Stock markets have recovered partly from their previous losses, although the indexes aren't back to their pre-crash highs. Consequently, retirees who depend on withdrawals from their portfolios for income face a choice between reducing withdrawals and increasing the risk of portfolio depletion. For retirees with significant home equity, however, utilizing that equity through a reverse mortgage could be a solution.
According to the National Reverse Mortgage Lenders Association (NRMLA), reverse mortgages continue to be one of the few areas of growth within the mortgage industry. The industry closed 112,100 Home Equity Conversion Mortgages or HECMs in Fiscal Year (FY) 2008, which ended September 30, 2008, surpassing the record loan volume for FY 2007, according to data provided by the Department of Housing and Urban Development (HUD). That loan volume continues a steady uptrend for the industry each year since 2001. Most recently, loan production has grown from 43,131 in FY 2005 to 76,351 in FY 2006 before climbing to 107,558 in FY 2007.
The personal-finance news media often criticize reverse mortgages because of the contracts' fees, but they can provide genuine value in the right circumstances. Richard Hoe, ChFC, CLU, AEP with Richard Hoe Investments, LLC in Tulsa, Okla., cites a case where a reverse mortgage helped preserve a client's investment portfolio.
The client was in her late 70s and her trust fund was being depleted rapidly through poor investment performance. By reversing her mortgage, she was able to reduce the amount of income withdrawn from her trust fund, preserve the corpus and allow some investment growth, while receiving a monthly income until her death, six or so years later.
Neil Sweren, CEO of American Home Loan, Inc./Allymac Mortgage Services in Owings Mills, Md., points out that there is nothing inherently good or bad about a reverse mortgage. "It is an incredibly versatile borrowing tool that allows senior homeowners to stay in their homes and remain independent longer," he says. "Funds can be accessed in a lump sum at closing, in the form of monthly payments or in a line of credit. Borrowers can access funds using any combination of those three methods."
There are cases where reverse mortgages don't work, Sweren cautions. They are typically not a viable option for short -term borrowing due to the set-up costs associated. Additionally, reverse mortgages will not work for someone who has already moved out of the home. "We get calls all the time where mom or dad has just gone into an assisted living facility and need to tap into the equity in the home immediately to pay for private care," he says.
"The house is on the market but not moving. Here it's too late for all institutional borrowing options. Had they set up a reverse mortgage line of credit while things were still good, they would now have had access to the funds they need with up to a year to try to sell the house. During that time the family would also have no monthly payment obligations. Any sort of refinance or home equity loan is difficult since few if any lenders will consider a loan on a home that is listed for sale. This is a situation where better planning would have been a big help," Sweren explains.
Most financial advisors lack experience with reverse mortgages and will need to work with a mortgage expert. The NRMLA recently started a certification program, but it's very new to the market. Sweren believes advisors should look for a mortgage advisor with reverse mortgage experience who also has traditional (forward) mortgage experience.
"To avoid being someone's experiment with a new product, I would recommend asking about experience and getting an idea how many RM loans they have actually closed," he says.