rate that I've written about often in this space and other publications can be a powerful tool.


In essence the strategy here is to use home equity almost like a bank account.  Depositing or "parking" funds safely in the guaranteed line as they become available and knowing that they are liquid enough to be easily accessible as needed.  We later determined that the funds in the HECM line might be the most liquid asset because the other investments would need to be liquidated and that usually takes some time to sell the asset, turn it into cash and have it deposited in the bank for the proposed use.   


If they can get the money from the line of credit then figure out how they want to "unwind" it from the other assets and pay it back they have more flexibility.   However, a payment is never required.  Payments are optional and as long as the loan is not paid to a zero balance the funds are not only readily accessible but there is additional credit extended each month so the person with a $200,000.00 line of credit would have access to almost twice as much in 10 years.   


Our client in this example is winding down his business and readying for retirement.  They are enjoying their summer in their second home and happy to have the flexibility the Reverse Mortgage offers.  The image of a Reverse Mortgage for most people is that it is a product of last resort.   And this person when we first spoke was a little skeptical.   As we were sorting through the complexity and getting through the details of how this could be put to best use by our "mass affluent" client, once the "light bulb" went off his response was:  "this is a pretty good deal."   

All Things HECM: June 2017

Part two of a Summer Series:  Actual Case Studies.   The Home Equity Conversion Mortgage has a lot of functional uses.   Many people think it’s for the desperate to take out as a last resort.   In reality it’s more a matter of figuring out the best way to make it work for you.  We recently had an individual who contacted us because he took out a Home Equity Line of Credit 10 years ago.  He made regular payments and paid it down quite a bit but one day he received a notice indicating there was a balloon payment due.   The letter was a reminder he owed $28,000.00 and it was due in full in October.   


The alarming letter caused our client to consider the options. There was more than enough money in the retirement account to cover paying it in full but then he’d have the income tax to pay on the withdrawal from his 401K and it would create a situation where he’s have to draw again pay the IRS.  He contacted us for information about the Reverse Mortgage.   The exercise made him decide to review all of his finances to see where his money was going on a monthly basis.   The biggest expenses were the mortgage payment, and the “pocket money” he used monthly to maintain and enjoy his lifestyle.   


We reviewed the information and determined we could pay off the small balance on the Home Equity Line and there was access to additional funds to pay him $1175.00 per month for the rest of his life no matter how long he lived or how much he drew.  This monthly payout was tax free and it reduced his need to draw from his retirement savings.   His income went from over $70,000.00 to less than $55,000.00/year.   But his lifestyle didn’t change because he no longer has to make the mortgage payment, and he doesn’t need to draw funds to cover his day to day living expenses.   


The client went from trying to “game” the system by drawing out of his retirement $20K in December before the year’s end and another $20K at tax time to cover his tax liability to only needing to make his Required Minimum Distribution.   The result of reducing his taxable income was his IRS tax liability was reduced.  His Healthcare costs went down.  He is now eligible for a Senior Freeze on his Assessed Valuation related to his property taxes and he gets a break on his annual tax bill because he now gets a Senior Exemption. 

    
I recently checked in with the client to gauge his satisfaction level and see if he had any questions.   His response was “this thing is beautiful, I don’t understand why more people don’t do it.”

All Things HECM: May 2017

A series of Case Studies of actual HECM Borrowers I have worked with.  Monthly income shortfall:  I've had a number of clients who used the HECM to bridge a shortfall in monthly income.  One in particular had been in a situation where her husband had passed away and she chose his social security income because it was higher and her own was eliminated.  Another issue was that their investment person had misappropriated their funds and she lost everything.  For a couple of years, the family helped her as much as they could but she really didn't like accepting funds or other assistance from them.  


She did have a "free and clear" house worth $275,000.00 and qualified for $176,000.00 based on her age.   The strategy should never be to take as much money as possible, rather one should only draw what they need.   In this case, our client drew $10,000.00 to cover some expenses for things she had been putting off and leave some cash reserves to take some of the mounting financial pressure off.   


She also had a cash flow shortfall and determined that she needed about $700.00 per month.   As we went through the process I checked in with her family to makes sure things were going as expected and to see if there were any questions.   Their response things were fine and they had not seen mom is such a good mood and in such good spirits for quite some time.   


A couple of months after starting to get funds deposited in her account she contacted me because she felt the $700.00/month was  not enough and she wanted to know what she needed to do to change it to $1000.00.   I initiated a conference call with our servicing agent and we arranged for the change to be made.  The agent mailed her a confirmation letter of the change to sign and return and once received the $1000.00 would be in her account the first business day of the next month.  The change is quite simple, allowable and the nominal charge was $20.00.   


The HECM effectively did many things for this client.  One it restored her dignity by not having to rely on her family for assistance.  Two it improved her mood and well-being because it reduced her financial stress.  It also, gave her access to enough money to live the rest of her life in her home in relative financial comfort.  She has access to more money in case of a "rainy-day" event  and if her monthly needs were to change we can increase the available amount through a simple phone call followed by a signature verification. 

 
The HECM is a powerful retirement tool.  This has been reported in many large publications recently.  In the case of this client she was able to use home equity to fund the entire retirement in a comfortable manner that allows her to live in her home as long as she is able and should she have to move to an assisted living facility there would be funds available from the HECM to get her into a comfortable more desirable facility.   Next month, we'll look at another scenario and continue over the course of the summer to examine different uses of the HECM loan with real stories about clients we have worked with.   

All Things HECM: April 2017

Buying a house with a Home Equity Conversion Mortgage.  Many people are not aware this is possible.  The conventional wisdom for many downsizing seniors is to pay cash for the new house because they don't want a house payment.  I see it all the time; people tying up a significant portion of their assets in a free and clear house so they don't have a mortgage payment.  Often these people struggle to make ends meet as a result.  Also, if they summed it all up it is likely that the home is the largest asset.  AND many didn't get the house they wanted because they didn't want to spend any more than the purchase price of the new home.


Enter the HECM for purchase.  A way to help people get the house they want without having to make a monthly mortgage payment.  The main benefit of the HECM for purchase if used correctly is it frees up more money to be invested in retirement.  It is much like having a house without a mortgage because no payment is required but you are still responsible for the taxes and insurance.


Most people I have helped to buy a house with a HECM for purchase (H4P) were looking for amenities in a home that were not in the price range they were looking for.   The net proceeds from the sale of their home were less than they expected and the result was the H4P could get them into the house they wanted without having to make a mortgage payment.   


The alternative is to take on a "forward" mortgage that requires a payment.  A $136,000.00 mortgage over 30 years has a $669.00 payment.  So a person in their 60s who commits to this transaction has actually committed to pay $241,000.00 over 30 years, well into their 90s.  That same person could buy a $300,000.00 house with a H4P and not be required to make those payments.  But, they can if they want to. 

 
There is another way to manage the home equity in retirement via the H4P.  A portion of the down payment could be used to fund a credit line that will increase the available credit over time.  Ultimately the credit line would be equal to what the down payment on the house was.  This get a little complicated but there is video at the following website that explains what I call the First Resort Home Loan:  www.h4p.info. 

 
Ultimately, the HECM for purchase is a product that was designed for people to use so they can get the housing they want without having to tie up all of their cash in the home.  


All Things HECM: March 2017

Selling a house where the homeowner has a HECM Loan:  There are a few ways a Home Equity Conversion Mortgage becomes due and payable.  First, non-payment of taxes and insurance would trigger the loan to be due.  Once the servicer determines the taxes are delinquent the homeowner is given notice that they have 90 days to remedy the situation by paying the taxes or the loan becomes due.  This happens in about 1 in 10 loans and recent policy changes have occurred to make sure the probability of a tax delinquency is reduced.  


Another event that can cause the loan to be due and payable is if the property is no longer the primary residence of the borrower.  This could be because they moved into a care facility for more than 1 year or because they passed away.   Upon the passing of the last surviving borrower, just as if there was a standard or "forward" mortgage in place, the heirs are given the option to either sell the property.  


If there is equity in the property, the heirs sell the property, pay the bank the amount owed on the loan and keep the rest.  If there is no equity, it still would benefit the heirs to sell the property.  The HECM loan has a "no recourse" feature which means that nobody is responsible for any shortfall from proceeds of the sale that may occur.  The FHA Mortgage insurance Fund is in place to cover any shortfall.   Part of the wording of the HECM application and closing package says that there is no personal liability created by the HECM loan, the only way it is paid back is through the sale of the home.


Should someone owe more than their property is worth when they go to sell it, there are some steps to follow.  First, the servicer should be notified of the intent to sell the property.  This may include providing the listing agreement for the property provided by the Realtor you plan to work with.  Next, an appraisal will be ordered to establish for the servicer what the fair market value of the property should be.   If the Realtor agrees with this number, the home can be listed for sale and sold.   The acceptable sales price will be 95% of the agreed upon sales price.  The heirs could also purchase the property should they choose for 95% of the asking price.   


If the realtor doesn't agree with the appraised value they can provide evidence of what they think the asking price should be and provide that to the loan servicer.  Ultimately a fair market value needs to be established for which the property can be sold within a reasonable time.  The total allotted time to sell the property is one year.  


If the loan balance exceeds the sales price of the property, this is not a "short-sale."   The Realtor should communicate with the servicer once a contract is agreed upon.  The 95%-100% sales price allows for net proceeds, too.  This means if someone received an offer for 95% of the sales price the bank proceeds would be the net amount after paying Real Estate Commissions, and any Customary Seller Charges related to the transaction including any transfer taxes.   The Bank will get the remainder and as mentioned previously, the "no recourse" feature means the Heirs nor the Estate are responsible for any shortfall.    Next month:  Buying a House with a HECM Loan.   


All Things HECM: February 2017

A HECM is an FHA Loan.  I received a call recently about why a condominium complex needed to be FHA approved for one of the homeowners to obtain a Home Equity Conversion Mortgage (HECM) the technical name for the "Reverse Mortgage."  The reason why is because a HECM is insured by the Federal Housing Authority, a division of the Department of Housing and Urban Development.   


Reverse Mortgages are actually a global product with the highest participation rate being in Great Britain where they call it an "equity release" loan.  I've long argued that if we were to change the name from Reverse Mortgage to something else more people would realize the amazing power a HECM loan has to offer.  The difference between the other global products and our HECM loan is that the HECM is the only one in the world with a government guarantee.  Those offering the loans globally do not get the same loan to value (LTV) as we do her in the United States because of that guarantee.   


What does the insurance do?  First, it makes the program even available.  Were it not for the FHA Guarantee there would be no Reverse Mortgage.  Presently the only competing product is in the "Jumbo" space for those with condos valued at more than $500,000.00 or single family properties valued over $1 million.   The LTV on this product is much lower than that of the HECM.  For example a 90 year old person qualifies for 75% of the value of their home with a HECM and the Non-FHA product only offers 50%.  It also lacks many of the boutique features offered by the HECM (more on that next month).


Other features created by the FHA Guarantees are the Line of Credit Growth Rate (covered in last month's column), the fact that there is "No Recourse" to the heirs or the estate (you never owe more than the value of the home), a tenure payment will continue for as long as someone is living in the home, and that the loan cannot be cancelled once put in place if all agreements are met (the loan is due on the borrower's 150th birthday).  Those agreements include the homeowner paying the property taxes, homeowners insurance and maintaining the property to FHA standards.   


The history of the HECM goes back to 1989.  It is not an entitlement program and FHA does not issue the loans.  They insure them, regulate them and the lenders, and effectively guarantee them.  Absent this, as indicated, there would be no Reverse Mortgage.   


Another thing FHA is make changes to them.  And there have been a lot of changes.   Most recently, Financial Assessment (FA) was implemented to strengthen the program (more on that in another column).  This makes it more difficult to qualify for a HECM loan because there is an "assessment" of the potential borrower's ability to pay their ongoing taxes and insurance.  Presently about 10% of the existing HECM loans are in default.  The unintended consequence of FA is that an estimated 20% of applicants are being turned away.  This is construed as a positive in the media because it reduces potential foreclosure risk of borrowers who have defaulted on these payments.   There are more changes coming, too.  Including changes to the FHA Condo policy previously mentioned.   


The bottom line, most people who understand the inner workings of the HECM program are perplexed that more people don't take advantage of it.  Thanks to the FHA insurance, it offers many advantageous opportunities around which several financial strategies can be deployed.