How is a Reverse Mortgage different from an Equity Line of Credit?

Laurie MacNaughton 2017

Answer? In several important ways…

Or…you can just strike oil

Laurie MacNaughton [506562] © 2017

When I was little I played house. I played school. I played orphan, pilgrim, mommy, fairy, and – as we called it then – Indian. In another nod to the political incorrectness of the time, my sister and I once played Siamese twins by tying ourselves together using my father’s neckties. Notice…”once.”

But never among the roles my siblings and I played did we include “adult child of an aging parent.” I didn’t see this role in the families I knew nor did I read about it in the books I read. In fact, the role wasn’t really much of a “thing” back then – and by “back then” I mean the 1970’s.

Fast forward: today most of us are either dealing with aging-related issues as they impact ones we love, or we have friends who are. And, typically, chief among the issues is the financial cost of care.

This Saturday past I met with an impressive couple in their lovely home. Both retired medical doctors, they did everything right – saved, lived within their means, engaged in a healthy lifestyle. But now, though only in their late-seventies, they’re beginning to worry their retirement savings may not be sufficient.

So what’s the deal here? How could a solidly upper-middleclass couple have made a significant dent in their savings ahead of schedule?

Easy: they’re bankrolling the wife’s 96-year-old mother. And in this case, though Mom is advanced-elderly, she’s by no means at death’s door. From all appearances, she could live another five years, maybe more. She’s not going back to work, however, and she long ago exhausted her own retirement savings. That means her daughter and son-in-law are probably looking at several more years of providing for Mom – and Mom’s care costs are unlikely to decrease over time.

Scarcely does a week go by that I don’t see some variation on this same theme: a couple who indeed planned appropriately for retirement, but was thrown a curve ball in the form of financing a relative’s longevity. Good health insurance is not a cure, as insurance doesn’t pay for many goods and services attendant with aging, and family typically foots the bill for non-medical sundries.

We hear a lot about a sustainable drawdown of retirement savings. But the not-uncommon situation I’m describing is a double drawdown, meaning the retired couple is funding their own retirement and a parent’s longevity. If the couple also goes on to enjoy a long life, they are likely to need someone to step in to help finance them. You can see a multigenerational impact in the making.

I hasten to add I was privileged to assist in the care of my parents, both of whom died of cancer a few years back. However, I am still in the workforce, and consequently did not experience a drawdown of my retirement funds, let alone a double drawdown. At least not on the surface.

Look a little closer, however, and there was a very real long-term financial cost: every dollar I spent flying to Arizona to spend weekends with my parents was a dollar I was not putting into retirement savings – and transit costs barely scratched the surface of my expenditures. Don’t get me wrong: I wouldn’t have traded those months with my parents for all the 401(k)’s in the world. But the point remains: the financial reality of caring for aging parents carries a long-range impact.

So what’s the cure here? Well, one is what J. Paul Getty said, namely, “Rise early, work hard, strike oil.” Sign me up.

For the rest of us, there are several things financial professionals recommend, including  becoming a lifelong saver – meaning continuing to save even once you’re receiving Social Security or other retirement benefits. Increasingly I hear financial advisors say they’re incorporating aging-parent care-costs into discussions even with younger clients.

But here’s also where a discussion of reverse mortgage comes in. Along with many others, when I first heard the term I assumed reverse mortgages were some shady mess cooked up in the back alley – and there’s a historical reason most of us think that. However, the modern reverse mortgage is an FHA-insured home equity line of credit designed to give homeowners access to some of their home’s equity, while not creating a monthly repayment obligation.

Reverse mortgage is going to play a role in the long-term financial well-being of many boomers as they age. Furthermore, if boomers’ parents are homeowners themselves, the parents’ reverse mortgage can help fund their care, taking some of the financial burden off adult children. Indeed, over the years I have done several “twin” reverse mortgages – one for the adult children and one for the advanced-elderly parent.

With longevity increasing, none of us is likely to get by on just our Social Security. Few will survive just on an IRA, a 401(k), or pension – or, for that matter, on a reverse mortgage. But when added together, all these contribute to becoming “self-pay” through the end of life.

A reverse mortgage is 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, long-term retirement plan.

Or…you can just strike oil.

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Understandable issues, unintended consequences

Laurie MacNaughton © 2017

The call seemed like an outlier: the elder law attorney said her widowed, wheelchair-bound client was poised to lose her home due to foreclosure of a HECM after the homeowner failed to pay her property taxes.

Weird thing was, the homeowner had long had a full property tax waiver.

And then came another call, and then another – all within a couple weeks. All borrowers involved had had property tax waivers.

The question then became the following: had anything in the tax code changed regarding property tax waivers for senior homeowners?

Bingo.

A few months earlier tax waivers for the elderly had been changed to tax deferrals. And that’s a big deal.

Here’s why: the Code of Federal Regulations (CFR) citation addressing tax deferrals as they impact HECM reads:

The mortgagor shall not participate in a real estate tax deferral program or permit any liens to be recorded against the property, unless such liens are subordinate to the insured mortgage and any second mortgage held by the Secretary (24 C.F.R. PART 206, § 206.27 (B)(3)).  [Emphasis added]

Tax deferrals are also addressed in the HUD Handbook:

The mortgagor is prohibited from participating in any real estate tax deferral program unless the lien created by this program is subordinate to the insured mortgage held by the mortgagee (HUD Handbook, 4330.1, chapter 13, section 12). [Emphasis added]

Due to federal guidelines on deferrals, if a HECM-holder’s tax waiver is turned into a deferral, the homeowner is subject to a clawback of the full amount of back taxes. If they cannot come up with the clawback and report late on their property taxes, their HECM is in default.

Virginia elder law attorney Veronica E. Williams cites an example.

She says:

My client, a participant in a senior homeowner tax relief program, has a reverse mortgage. Per county requirement, my client filed his annual application for tax relief and it was accepted.

Due to a municipal change from tax waivers to tax deferrals, my client’s reverse mortgage servicer became aware of the fact he now has tax deferral status instead of tax exempt status. As a result, the servicer advised that he had to withdraw his application for tax relief. When my client withdrew the application all deferred taxes became due and payable. The reverse mortgage servicer then notified him he had to pay all back real estate taxes.

The story gets worse. Attorney Williams continues:

My client advised the servicer he was unable to pay the taxes all at once because he was on a fixed income.  The servicer offered to put him on an affordable installment plan, and he agreed to the terms of the plan.  However, the servicer also advised that HUD would have to approve the payment plan.

Unfortunately, HUD did not approve the payment plan. This lack of approval was not based upon any fault on the part of my client, but instead was based upon the fact my client’s reverse mortgage didn’t contain funds enough to pay the back taxes.

The reverse mortgage servicer paid my client’s real estate taxes and then sent notice he would be subject to foreclosure and eviction if he did not reimburse them for paying back real estate taxes.

This homeowner did nothing wrong. The rules changed and now he stands to lose his home.

From the county or municipality viewpoint the issues here are understandable: county boards concede the point that payment of property taxes can be a crushing burden in the retirement years. However, many counties face declining revenues, have yet to recover financially from the recession. For this reason they feel they cannot forfeit taxes outright, and instead recover back taxes after the property has been vacated by the senior homeowner.

But here’s where the math becomes complex: if seniors who were successfully aging in place and on track to being self-pay through the end of life lose their homes, solutions can represent a pricy fix. Long-term solutions potentially carry a price tag that far exceeds the tax revenue the county recovered. For instance, is there affordable housing sufficient to accommodate the newly displaced senior? And, does the county want to foot bill for aging homeowners who cannot qualify for reverse mortgages in the future due to property tax policies?

One last twist here: If the senior homeowner had Medicaid home-based care (also called an EDCD Waiver), and now has no home in which to receive care, are there enough Medicaid-approved nursing home beds to house the Medicaid recipients?

Medicaid is a cooperative between states and the federal government, meaning the financial burden does not fall upon individual counties’ shoulders. If counties inadvertently cause a care crisis, they don’t foot the bill; rather, the burden falls to the state and federal governments. No county would dare say, “We are a senior un-friendly community, and our goal is to disenfranchise our older homeowners.”

And yet – and yet – this can be precisely the unintended consequence if counties move forward with tax deferrals in a manner that does not take HECM guidelines into account.

There are examples of states successfully addressing the waiver/deferral issue. National Reverse Mortgage Lenders Association Executive Vice President Steve Irwin says California, Oregon, Massachusetts, and New Hampshire record tax liens subordinate to a HECM, thus fulfilling both the CFR and HUD Handbook qualifying requirements. Oregon is taking it one step further and moving legislation on the matter.

Making a way forward for as many people as possible to be self-pay through the end of life is a goal shared by many homeowners and municipalities alike – and reverse mortgage plays an integral role in achieving this goal.

Informed tax policy is going to prove a determining factor for many as to whether aging in place remains a viable option. As author Eckhart Tolle says, “Awareness is the greatest agent for change.” ‘Tis indeed, ‘tis indeed.

Potato Skins and Emerging Trends: Aging In America

Charles, Jr., always preferred the name Chuck. But in his years as a scrappy street-fighter in Providence, Rhode Island, he was simply called “Bull Dog.” The aptness of that description I will leave unaddressed.

Chuck was the only son of Charles, Sr. and Elizabeth, New England socialites who came into fast money when Charles, Sr., a chemist, patented a durable fabric blend for Pullman sleeper cars. Wanting nothing to do with his parents’ new-found wealth, Chuck dropped out of high school to run bets for an off-track gambling ring. Not yet out of his teens, he was a heavy drinker, ruthless fighter, and on several occasions narrowly escaped police sweeps.

Around 2:30 Sunday afternoon, December 7th, Chuck and a friend were walking to join a game of nine-pin. One street over they heard yelling, and thinking a fight had broken out, ran to join the fray. What they found changed their lives, their nation, and indeed the whole world. What they found, of course, was news of Pearl Harbor.

Chuck’s particular journey led him into the U.S. Eighth Army Air Corps, proudly referred to as “The Mighty Eighth.” On its twenty-second mission his B-24 was shot down, and Chuck and the one other surviving crew member spent the remainder of the war in Stammlager Luftwaffe #17b, otherwise known as the infamous Stalag 17.

Hunger, cold, vermin, illness, and despair defined life for the 4000 men in the camp. Chuck, wanting documentation of the men’s lives, worked alongside two other corpsmen to create photosensitive paper, done by coating scraps of paper with a potato skin emulsion. The paper was then placed into a light-tight box, with only the smallest of holes carefully punched in one end. These photos exist to this day in a book called Kriege Memories, self-published after the war by Chuck and one of his fellow corpsmen.

Chuck, now gone, told me his story several years ago. As the daughter of an aerospace engineer, I gathered details of his story the way others collect baseball memorabilia, Indian head nickels, or teacups. I have Chuck’s photos, several Western Union telegrams, Red Cross communications, and his letters home that were never posted.

For me in some ways this account has grown richer over the years. Some of the power comes from the photos themselves, arrestingly clear despite their fundamentally unstable original medium, and their having been stored for years before being preserved.

But part of the elemental power is simply this: this was a generation that did what it took, with what was at hand, to get the job done. And though we are losing this generation, these qualities still persist.

This week past I met with…a “family.” My client, the homeowner, is well past 80, widowed, and in need of companionship, light housekeeping, transportation, and help with medications. Living with her is a male companion, a long-time friend, who is several years her junior. Also in the home is a pre-teen boy and his mother, who lost her own home when she was laid off from her HR job. She is now back to work, and well on her way toward regaining financial stability.

Messy, right?

Oddly, no.

In fact, I have been in households composed of blood relatives that were far less functional, far less kind, and in far greater distress.

Life is really just stitched-together stories, so I asked my client to tell me the story of her household. The simplicity, elegance, and bald-faced honesty were arresting: she said, in effect, “I have a house, they needed a home. I need help, they have youth.”

Even now this is a generation that does what it takes, with what is at hand, to get the job done.

And, as it turns out, my client and her new, blended family are far from being an isolated phenomenon. In fact, it is one of the fastest-growing household trends…

And more on that in my next post.

Let me know what you’re seeing – I always love hearing from you.

Laurie

Laurie Denker MacNaughton [NMLS# 506562] · Reverse Mortgage Consultant · Middleburg Mortgage, a Division of Middleburg Bank · 20937 Ashburn Road, Suite 115 ·Ashburn, Virginia 20147 · 703-477-1183 Direct · LMacNaughton@MiddleburgBank.com · www.middleburgmortgage.com/lauriem

Visit my Informational Blog at https://middleburgreverselady.wordpress.com/

How Much Money Will You Really Need In Retirement?

How Much Income Will You Really

Need in Retirement?

Erik Carter Erik Carter, Contributor
RetirementRetirement (Photo credit: Tax Credits)

When we meet with individual employees, one of the most common retirement questions we get is how much income they will need in retirement. Unfortunately, it’s one question we can’t answer for them.  For example, I may run a retirement calculation that projects your retirement income at $65k in today’s dollars at age 62. What I can’t tell you is whether that’s enough or whether you should save more or retire later. Financial planners typically say you need about 80% of your income before you retire but actual needs can vary considerably. Here are some questions to help you figure that out.