The long journey: from end-of-the-line to mainline

Laurie MacNaughton [506562] ©2016

What a change a few years make. In this week’s FinancialPlanning online magazine, a publication for financial professionals, author Dave Lindorff writes in a piece entitled “Reversal of fortune: Home equity makes a comeback for retirees”:

…[A]dvisers…are starting to view reverse mortgages as an important part of the retirement planning process, particularly since a set of reforms were imposed by the Federal Housing Administration and the Department of Housing and Urban Development in 2013.

The reforms he refers to are a tightening of guidelines surrounding qualifying for a reverse mortgage. Though many homeowners aged 62 or better still qualify, those with severe property tax default issues may have a harder time – or, in certain circumstances, may not qualify at all.

Lindorff goes on to cite FINRA, the Financial Industry Regulatory Authority, as an example of the financial planning industry’s change of heart toward reverse mortgages:

In the past, [FINRA] warned that reverse mortgages should only be recommended as a “last resort” for clients with no other sources of support besides the equity in their homes.

This past year, though…FINRA changed its recommendation.

The regulator now says only that reverse mortgages should be “used prudently.”

Not to pick on FINRA, but that is a little like saying, “Water can be beneficial to life, but only when used prudently.” I’m pretty sure any bona fide financial planner gets the fact that any financial tool should be used prudently.

Financial planners routinely recommend that their clients establish a line of credit to hedge against life’s unexpected events. But here’s the thing: the later in retirement an unexpected event occurs, the less able most people are to meet the month’s end payment that greets them once they’ve drawn on their line.

A reverse mortgage line of credit is not repaid on a monthly basis. Rather, the amount borrowed is repaid once the last person on title permanently leaves the home. The remaining equity goes to the homeowner or the heirs. And the difference between having a monthly payment and not having a monthly payment? It can mean the difference between staying in the home and having to leave the home.

Few government-insured financial products have ever been subjected to a beating like the FHA-insured reverse mortgage program has been over the 30 years since its creation. Nearly pronounced dead in 2012 when the last mega-bank stopped offering reverse mortgages, Tennessee Senator Bob Corker said to then-HUD Secretary Shaun Donovan, “I do not understand why you do not shut the program down.”

And why did HUD not shut down the reverse mortgage program?

Because HUD saw what those us of who don’t share Senator Corker’s $89.7 million in net worth saw: mainstream Americans whose savings simply were not sufficient to meet their financial needs in an ever-lengthening retirement.

Lindorff concludes his piece by quoting Steven Sass, program director at the Boston College Center for Retirement Research:

Reverse mortgages make sense not just for low-income people who want to stay in their homes but also for wealthier retirees who have considerable equity but want to goose their income streams.

You can say reverse mortgages need to be part of the retirement plan discussion.

Indeed. As we Americans age, nearly all of us will need every financial tool available to get through retirement with as much independence and dignity as possible.

Give me a call and let’s talk. I always love hearing from you.

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The Old, Poor, Sick Fallacy

Laurie MacNaughton [506562] © 2016

As supper came to a close my engaging dinner companion surprised me – not because he said something I hadn’t heard before, but because I hadn’t heard it for a long time.

“My clients aren’t candidates for reverse mortgages. Reverse mortgages are basically for the old, poor, and sick.”

There is certainly no dearth of data on the matter, so I was somewhat taken aback by my colleague’s settled declaration.

Fact versus fiction

So what do the data show regarding homeowners who take out reverse mortgages?

Nationwide statistics show that homeowners with higher than average incomes, and above average educations, tend to take out reverse mortgages at an earlier age than do homeowners with lower income and education levels. Part of the reason for this is access to better information, such as Dr. Wade Pfau’s report in last month’s Forbes Magazine:

[Researchers] found that using the standby [reverse mortgage] line of credit improved portfolio survival without creating an adverse impact on median remaining wealth (including remaining home equity). This provided independent confirmation that the reverse mortgage line of credit can help mitigate sequence of returns risk without impacting legacy goals.

Though wealth managers tend to be well-informed about recent retirement research, many of our oldest, poorest, and sickest are not actively working with financial planners. On the other hand, regions of the country with the highest home values and the highest education levels also have the greatest numbers of homeowners originating reverse mortgages while in their 60’s, well before they need access to the funds.

Inaccessible wealth

Most Americans have the majority of their wealth tied up in their home – a dynamic called asset illiquidity. Reverse mortgage, fundamentally a home equity line of credit, is designed to enable homeowners to access some of that equity, while not obligating them to a monthly payment. And, in what is perhaps the least known feature of the reverse mortgage line of credit, the credit line accrues a compounding growth rate. This means by the time the homeowner does indeed need access to a safety net, in most cases that safety net has grown appreciably.

Reverse mortgages are not a fit for everyone – no one financial product is.

But a reverse mortgage is going to play an important role in many homeowners’ financial health in retirement, particularly when used as part of a sound, informed, long-term retirement plan.

For more information on how an FHA-insured reverse mortgage may help with your clients’ long-term financial goals, give me a call. I always love hearing from you.

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Life is What Happens…While You’re Making Other Plans

Laurie MacNaughton [506562] ©2016

The gentleman on the phone said, “Honestly, we’ve been in a bad way for a while; it’s just finally come to this.”

After 52 years of marriage the “this” Martin and Bettie (not their real names) are referring to may come as something of a surprise. It’s a later-in-life divorce.

Martin is willing to stay the course – despite the fact the course has been bumpy for years.

Bettie, however, at age 73 doesn’t want to continue on for another potential 20 years.

This is not just one isolated case: according to the National Institute on Aging, while divorce rates in the general population have fallen, divorce among couples aged 62 and older occurs at a higher percentage than in any other age group.

Issues in a divorce later in life quickly reveal a difficult intersection between elder law and family law. For instance, when both spouses are living on Social Security and have few assets other than the marital home, how does the spouse remaining in the home pay the departing spouse’s portion of the marital share?

For some older divorcing couples, selling the marital home may make the most sense. But if one spouse is intent upon remaining in the home, one way to accomplish this can be by means of a reverse mortgage.

Couples married many years often have equity enough in the home for the proceeds from a reverse mortgage to pay the departing spouse’s portion of the marital share. Alternatively, reverse mortgage proceeds, plus an additional cash payment to the departing spouse, may make retention of the home possible, without the spouse remaining in the home draining retirement savings or picking up a monthly mortgage payment.

A reverse mortgage will not work in every “silver divorce.” But in many divorces involving homeowners in which at least one party is aged 62 or older, it’s one of the few ways a Property Settlement Agreement’s financial mandates can be met without forcing sale of the home, depleting financial reserves, or acquiring a monthly mortgage payment in the retirement years.

Divorce is no one’s “Plan A.” But as the classic line goes, life is what happens while you’re busy making other plans.

Give me a call and let’s talk. I always love hearing from you.

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The Breathtaking Irony

Laurie MacNaughton ©2016

It wasn’t yet noon, but already I had had the same conversation with two separate homeowners:

“It’s not that you have insufficient income; it’s that the first fruits of your income are going right back out the door to pay your home mortgage.”

“It’s like you know me,” the caller said.

Know you? No.

Intimately know your situation? Absolutely. I see it every day.

It boils down to this: retirement + mortgage payment = not a good combo for many older homeowners.

Nationally, most homeowners of retirement age owe nothing on their home by the time they retire. In the greater Washington, D.C. area, however, that is less likely to be true because many homeowners moved to the area as consultants after spending much of their successful career elsewhere. This means many homeowners go into retirement with years yet to go on their mortgage. An alternative – but common – scenario is that homeowners paid cash for their home, and now have much of their net worth tied up in a pricy, illiquid asset.

And the breathtaking irony is this: the same gifts and skill packages that enable homeowners to work into later life can also set them up to falter financially if health fails abruptly and catastrophically, or if any one of life’s many other vagaries ensue.

Back to this morning’s conversation: this homeowner, indeed a consultant, has a home conservatively valued at $1,000,000. He and his wife are in their mid-70’s, but still have 15 years to go on their mortgage. His health is still robust, but his wife was recently diagnosed with cancer. Their fear is they will encounter uncovered medical costs that will consume their investments. It was their financial advisor who suggested they look into a reverse mortgage in order to free themselves of their monthly mortgage payment.

Is a reverse mortgage a fit for everyone? Of course not. No financial product is.

Is a reverse mortgage going to play a part in the long-term financial wellbeing of many retiring – or retired – homeowners? Absolutely.

If you have a family member, client, or colleague who would benefit from knowing more about an FHA-insured reverse mortgage, give me a call.

I always love hearing from you.

And…

Check out my various YouTube videos. Just click the link, or google Laurie MacNaughton YouTube.

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Reverse Mortgages – Why So Scary?

Laurie MacNaughton ©2016

“Why are these things so scary?” That was how the man on the phone led off.

I had to laugh – not at the question, because, honestly, we’ve all been there. No, I had to laugh at his frankness.

Why are they scary? What is it about a reverse mortgage that causes significant numbers of people to dive for cover when they hear the very term?

There are many ways to answer this, but basically it boils down to this: it used to be a bad product. There was poor regulation and there were problems with some of the lending guidelines. And, frankly, there were some bad characters in the field of reverse mortgage lending.

So now you’re expecting me to say all those things have been fixed and it’s a good product.

That’s not what I’m going to say. I’m going to say all those things have been fixed and it’s a great product.

I’ve been in this field for years now, and have watched reverse mortgages perform just as intended: they create a financial buffer, they provide funds for in-home care, they extinguish income-sapping “forward” mortgage payments. And increasingly often I see them relieve aging adult children from draining their own retirement savings as they struggle to bankroll an advanced-elderly parent’s longevity.

A reverse mortgage is not a fit for everyone – no one financial product is. But as I’ve said many times, no one is going to get by on just their Social Security. No one is going to make it on their 401-K. Few are going to survive on their pension, their annuity, their IRA, their bank account – or their reverse mortgage. But when added together, all these combine to create a long-term means of financing retirement.

If you are – or someone you know is – thinking about a reverse mortgage, now is a really good time.

If you’d like more information on how a reverse mortgage may help you or someone you know achieve retirement goals, give me a call. I always love hearing from you.

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Harvard Report Points to Dramatic Senior Housing Shortage

Laurie MacNaughton ©2016

Ok, so we’re not exactly dealing with breaking news when we see Harvard’s housing research team reporting a shortage of senior-appropriate housing.

In fact, everywhere we look we see evidence of the shortage in senior-appropriate housing: Warrenton, Leesburg, Middleburg, Reston, Oakton, Arlington – pretty much everywhere you look in the greater D.C. Area you see new construction. But many of the new homes are multilevel “starter castles”…as I call them.

Harvard’s Center for Housing Policy study, titled “Housing an Aging Population,” backs up observations with numbers, and they’re a bummer.

Among other things, the report documents:

Within the next couple decades the population aged 65 and older will increase 120 percent. Over the same period the number of our oldest Americans, those aged 85 and older, will increase more than 200 percent.

Wowzers, right? But here’s where the report gets really scary:

  • The need for appropriate housing will radically outpace the availability of appropriate homes.
  • One in four households aged 85 and older spend at least half their income on housing.
  • Housing challenges are particularly severe for older adults with very low incomes – and most household incomes decline after the age of 85.

The takeaway? Pretty straightforward:

The number of older adults is rising. The need for affordable senior-appropriate housing is rising. But affordable options are not rising.

Not everyone can age in place. That’s just the hard truth. However, for those whose can age in place, everyone involved benefits. But we need to urge our communities to support construction of appropriate housing.

We can do this.

It’s just a matter of doing it.

Laurie

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This You Can Count On: Things Fall Apart

Laurie Denker MacNaughton

Here’s a phrase I haven’t thought about in years: critical system redundancy.

I’ve been aware of the term – along with other phrases like “gyroscopic effect” and “linear actuator” – since I was about three years old, the consequence of having a rocket scientist for a father. The reason I haven’t thought about the term for a very long time is that it just doesn’t come up that often in the world of Reverse Mortgage lending.

But when speaking with a friend today “critical system redundancy” came to mind, and despite the uncommon nature of the term itself, the concept is very common.

In a nutshell, here’s the idea: if you have something essential to operations, you’d better make darn sure there’s a backup. This is equally true when talking about the ruler of a sovereign nation, Pampers in the diaper bag, a spare tire in the trunk…or retirement finances.

Over the years I’ve met couples who didn’t save enough for retirement. But I’ve never met anyone who purposely didn’t save enough. And only rarely have I met someone who burned through retirement savings in foolish spending.

Rather, this is what I see: homeowners who have reached the age experts call “advanced elderly.” Many of these homeowners once had extensive savings, but simply have outlived their reserves.

I see homeowners whose adverse health event consumed savings, or whose late spouse suffered a condition that left the survivor with substantial debt.

I meet individuals who were laid off at age 60, aging parents raising grandchildren, retired women newly divorced, couples in need of home healthcare.

But I also meet the planners – the couples who know things fall apart, issues will eventually arise, that days of evil may come upon us as a thief in the night, as the Psalmist says.

These are homeowners who originate a reverse mortgage before a need arises, and who hold their reverse mortgage in reserve in order to take full advantage of the growth rate collecting in their line of credit.

A reverse mortgage is a tool, not a miracle. There is still going to have to be self-discipline. Retirees are still going to have to practice economy. That’s just the way it is for most of us. But that’s a far cry from lying awake nights worrying whether there is going to be money enough to last the month.

As I’ve said many times, in retirement no one is going to get by on just their Social Security. No one is going to make it on their 401-K. Few are going to survive on their pension, their annuity, their IRA, their bank account – or their reverse mortgage. But when added together, all these combine to create a long-term means of maintaining financial independence in retirement.

In fact, you can think of a reverse mortgage as critical system redundancy for retirement finances.

If you would like to explore how an FHA-insured reverse mortgage might help with your retirement plans or those of your loved ones, give me a call. I always love hearing from you.

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