Presented by Mark Schumacher NMLS 519754 This is where financial planning counts Help your client conserve this asset do not plunder this asset Identify the strategies that help secure retirement ID: 802125
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HECM 101
For Financial Professionals Only
Presented by
Mark Schumacher
NMLS # 519754
Slide2This is where financial planning countsHelp your client conserve this asset / do not plunder this asset!Identify the strategies that help secure retirement
Slide3What is Home to the Retiree?
Source of security and comfortConnection to family and friendsLikely the largest asset
US CENSUS Bureau
Slide44
Research Demonstrates Housing Wealth Contributes to Retirement Security
Slide5What is a Reverse Mortgage ?A Home Equity Loan with Special Features 1. Payment deferred until no longer live in home 2. Proceeds aligned with life expectancy 3. Available to homeowners 62 or older
4. Liability limited to home value 5. Loan is in effect to age 150 6. Lender CANNOT cancel, freeze or reduce
Slide6What is a HECM ?A Home Equity Conversion Mortgage 1. Most popular reverse mortgage > 95% 2. Insured by the full faith and credit of US Government
3. Regulated by the Federal Housing Authority (FHA) 4. A non-recourse loan “no deficiency judgment may be taken against borrower/estate” 5. Borrowing capacity grows every month at the same percentage rate as the loan balance
Slide7Why Such a Bad Reputation?Generally misunderstood : 4 NEVERS * 1. Never give up title : Bank does not get the house 2. Never owe more than home value, any remaining equity belongs to homeowner or estate
3. Never have to move, even if all the money is used 4. Never have to make a payment on principal/interest* Until the last borrower dies, moves, or sells and tax and insurance obligations are met © 2000 Giordano
Slide8How has the HECM Changed?Beginning with 2013 Reverse Mortgage Stabilization Act 1. Cannot borrow too much too soon 60/40 2. Reduced loan to value
3. Protect Non-Borrowing Spouse 4. Reduced Overall Cost a. generally lower interest rate margins b. lower on-going FHA mortgage insurance 5. Underwriting assures that the loan is suitable for the client
Slide9What is the Process?
Establish eligibility and proceeds available http://rfslends.com/calculate/
Slide10What is the Process?Proposal Stage Is there a mortgage to pay off? What payment plan makes the most sense? Lump sum Tenure
Term Growing Line of Credit Combination What are the costs? Origination Fee Third Party Fees FHA Mortgage Insurance Fee
Slide11What is the Process?3. Counseling Stage
Slide12What is the Process?Processing Stage FHA Appraisal Title Search Confirm Insurance/Property Taxes Underwriting
Is the homeowner willing and capable of meeting homeowner obligations? An escrow of taxes and insurance may be a condition : LESA
Slide13What is the Process?5. Closing Similar to any mortgage closing If there is a lien, it is paid off with the HECM proceeds ~chose how to draw remaining proceeds
Slide14What are Effective HECM Strategies?
Slide1515
Wade Pfau, PhD, CFA
Reverse Mortgages, How to Use a Reverse Mortgage to Secure Your Retirement, 2
nd
Edition
1. In retirement, must plan for your client living beyond life expectancy.
2. Volatility makes distribution decisions difficult.
The fewer fixed expenses, the better able for your client to withstand sequence of returns risk.
Slide1616
Wade Pfau, PhD, CFA
WORST
BEST
Reverse Mortgages, How to Use a Reverse Mortgage to Secure Your Retirement, 2
nd
Edition
Replace mortgage with HECM
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Avoid Adverse Sequence of Returns
Following Bear Markets, allow the portfolio to recover.
Draw from HECM instead.
When times are good, resume draws from portfolio.
Slide18Slide19Avoid Adverse Sequence of Returns
Slide20Slide2110/16/2018©. 2016. Giordano. All rights reserved.21
HECM
Portfolio Shock
Divorce Shock
Health Shock
Inflation
Shock
Housing Value Shock
Liquidity Shock
Shannon Hicks
Slide22Growth of Line of Credit Borrowing PowerCompounds Monthly at Contractually Established RateCannot be cancelled, frozen or reducedGrows even if housing value does not
10/16/201822©. 2016. Giordano. All rights reserved.
5%
4%
www.toolsforretirementplanning.com
Slide23Slide24HECM for Purchase
“H4P”
The Last Time Home Buyer…
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H4P: Potential Revolution in Financing Real Estate in Retirement Years
Beginning January 1, 2009:
FHA allows the reverse mortgage to be used as a primary financing tool for home purchase
HECM no longer limited to refinancing of existing residence
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What does this mean?
Seniors 62 or over are able to purchase real estate by
combining
a down payment with a reverse mortgage at the closing table and
have no monthly payment
Slide27Slide28In this case study, the client will bring $236,900 to the closing table. The remaining $163,100 (41%) is provided by an H4P lump sum.
No principal or interest payments are due until the last homeowner dies, moves or sells.*Other property obligations such as tax and insurance must be met, no different than any homeowner.
Slide2929
Wade Pfau, PhD, CFA
BEST RESULT : HECM for Purchase/Coordinated Strategy : Voluntary Payments Except in Years Following Bear Market
WORST RESULTS : Paying Cash or Take Out a 15 Year Mortgage
$300,000 house 65 year old
For a 15 year mortgage,
this requires $60,000 upfront
and payments of $20,838 (3.5% rate).
Or Take out a H4P for $137,700
WORST
BEST
Reverse Mortgages, How to Use a Reverse Mortgage to Secure Your Retirement, 2
nd
Edition
Slide30ConclusionsHECM has evolved to provide even greater consumer safeguardsHECM reduces the fixed expense for home financing/reduces exposure to SORRHECM improves cash flow where labor income is not longer availableHECM improves retention of investable assetsHECM is flexible and allows voluntary payments at client’s discretionHECM is safe, backed by the full faith and credit of the US GovernmentHECM gives you the power to solve your client’s housing challenges
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