Retirement researchers, prominent academics and planning experts are united in recommending that home equity and reverse mortgages be a fundamental consideration in retirement planning practices.
Financial advisors, including Registered Investment Advisors (RIAs) and their financial planning counterparts (CFPs among other designations), were soundly criticized in a recent article, Financial Advisers Should Avoid Error by Omission and Consider Reverse Mortgages, by Jamie Hopkins (Investment News, January 22, 2018).
Jamie Hopkins is a professor of tax at The American College’s Retirement Income Certified Professional program and a nationally respected retirement planning expert. This article criticizes trusted retirement professionals for failing to recognize the value and importance home equity (housing wealth) may provide to senior homeowners and basic retirement planning practices. Specifically, he stated, “The vast majority of financial services professionals still fail to incorporate home equity planning or reverse mortgages into their practices. And yes, this is a failure. In my opinion, not including home equity and reverse mortgages in the financial planning process is the largest failure of the financial services profession at this time.”
This rebuke is stern notice to financial professionals to change; to become informed and educate clients on the intrinsic value housing wealth and reverse mortgages may provide to their retirement plans. Further, learn what reverse mortgages really are, how they operate, and dispel common misconceptions, such as “the lender will own the house”. They don’t. Unfortunately, though, too many advisers are uninformed, or misinformed, which is a disservice to their clients.
Housing wealth is too large an asset to be ignored in the planning process, especially when considering retirement income and cash flow. For example, replacing current mortgage debt (requiring monthly payments) with a reverse mortgage could significantly improve cash flow. Reverse mortgage payments are optional – not mandatory. Or, using a reverse mortgage to eliminate other debt, fund health and long term care costs, or simply create a growing standby line of credit for future needs. The options are numerous.
The dominant reverse mortgage is the HUD/FHA insured Home Equity Conversion Mortgage (HECM). HECMs constitute over 95 percent of all reverse mortgages nationally. This government insured program was designed exclusively for senior homeowners (62 and older) to enable them to monetize a portion of their housing wealth to supplement other savings and increase financial security. HECMs provide unique terms including: (1) no mandatory payments – repayments are optional; (2) no maturity date – loan never comes due until no borrower resides in the property, regardless of age; (3) non-recourse loan – neither borrower(s) or their heirs incur personal liability; and (4) borrower obligations are limited to keeping property obligations, such as real estate taxes and hazard insurance current and performing basic maintenance, while also continuing to live in the property as their primary residence. That’s it, and as long as the loan remains in good standing it can never be called, even if property values decline or the bank fails. HECM terms are guaranteed by the HUD/FHA insurance fund independent of the lender.
In short, reverse mortgages facilitate fulfillment of three key planning objectives: (1) improve cash flow; (2) mitigate retirement risks including – sequence of return, health, and long-term care risks; and (3) protect assets under management.
Advisers who believe they serve the best interests of their clients and make their lives better need to include housing wealth and reverse mortgages in their practices. A best-interest standard requires advisers to consider all factors that might reasonably impact any recommendation. Clearly, the home and its financing arrangements need deliberation when reviewing any client’s financial plan. Most commonly, advisers review current mortgages and may recommend traditional refinancing to lower interest costs, reduce maturity dates, or access additional cash. However, few recommend (or even consider) the unique benefits a reverse mortgage may provide. This could be a serious omission.
In his article, Hopkins challenges financial advisers with two questions, “1) Is it reasonable to ignore the client’s largest asset when developing a financial plan? and 2) Is it reasonable to ignore a government-insured mortgage product that could substantially improve the client’s situation? Most likely the answer to both questions is no.” Further, the client may be placed in a worse situation, the result of an error of omission. A failure to prudently plan, or a failure to consider an important option could lead to liability.
Hopkins concluded, “There are a number of reasons why advisers do not incorporate home equity planning and reverse mortgages into their practices, including compensation models, a lack of education and specific compliance policies. However, if advisers are truly committed to doing what is in the best interest of their clients, this needs to change. The financial advisory world needs to embrace home equity and reverse mortgages. Anything else is not reasonable.”