It’s only obvious if you know your options

Laurie Denker MacNaughton ©2016

I read a great term recently: retrospectively obvious.

Maybe it struck me because over the years I have done many things that were retrospectively obvious – from trying to take off my jeans while still wearing my tennis shoes to asking a vegan for a restaurant recommendation. Not good, not good.

But some of life’s avoidable difficulties are not retrospectively obvious, only because there is no known alternative.

Yesterday I met with a husband and wife who could have been neighbors, friends, or colleagues: both hold graduate degrees and have pension plans, they own a lovely home, they change their oil every 5,000 miles. Ok, so I’m not sure about that last one. But you get the point.

But here’s what they also have: retirement accounts that are almost tapped out – and they haven’t yet retired though they’re both approaching 70.

How did this happen? Profligate spending? Extravagant lifestyle? That’s what most of us would assume if given the bare bones of the scenario.

But the answer is far more common, far more relatable, far more touching: for 17 years they bankrolled the wife’s incapacitated father, until he died this spring at the age of 92.

First they used the father’s long-term care – until it ran out. Then they used the father’s savings, until those ran out. Then they sold the father’s home and moved him in with them. Then they continued to care for him, draining their own saving to cover what Medicare did not.

Now they’re looking to retire. They’ve done the math. If they live to age 90, their own adult kids are going to have to bankroll them – which means the adult kids won’t be able to save appropriately. You can see the dominos lined up far into the future.

Let me interject here on a personal level: my own parents both died within the past few years. I will be the first say it was a blessing to journey with them through their final chapter – and I can testify to the fact the financial cost was not inconsequential. Ignoring aging parents’ needs is not what I’m talking about here.

What I am talking about is that, as a parent myself, I would do anything possible to prevent my adult daughters from having to bankroll me as I age.

“Self-pay through the end of life” is a term I heard years ago while attending a conference on aging. And this is where reverse mortgage plays a role.

A reverse mortgage is a home equity loan. End of story. However, it’s a home equity loan that does not have a monthly repayment obligation. Rather, the loan is repaid when the last person on title permanently leaves the home.

But there’s another element – a lesser-known element – of a reverse mortgage line of credit that makes it a valuable long-term financial planning tool: the line of credit grows over time, not unlike an annuity. However, unlike an annuity, the funds from a reverse mortgage are non-taxable.

Rarely is a reverse mortgage going to be the full solution to funding retirement. But here’s what a reverse mortgage is: a home equity loan for the years when having a monthly mortgage payment can be a back-breaker. It can be a miracle for adult children struggling to bankroll their parents’ longevity, and make aging in place possible.

A reverse mortgage is not a fit for everyone. 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 maintaining dignity and independence in retirement.

In retrospect it seems so obvious that a reverse mortgage can help fund a parent’s longevity. But it’s only obvious if you know your options.

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


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Silver Divorce – How Reverse Mortgage Can Make a Way Forward

When Ill-Conceived Rules Go Bad

Laurie MacNaughton ©2016

For nearly thirty years FHA’s reverse mortgage program has enjoyed tremendous success in making a way forward for aging homeowners to remain in their own homes. But just like any other loan program, over time guidelines needed to change to reflect evolving realties. In the case of reverse mortgages this included cutting back on available funds to accommodate ever-lengthening life expectancies.

After the housing crisis additional major changes were made to the program, including requiring that every reverse mortgage applicant pass a federal “financial assessment.” This was done to protect the FHA mortgage insurance fund, and to ensure the program’s long-term viability.

Nationally, numbers reflect the fact that some borrowers have indeed failed to qualify under the assessment guidelines – and that may have been necessary.

But now another round of changes is being considered. In addition to raising the bar yet higher, the proposed rules appear plain ill-conceived.

The most problematic of the proposed new rules may be including utilities in the financial assessment, “if failure to pay…utilities would result in a lien on the property.”

A couple things here.

First, what unpaid bill doesn’t run the risk of becoming a lien? I have seen hospital liens. I have seen homeowner association liens. I have seen eye-doctor liens. Why doesn’t FHA just say, “If you’re an aging homeowner and could potentially fall behind on future bills, start packing now”?

Second, there are many, many housing-assistance programs. A quick Google search returns references to hundreds of programs, some federal, some state-run, some private, and many which combine several funding sources.

But most of them have maximum income restrictions, and many, including some of HUD’s own affordable housing programs, don’t kick in until income is 60% below the regional average.

By contrast, as guidelines currently stand, to qualify for a reverse mortgage that enables homeowners to remain in their own home, combined homeowner’s insurance and property taxes are not supposed to exceed 10% of the homeowners’ income (HECM Financial Assessment and Property Charge Guide, §3.98).

So what happens if utilities are now included in that 10%?

Here’s what could happen: fewer homeowners could qualify. And here’s the thing: there is a really big gap between 10% of one’s income going to property taxes and insurance, and financially being in the bottom 30% of one’s region. So where are our aging who fall into the donut hole supposed to go?

I honestly don’t think HUD is trying to turn homeownership into a perk available just to the “welderly,” the wealthiest of our aging homeowners.

But advertently or inadvertently, that certainly looks like what they’re proposing.

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What to do about Mom?

Laurie Denker MacNaughton [506562]

The respirator’s soft “chhhh…pffff” sounded in the background as Susan and I sat at the kitchen table. “Years ago,” Susan told me, “I promised Mom, come hell or high-water, I would let her die at home – and I plan to do whatever it takes to keep my promise.”

It’s one thing to say that. But what do you do when you’re overseeing care and medical needs outpace your ability to foot the bill?

Susan’s parents had not gone into retirement financially unprepared: they retired with federal pensions, Social Security and Medicare, substantial savings, little debt and no mortgage. But four years back, on Thanksgiving, Susan’s mother had a massive hemorrhagic stroke. She spent 3 weeks in the hospital, and another 30 days in rehab. But when she failed to progress in her recovery, she was discharged – and Susan, true to her word, brought her mother home.

First they utilized their long-term care benefits until the benefits ran out. Then they used their savings. When those were gone, Susan began tapping her own retirement savings to help cover her mother’s in-home medical care. This was clearly unsustainable, so Susan made an appointment with an elder law attorney, who suggested she look into a reverse mortgage for her mother.

In this case, due to the value of the home and the homeowners’ ages, the reverse mortgage will provide funds enough to cover another 4½ years of care, and the attorney is working to put in place additional benefits that will further stretch the reverse mortgage funds.

Increasingly, boomers face this same challenge: helping mom and dad finance care, even as they themselves labor to save for retirement. Reverse mortgage can play a significant role in helping balance this equation.

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

But as we Americans age, nearly all of us will need every financial tool available, either as we fund our own retirement, or help mom and dad fund theirs.

If you have questions, give me a call. I always love hearing from you.

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Wealth managers’ changing views on Reverse Mortgage

9 surprising ways to use a reverse mortgage

By Mary Beth Franklin • InvestmentNews © 2016

Financial advisers who dismissed reverse mortgages in the past may want to take a second look. Consumer protections have increased and set-up fees have been dramatically reduced. Leading researchers believe reverse mortgages could solve some of the income challenges of retirees who saved too little to finance a retirement that could last decades.

Read more at:

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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