The Pickle and the Pickle Jar

Today I met with two typical Washington, D.C. couples: well-educated, highly-sophisticated, both have traveled broadly and lived internationally. Both live in charming, high-end D.C. neighborhoods. And in what I can only call a rapidly emerging scenario, though well past the traditional age of retirement, both couples still work – and both have one advanced-elderly parent living with them.

What has transpired that the HECM now finds itself squarely within the retirement plans of a demographic who heretofore would not so much as have entertained the idea.

The answer?

Life expectancy.

The Pickle

We have prolonged life to a remarkable degree – but we cannot stop aging. We’re in a pickle: the old go on for decades, until the children of the advanced elderly are themselves deep into their own retirement years.

Many adult children will eventually be called upon to support their parents. The parents, no matter how independent they wish to be, cannot be left unsupervised. They need, at very least, an in-home companion, but as needs go up, costs go up. And here’s the tough part: the adult kids themselves need every penny they have to make it through retirement.

The Pickle Jar 

The graphic I often use when speaking on the HECM is one of an old fashioned pickle jar. Not the little kind where you can reach bottom with an iced tea spoon – no, the jar I’m talking about is one of the BIG ones, the kind you had to reach your whole arm down into to grab the big, fat pickle at the bottom. So that big jar, into which for 30 years homeowners have been piling pennies, is the home. Now the mortgage is paid off, the jar is full – or mostly so – but the jar lid is screwed on.

The FHA-insured HECM, when set up as a line of credit, allows seniors to reach into the jar and take out pennies – one at a time, ten at a time, or a fistful at a time – according to their need. It is a non-cancellable line of credit, waiting in reserve to be used as needs arise.

How does this help in the case of the families I met today.

As they labor to meet the needs of their advanced elderly family member, the “burn-through” rate of their income and savings is too rapid. They have done the math: if expenditures continue apace, there will be nothing left for them when they are that age.

In today’s Journal of Financial Planning, authors Dr. John Salter and Harold Evensky write, “…[t]he FHA HECM Saver offers unique and attractive features,” and then go on to say:

We find this risk management strategy improves portfolio survival rates by a significant amount. The improvement in survival rates is attributable to the mitigation of the volatility drain – the risk of having to sell investments when depreciated.

The Journal article is spot-on. Current trends suggest that within a few years, rare indeed will be the person whose older relative does not depend upon a reverse mortgage for income, for a financial safety net – and for the very preservation of dignity itself.

Give me a call. 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/

Reversing Years’ Worth of Skepticism

Even if they don’t adhere to it, most people have at least heard of the “bucket” strategy of saving for retirement. Basically, it’s a method of asset allocation, a way to diversify investments and save for the day you’re no longer working full time.

But here’s a question you might not know the answer to: for most people, what is the biggest – and best funded – bucket?  Cash equivalents? Fixed-income securities? Pension?

Answer: No, no, and no. For most people, the single biggest “investment bucket” is their home.

You can think about it this way: you might have designated several buckets. But if you didn’t put sufficient money into them during the working years, those buckets are not going to get you through retirement. However, most Americans paid into their home, even during the past few years when times were tough.

But here’s the problem: after spending years pouring the first fruits of one’s income into the home, that money is frozen, tied up in an illiquid asset. It’s an investment, certainly. But it’s not one easily converted into an income stream for retirement.

Increasingly, however, drawing upon that bucket by means of an FHA reverse mortgage is being recommended as a way to meet seniors’ financial needs during retirement.

FHA reverse mortgages have been around since 1988. But until recently, the financial planning community viewed them as the dirty underbelly of financial products.  It was the rare financial planner who saw any legitimate use for them whatsoever, let alone who used them in a strategic way.

However, within the past few years scores of scholarly studies have shown both the near-term and long-term positive impact of reverse on standard of living, financial portfolios, and estates.

In “How Important Is Asset Allocation To Financial Security in Retirement?” authors Munnell, Orlova, and Webb with Center for Retirement Research at Boston College state:

…[F]inancial advice…tends to focus on financial assets, applying tools that give prominence to the asset allocation decision. But most people have little financial wealth, and financial tools are often silent on the levers that will have a much larger effect on retirement security for the majority of Americans. These levers include delaying retirement, tapping housing equity through a reverse mortgage, and controlling spending [emphasis added].

Of particular interest to many financial planners is that, when set up as a monthly payment option, a reverse mortgage basically annuitizes the home – and it’s a considerably bigger annuity than most people would have been able to establish in the years they were supporting their family, helping with college tuitions…and paying their mortgage.

Rick Gow, wealth manager with the independent investment firm Lara, Shull, and May in Falls Church, Virginia, cites the example of a 66-year-old with a house valued at $400,000.

After subtracting closing costs, the retiree could receive a tax-free, monthly check of $1,252 for as long as the home remains the primary residence. By the time the homeowner turns 85, disbursements would total more than $289,100; by age 95, the total payouts would be over $435,600.

If the homeowner were to take a onetime, lump sum payout, he or she would receive approximately $256,800.  A third option would set aside that amount in a line of credit, the balance of which grows over time, tax free.

There is also a newer, reduced fee FHA reverse mortgage, called the HECM Saver. The over-all payout is less with this option, but Gow points out the lower closing costs make it a good option for some.

The majority of Americans fear running out of money in retirement more than they fear death, according to a May, 2012 AARP bulletin. In an America where 10,000 boomers a day turn 62, the FHA reverse mortgage has an increasingly pivotal role to play in retirement planning.

I always love hearing from you. Call me at any time with questions.

Laurie

Laurie 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/

Babies Don’t Have Dumb Ideas

When my daughters were teenagers I often said the biggest difference between teens and babies is that babies don’t have dumb ideas yet.

But both teens and babies have this in common: just a couple years later, both are more capable, more independent, and better able to care for themselves.

It’s tough to acknowledge, but I now have to add my mother to the comparison.

My mother is probably the most gifted person I know: brilliant, beautiful, funny, well read, extensively traveled, graceful and poised.

But she is getting old, and her proficiency in daily tasks is falling away at a relentless pace. And, unlike either babies or teens, a couple more years is not going to make the issue any better.

NPR Morning Edition’s Jessica Smith, in “Baby Boomer Money Squeeze Worsens, Multi-Gen Households Rise” (June 6, 2012), writes,

Roughly 78 million baby boomers are moving into their retirement years now. At first, they will be the “young” old. Legions of retired boomers soon will be walking around the mall, volunteering with community groups and taking grandchildren on trips.

At first, that can be good for the economy. But this immense generation, born between 1946 and 1964, will keep aging. Based on current medical outcomes, most of the people who live beyond age 85 will end up with dementia or other disabilities that require costly care.

Here’s how fast the numbers will ratchet up: In 1990, only about 3 million Americans were over the age of 85. Today, the figure is 6 million. By 2050, the United States will be home to about 19 million people older than 85, according to U.S. Census projections.(http://www.npr.org/2012/06/05/154001412/baby-boom-money-squeeze-is-set-to-get-tighter)

Almost 20 percent of advanced elderly Americans now live with their aging adult children, putting tremendous pressure on “leading edge” boomers who are hitting traditional retirement age. Boomers tended to have fewer children, later in life, which in some cases has resulted in their still having dependents at home at a time previous generations would have been saving intensively for retirement. Additionally, many middle-aged parents find themselves helping grown children who have lost jobs, homes, and businesses – the classic “sandwich generation” squeeze, made more intense by a prolonged recession.

We are a becoming a nation of the old and the older, the squeezed and the very squeezed.

Writes Ms. Smith, “For individuals, families, local government officials and federal taxpayers, this demographic shift will drain dollars and attention, and force extremely difficult decisions about living arrangements, as well as end-of-life care.”

When we have these talks about taxes and government, what kind of numbers are we talking about?  The primary number to watch is the national debt: in 1970, when boomers were young, the national debt ran about 28 percent of gross domestic product. It now stands at 70 percent.

And, as in the case of my mother, a couple more years is not going to make this issue any better.

According to Centers for Medicare and Medicaid Services, Medicare will remain solvent until 2024. Starting last year, Social Security already began paying out more than it takes in.

As former U.S. Comptroller General David Walker, a federal spending expert says, “Government has grown too big, promised too much and waited too long to restructure. It is going to spend less over time … which means that individuals will have to plan, save and invest for the future.”

Plan, save, invest…and take out a reverse mortgage, according to research put out by Boston College in May, 2012.

….but more in my next piece about several watershed reverse mortgage articles published this spring by major research institutions.

Laurie

         Laurie 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/

Too Much Life Left At The End Of The Money

Monday I had lunch with a Morgan Stanley wealth adviser. He is a charming conversationalist with a gift of giving animated accounts of issues he encounters.

Among the many things we discussed was the fact that, for the first time in his 27 years in the field, he has started having the following financial discussion with young couple:

• Save for your kids’ college education
• Save for retirement
• Save to support your parents, not if – but when – they run out of money

Gone, according to him, are the days we could expect an inheritance from our parents. Rather, most of us will watch our parents live to deplete their own savings, and will have to step in to financially support them in their last years. I myself, as one immersed in financing for seniors, certainly see this trend playing out.

It was like reading a contrived movie script when I got back to my Middleburg Bank office after lunch and read the following Wall Street Journal headline: “Counting on an Inheritance? Count Again.” The subtitle read, “The bad news: Many baby boomers are likely to get less money from Mom and Dad than they thought. The worse news: They may have to help their parents financially instead.”

For many Americans, too much life left at the end of the money is a reality. According to the WSJ article:

…a 65-year-old man has a 60% chance of living to age 80 and a 40% chance of reaching 85. For women, the odds are 71% and 53%, respectively. All of this has made the 85-and-over age bracket the fastest-growing segment of the population. In an era of low interest rates, volatile financial markets, and rising costs for health and long-term care, finding money to cover those years isn’t always easy.

From the side of the desk I sit on, I would change this last sentence to read, “…finding money to cover those years can be nearly impossible.”

However, that picture can change dramatically if proceeds from an FHA-insured reverse mortgage (FHA HECM) are added to the equation. In fact, the Journal article goes on to say:

…there are several steps families should consider, financial planners say. Among them: Have parents recalibrate their budgets, downsize to a smaller residence, buy an annuity or longevity insurance to lock in a lifelong income, or take out a reverse mortgage.

I have often said the FHA HECM is as close to a miracle product as you are ever going to see in the world of finance. It’s not a fit for everyone, but for many, not only is it a good option, it is an excellent option. It lifts the burden on the upcoming generation, and allows seniors to live out their final years in the dignity and comfort of their own home.

A separate product, the FHA HECM for Purchase, is a purchase loan available for the senior who needs to relocate into a home better suited to aging in place.

Call any time. I always enjoy hearing from you – and I love walking you through your reverse mortgage questions. Talk to you soon.

Laurie

Laurie 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/

READ THE FULL ARTICLE AT: http://alturl.com/b3cpm

FHA Weighs Rule Reversal, Boon for Condo Sales?

Daily Real Estate News | Tuesday, May 22, 2012

The Federal Housing Administration is reportedly considering revising rules that many in the real estate industry have called overly strict and that have left many condo units ineligible for FHA’s low-downpayment mortgages.

For example, one sticking point under the FHA’s rules has been that “individual condo units cannot be sold to buyers using FHA-insured mortgages unless the property as a whole has been approved for financing,” The Wall Street Journal reports. However, condo association boards are increasingly opting not to obtain recertification of their buildings for FHA loans due to its tightened regulations against condo units.

FHA’s regulations “have had an enormous impact on individuals,” says Moe Veissi, president of the National Association of REALTORS®. More condo unit residents are finding they are unable to sell their unit because the condo board hasn’t obtained approval from FHA, Veissi told The Wall Street Journal. This then can have a roll-over affect that negatively impacts the price of condo units in the buildings then.

Half of all condo buyers tend to use FHA mortgages, and it’s an important source of lending for first-time and minority home buyers, Christopher L. Gardner, managing member of FHA Pros, a consulting firm that helps condo boards obtain FHA approvals, told The Wall Street Journal.

FHA officials say they are willing to reconsider some of their rules that have raised such an outcry among condo owners, lenders, and real estate professionals. For example, one rule the FHA is reportedly reconsidering is its stance on non-owner occupancy. As of now, FHA requires that no more than 50 percent of the units in a condo building be non-owner occupies. “This rule alone has made large numbers of condominiums in hard-hit markets ineligible for FHA financing, where investors have purchased units for cash to turn into rentals,” The Wall Street Journal reports.

FHA also is reportedly revisiting its condo rules on how many owners in a building can be delinquent on their fees. As of now, FHA refuses to approve a project if more than 15 percent of the condo units are 30 days or more late on their condo association fees, The Wall Street Journal reports.

Source: “Condo Sales May Become Easier if FHA Revises Rules Governing Mortgages,” The Wall Street Journal (May 18, 2012)

Financial Planners to Reverse Mortgage Lenders: Educate Us

by Elizabeth Ecker Published in News, Reverse Mortgage

A panel of financial planning professionals shared insight with attendees of the National Reverse Mortgage Lenders Association conference in Irvine, California last week. By and large their message to reverse mortgage professionals was: education is paramount.

While some financial planners do understand the viability of reverse mortgage products and they ways in which they can work for clients, and even with the help of recent positive financial planning press on the products, there is still work to be done on the education front, they say.

“I was getting a lot of phone calls about reverse mortgages,” said Pat McClain, senior partner and founding principal of Hanson McClain Advisors of his early experience with reverse mortgages. “I initially had a negative attitude toward reverse mortgages. But I realized they weren’t the reverse mortgages of old; they actually help people if used correctly.”

McClain, who became one of the founders of Liberty Reverse, now advises clients on financial planning. While his mind was changed, there are still others who need help understanding how the products can work.

“In terms of clients’ perceptions, there is still a lot of work to be done,” says Jerry Clements, certified financial planner with Ameriprise. “For most there is a negative connotation when I talk to clients.”

But, Clements says, there are ways reverse mortgage professionals can work with financial planners to bring them up to speed. Some are working with reverse mortgage advisors already, others are not.

“A lot of us still have preconceived ideas. …hopefully over time with education [the reverse mortgage] could be something they integrate more as a tool to prevent portfolio failure,” he says.

While real estate professionals focus on location, location, location, McClain says, for financial planners, it’s education that counts.

“For us in the financial planning community, it’s education, education, education,” he says. “You may assume we understand how it works, but some do not have a clue. It’s a process. It may take years to develop the relationship, but if you do and there’s that trust, you will be top of mind. Our clients are asking about it and the more educated we are the more we can help our mutual clients.”

Looking ahead, McClain says, the reverse mortgage could be incorporated into financial planning calculators.

“Figure out as an industry how to bake calculators into financial planning software, so it shows up as a line item. It will make a difference in three to five years, whether they recognize it now, or not.”

Wall Street Journal: Without a Reverse Mortgage, Most Americans Won’t Make it Through Retirement

Saturday’s Wall Street Journal article by Tom Lauricella minces no words: “Your financial adviser doesn’t want you to read this column.”

What would cause this venerable financial publication to introduce a piece in such robust terms?

Because, based upon research done by the highly esteemed Center for Retirement Research at Boston College:

Without making any changes to their savings and investment strategies, 74% of households would fall short of their income needs at age 62, and 47% would fall short at age 67, when individuals (born in 1960 and later) become eligible for full Social Security benefits.

By anyone’s standards, these are scary numbers.

This sobering data, fortunately, is not the whole story. The article goes on to state that when certain “levers” are pulled, seniors’ odds improve significantly.

By adding two factors – the aforementioned “levers” – to a retirement portfolio, research demonstrates that odds swing greatly in seniors’ favor.

So what are these two levers?  First is working longer. This cuts down the number of years spent in retirement, and adds savings to the retirement kitty. Demographic studies consistently show people are working significantly longer even compared to just a few years ago, and this trend looks poised to continue.

And the second lever? For many Americans entering retirement, or for those already retired, a Reverse Mortgage makes possible living out their retirement years with dignity and in financial security.

With the FHA-insured Reverse Mortgage, homeowners never give up title, cannot get underwater, never make a payment as long as they remain in the home, and never have to move.

Read the whole article at: http://alturl.com/jiu2o

CNBC Reports on Financial Planners’ Rising Interest in FHA Reverse Mortgage

“Financial planners often don’t even understand [reverse mortgages] because the lessons they have learned (from other financial products) don’t apply,” said Barbara R. Stucki, vice president of home equity Initiatives at the National Council on Aging.

But advisers are now jamming them into their tool boxes. Financial planners who once shunned them as too costly and confusing are starting to see their value – especially as other cash sources dry up for retiring baby boomers.

“A reverse mortgage can be a perfectly good way to use your home equity,” said Stephanie Moulton, an Ohio State University public policy assistant professor and reverse mortgage expert who has worked a reverse mortgage counselor for American Association of Retired Persons.

“The danger is that boomers might draw down their equity and spend it on the wrong thing, like expensive vacations, and find themselves with none left at age 75 when they need it even more. But if you use reverse mortgages as part of a financial strategy, they can be a sophisticated product that fills a real need.”

How They Work

Reverse mortgages are offered to people who are at least 62 years of age. There are two main types set up under the FHA’s Home Equity Conversion Mortgage, HECM, and referred to by insiders as ‘heck ‘em.’ (The Federal Trade Commission has a reverse mortgage primer on its site.)

The “standard,” or traditional, reverse mortgage, gives you a stream of income for a number of years, usually as long as you live in your home. As with Social Security, though, there is no “means-testing” or upper income limit. The program can pay thousands of dollars per month on principle of up to $625,000. It is government-guaranteed and not taxable income, and it is not likely to affect Social Security or Medicare benefits. The older you are, the higher the payout.

Read the article at: http://alturl.com/qo9p2

Housing Expert John Adams on the FHA HECM (Reverse Mortgage)

CLICK HERE: John Adams on the FHA Reverse Mortgage program, as seen on Fox News

In this short interview, John Adams, an expert on east coast housing issues, takes a look at the FHA Reverse Mortgage. Among other interesting comments he makes, he states that his view of Reverse Mortgage has changed over time. Once not a big advocate of the program, he now strongly supports the FHA HECM as a way for seniors to use their home to stay at home – where most want to be.

Let me hear from you about how your views on the FHA HECM have changed.

You Can’t BUY a Home With a Reverse Mortgage…You Dummy

Every once in a while something so odd happens that you spend the next few days…or weeks…or MONTHS – if it’s odd enough – trying to process the various elements of the event.

Exactly a year ago I was in the middle of a complex HECM for Purchase transaction. It involved a knotty situation in which a builder had declared bankruptcy before completing construction on a condo, and another builder had finished the project. However, the new guy had never properly recorded some of the completed condo units, resulting in significant tax issues. I will sum up the details of the situation simply by saying Uncle Sam does not smile upon this business model.

After a couple weeks mucking about for resolution utilizing the obvious channels, such as the homeowners association attorney – whose job description, incidentally, does include this type of thing – I decided to go to the top of the food chain and contact my client’s US Congressman.

Imagine my surprise when I received a mini-lecture from a congressional aide, who stated with great conviction, “You can’t BUY a home with a reverse mortgage. Reverse mortgage is a refi product. So put that in your pipe and smoke it, you dumb Reverse Mortgage Specialist.”

Ok, so maybe he didn’t say this last part. But it was implied.

Well, well, well, Mr. Aide, thank you for THAT helpful input.

So, is that to say you CAN you buy a home with a reverse mortgage?

In a word, yes!

So how does Reverse for Purchase – also known as HECM for Purchase – work? And why do so few people know about it?

The concept of HECM for Purchase could not be more straightforward: the home buyer, aged 62 or older, provides a down payment, the size of which is determined by the home buyer’s age. The HECM loan provides the rest.

That’s it. End of story. You are in your home for the rest of your life – or as long as you want to live in the home as your primary residence – and never make another payment.

This smells fishy. How can I live in a home and not make payments?

Answer: Not making payments is very different from saying the loan is never repaid. The loan is always repaid – it’s just that you don’t repay it. When you are finished with the home, the home itself repays the debt.

But when is the loan repaid?

Answer: The loan is repaid when the last person on title moves, sells, or dies. In other words, the loan is repaid BY THE HOME once the senior no longer needs the home.

But where does the money come from to repay the loan?

Answer: The home is either sold, and the proceeds from the sale repay the loan, or the family secures new financing and buys the home.

But what if the home has gone down in value and the proceeds from the sale can’t repay the loan?

Answer: The home repays what it can. Any shortfall is made up by the mandatory Mortgage Insurance Premium (MIP).

But what if I want to leave the house to the kids?

Answer: You can still leave the house to the kids: it’s still your house. The kids will need to 1) line up their own financing, and buy the home, or 2) sell the house. However, they would have to do this anyway if you had a “forward” mortgage…AND they would have to make your mortgage payment every month after you were gone, or risk losing the house.

How long can I stay in my home?

Answer: As long as you want to. As long as you pay your property taxes, keep current on your homeowner’s insurance, and maintain the home, you never have to move. You can, however, move whenever you wish.

Ok, So I’ll Be Blunt: If this program is so great, why don’t more people know about it?

Answer: First, it has not been around all that long: FHA rolled it out just over three years ago. Second, despite a lot of money spent on financial education for seniors, there are still far too many people – like the congressional aide mentioned above – who are very bold in speaking very forcefully about topics they know very little about. And that is very unfortunate.

If you or someone you know needs to move into a home better suited to aging in place, call me.  FHA’s HECM for Purchase may very well make this possible.

I always love hearing from you, and I love answering questions about senior housing and matters impacting the financial health and the long-term well being of our seniors.

Laurie

Laurie MacNaughton [NMLS# 506562]
Reverse Mortgage Consultant
Senior Products Division
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