1. Reverse Mortgage Training
Using HECMS in a Comprehensive Retirement Plan

2. The New Perspective
“New academic research demonstrates how HECMs can play a vital role in retirement planning – not just as a tool of last resort but as a strategic way to provide greater financial flexibility to seniors with ample savings.”*
*Salter, Pfeiffer and Evensky, Texas Tech University, “Standby Reverse Mortgages: A Risk Management Tool For Retirement,” Journal of Financial Planning, 2012.

3. The New Perspective, Cont.
2012 – Sachs and Sachs, Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income, Journal of Financial Planning
2014 – Wade Pfau, PhD, The Hidden Value of a Reverse Mortgage Standby Line of Credit, Advisor Perspectives.

4. The Basics

5. What Is a Home Equity Conversion Mortgage ?
Loan that gives Borrowers access to a portion of their home value.
No payments required until the last borrower permanently leaves the home.
No-Recourse loan (lender can only look to property for lien satisfaction)
Also known as a HECM
A reverse mortgage (also known as a “HECM”) is a non-recourse loan that allows homeowners to access a portion of their home equity.
Borrowers can access equity as cash, term or tenure payments, a line of credit (also known as a “HECM LOC”), or any combination of these.

6. HECM Eligibility Requirements
All Borrowers must:
Be age 62 or older
Live in the subject property as their primary residence.
Demonstrate Financial Capacity and Credit responsibility.
Attend an FHA approved consumer counseling session.
Borrowers
In order to qualify for a HECM, borrowers must:
Be age 62 or older,
Live in the property as their primary residence, and,
Be able to pay taxes, insurance, and property maintenance charges.

7. HECM Product Options Fixed Rate Monthly Adjustable (10 pt. cap)
FHA-Insured Products Proprietary Program FAR’s HomeSafe® jumbo program is a fixed-rate ONLY product, with a maximum loan amount of $2,250,000.
Fixed Rate
Monthly Adjustable (10 pt. cap)
Annual Adjustable (5 pt. cap)

8. How Much Value is Available?
Formula: Max Claim Amount x’s Principal Limit
Max Claim Amount is lesser of FHA Lending limit ($636,150 nationally) or appraised value.
Principal limit is published by FHA and based on the age of the youngest borrower or non- borrowing spouse and the Expected Interest Rate.
- 10 Year Libor Swap rate plus Lender Margin.
A reverse mortgage (also known as a “HECM”) is a non-recourse loan that allows homeowners to access a portion of their home equity.
Borrowers can access equity as cash, term or tenure payments, a line of credit (also known as a “HECM LOC”), or any combination of these.

9. Available Value, Ex:
The amount of available value increases with the age of the borrower at application.
Assume an MCA of $636,150 for these calculations, and expected rate of 5.06%.
Age 62
Age 76
Age 90
Available Value
$333,343
$395,685
$477,113
Principal Limit Factor
52.4%
62.2%
75%
The amount of available funds increases with the age of the borrower at application.
Available Funds
$333,343
$395,685
$477,113
Principal Limit Factor
52.4%
62.2%
75%
Note: In these calculations we used the MCA of $636,150 as the home value with an expected rate of 5.06%.

10. How Can Value Be Accessed ?
All Existing Liens Must be Paid off First.
Remaining Balance Available As:
A Line of Credit guaranteed to grow and compound.
Tenure Income payments for life.
Term Payments for specific amount and period.
Cash
Any Combination of These (Libor Products only)
Fixed products have cash at close option only.
A reverse mortgage (also known as a “HECM”) is a non-recourse loan that allows homeowners to access a portion of their home equity.
Borrowers can access equity as cash, term or tenure payments, a line of credit (also known as a “HECM LOC”), or any combination of these.

11. Program Features

12. HECM Line of Credit
Guaranteed to grow at the same rate as the interest and FHA Mortgage insurance premium that is being charged on any outstanding loan balance.
Cannot be called due to a change in home value.
Has no term limits or balloon payments.
Funds can be accessed, paid back if desired, and accessed again at a future date.
Any payments on outstanding loan balance automatically become accessible in the line of credit.
Excellent risk management feature for
fluctuating real estate values, stock market
volatility, and long term care events.

13. Credit Line Example-Real Estate Hedge
In 2006, a 62 year old in Las Vegas owned a home
worth $400,000, and secured a $235,000 HECM LOC.
HECM LOC had increased in value to $281,720.
By 2011 the home was only worth $262,000.

14. Tenure Payments
Reserve some or all available equity for guaranteed payments as long as the borrower is living in the home.
Generally a higher payout than an annuity contract which is based on short term rates at the time of annuitization.
Payment plan can be changed at anytime with a $20 fee to the servicer.

15. Tenure Example - Fixed Income Planning
Situation:
Pete is retiring at age 66.
Has $150,000 pension distribution and considers an annuity option.
Wants a guaranteed life income to supplement his social security.
Owns $400,000 home and has $219,600 available from a Reverse Mortgage.

16. Fixed Income Planning (Cont.)
Annuity HECM Tenure Solution
Use $150,000 of home equity for tenure payments of $824 **per month. Balance in LOC.
Payments are income tax free.
Roll over the $150,000 distribution to his IRA.
Guaranteed income for life of $717*
Income will be taxable
* Based on annuity payout tables as of 3/20/2017.
** Based on 4.95% initial rate as of 3/20/2017.

17. Term Payments
Define a specific dollar amount to be received for a specific period of time.
Subject to available proceeds.
Calculation for reserved proceeds includes the age of the borrower and a growth rate.

18. Term Payment - Social Security Planning
Situation:
In 2015, Dave is 66 and planned to work to age 70.
He was in good health, longevity in his family, and anticipated he will need the higher social security benefit of $3506 per month, verses $2603 at his current age.
Becomes a victim of corporate downsizing and is now out of work.

19. Social Security Planning (Cont.)
Solution:
He owns a $350,000 house and is eligible for $191,000 in HECM proceeds.
Selects Term payment of $2600 per month from HECM for 4 years until he can get the maximum Social Security benefit.
Allows 401K and IRA to continue to compound tax deferred.

20. Other Strategic Uses for Home Equity

21. Manage Sequence of Returns Risk
What is Sequence of Returns?
Order in which annual returns are credited to an investment.
Does not impact Average Annual Return (AAR) or Compounded Annual Growth Rate (CAGR) with a buy and hold position.
Greatly impacts CAGR if distribution phases has begun.
Incorporating Home Equity as an alternative funding source during bear markets can dramatically improve the odds of a successful long-term distribution plan.

22. Sequence of Returns Risk (Cont.)
Buy and Hold:
Year
Actual
Reversed
S&P 500 Returns
2008
-37.00%
11.96%
2016
AAR
9.12%
CAGR
7.10%

23. Sequence of Returns Risk (Cont.)
Withdrawal rate 4% + CPI, Years 2008 – 2016:
No LOC
Pay Back LOC
No Pay Back
Start Value
$500,000
End Value
$574,384
$668,762
$809,185
LOC Balance
$109,165
Net Value
$700,020
CAGR
1.55%
3.25%
5.50%

24. Manage Tax Liabilities
Situation:
Patti inherited a $150,000 portfolio from her mother in By 2016 the portfolio value is $497,697.
She has always taken dividends from the account, but now needs to supplement her income by $1500 per month.
She is 68 years old and owns a home valued at $525,000.

25. Tax Liabilities (Cont.)
Solution:
She is eligible for $292,307 in HECM proceeds.
She is going to take tax free HECM Tenure payments of $1658 per month.
When she passes her children will inherit the portfolio at a date of death valuation with no current tax liabilities.

26. Increase Household Cash Flow
Supplement Investment portfolio income to keep withdrawal rates at levels that historically insure portfolio longevity.
- 4% is historical “safe” rate, client needs 6%.
- Draw extra 2% from HECM to preserve portfolio
Payoff existing mortgage to increase monthly cash flow.
- If still working, make monthly HECM payments to grow line of credit for future use.

27. Payoff Home Example 62 year old Couple, $400,000 home, $80,000 loan balance. Refi to a HECM. Initial Loan Rate 4.95%
Make no payments, save $1000 per month. LOC in year 20 is $348,283
Make $1000 per month payments for 8 years. LOC in year 20 is $560,932

28. Diversify Real Estate Situation:
In 2010, Andy and Peg, both 70 years old, wanted to purchase a $175,000 vacation condo in Florida.
They owned a $650,000 home in Connecticut – eligible for $360,288 in HECM proceeds.
Solution:
Withdrew from HECM to pay cash for the condo.
As of YE 2016, the Florida condo has appreciated 55.9%. Connecticut home has depreciated 2.9%.

29. Fund Education Situation:
Charlotte is an 82 year old widow who wants to help fund her 2 youngest granddaughters college education.
She has a modest $300,000 portfolio.
Enough social security and pension income, and has a Long Term Care Insurance policy.
Owns her home worth $186,000.

30. Fund Education (Cont.) Solution:
Charlotte is eligible for $125,364 in HECM proceeds or $913 per month in tenure payments.
The granddaughters have a total monthly student loan expense of $2100 for 10 years.
Charlotte has decided to send her tenure checks directly to the loan servicers, and nearly pay for half their monthly student loan bills.

31. Fund LTC Protection Situation:
Chris and Joanne, age 62, owned a home worth $425,000 and have no Long Term Care protection:
Their portfolio, projected pensions, and social security would take care of their retirement funding needs, unless there was a long term care issue.
Long Term Care Policy premiums are $6200 per year.
Would be a prohibitive on-going expense with regards to household cash flow.

32. LTC Funding (Cont.) Solution: Eligible for $225,250 in HECM proceeds.
Decide to take $500 per month in tenure payments to pay for LTC policy and have $133,532 available in a growing Line of Credit. Offers protection against rate class premium increases.
HECM will fund the protection they need with no effect on household cash flow.
The house is going to provide the protection they need to insure there is no risk to their income producing portfolio.

33. Fund Charitable Contributions
Situation:
Thelma is 78 years old, owns her home worth $300,000, and has volunteered at her local hospital for 37 years.
Has long term care insurance, a modest portfolio but more than enough income from her pension, IRA and social security to live a comfortable life style
She would like to make donations to the hospital while she is still alive and can see the benefits.

34. Fund Charitable Contributions (Cont.)
Solution:
Thelma has her IRA trustee send $20,000 per year directly to the hospital as a Qualified Charitable Deduction (QCD).
She will save $4200 per year in income taxes
Will draw an equivalent after-tax amount of $15,800 per year from her HECM Line of Credit.
If interest rates remain the same, she can do this for 16 years.

35. Purchase a New Home 1 in 3 Boomers say they want to move.
Want to equal or better their current lifestyle.
Does not necessarily mean less expensive.
Looking for community based life style including planned developments and urban centers.
The HECM Purchase program uses the same
calculations as the regular HECM refinance program.
Libor options also allow the homeowner to pay down the
outstanding balance and build a line of credit for future use if desired.

36. Purchase a New Home EX: Situation:
Jim and Sandy are 68 and looking to purchase a $600,000 home in a Florida golfing community.
They will net $460,000 from the sale of their current home.
If they pay cash for the new house they will need to bring $140,000 additional funds to the closing table.

37. Purchase a New Home Ex: (Cont.) Solution:
Cash Transaction
HECM Purchase
Sale of previous home $460,000
Purchase price new home $600,000
$140,000 Cash Needed from other assets.
Sale of previous home $460,000
Purchase price new home $600,000
$337,200 available from HECM.
$197,200 leftover cash available .

38. This is Today’s HECM! Solutions For: Managing Sequence of Returns
Fixed Income Planning
Managing Tax Liabilities
Social Security Planning
Supplementing Household Income
Diversifying Real Estate
Funding Education
Funding Long Term Care
Funding Charitable Contributions
Purchasing a New Home

39. Other Details

40. 1st Year Restrictions
Greater of Mandatory Obligations plus 10% of Principal Limit, or 60% of Principal Limit. Ex: $333,343 PL $200,005 = 60% of PL Avail 1st Year OR $235,000 = MO Example $ 33,343 = 10% of PL $ 268,343 Avail 1st Year
The amount of available funds increases with the age of the borrower at application.
Available Funds
$333,343
$395,685
$477,113
Principal Limit Factor
52.4%
62.2%
75%
Note: In these calculations we used the MCA of $636,150 as the home value with an expected rate of 5.06%.

41. Life Expectancy Set Aside
Lenders can create “Lifetime Expectancy” set- asides at closing that are payable ONLY toward taxes, assessments, and insurance (hazard and flood).
Can be required due to insufficient qualifying profile, or optional at borrower’s request.
Borrowers must retain sufficient equity to pay taxes and insurance throughout the life of the loan. To ensure this, disbursements at loan closing, and throughout the first 12 months, cannot exceed the GREATER of:
60% of the Principal Limit,
Or,
Mandatory obligations (closing costs, repairs, etc.) plus 10% of the Principal Limit.

42. The Costs
Mortgage Insurance Premium:
2.5% MCA if first year distributions are greater than 60% of available funds
0.5% MCA if first year distributions are less than 60% of available funds
1.25%of the outstanding balance annually
A possible origination fee
The cost of a HECM includes:
Traditional third-party closing costs
A possible origination fee
Mortgage Insurance Premium (MIP) charges are :
2.50% of the MCA if the first year distributions exceed 60% of available funds,
Or,
0.50% of MCA if the first year distributions are less than 60% of available funds,
Plus,
1.25% of the outstanding balance annually.
Traditional third-party
closing costs

43. Consumer Protections
Mandatory FHA Counseling session required for borrowers, non-borrowing spouses, and POAs. Screens for competency and comprehension of the loan program.
Financial Assessment determines if borrower has financial capacity to pay taxes and insurance, and ongoing maintenance of the property.
Non-Borrowing spouse rules make it possible for a spouse to remain in the home even if the borrower dies.

44. What Happens When Loan is Due?
3 Options:
Repay the loan and keep the house. Family will not need to pay more than 95% of the appraised value.
Sell and repay loan balance, keep remaining equity.
If the loan value exceeds home value, deed home to servicer and walk away. FHA Insurance covers the lender for any losses.
Heirs have 6 months to satisfy the loan, and up to two 90 day extensions, granted by HUD, provided they are actively pursuing satisfaction of the loan.

45. Final Thoughts

46. Maybe We’ll Do This In a Few Years
Delaying Could be Problematic:
FHA has changed the PLF Factors 3 times, and the insurance rates twice in the past 10 years.
When interest rates rise, Principal Limit Factors decrease resulting in lower available funds at loan closing.
If borrower’s residual income or credit declines, they may no longer qualify for a HECM.

47. What Financial Advisors Can / Cannot Do
Identify a need.
Discuss an overview of
the program.
Refer them to a HECM specialist.
Include family members in your conversations.
Request compensation
Invest the loan proceeds.
Require your client to get a reverse mortgage.

48. Your Host: David Cook, Reverse Mortgage Consultant
Presenter: Steve Resch, VP Retirement Strategies
Finance of America Reverse ;
Your Host: David Cook, Reverse Mortgage Consultant ;
This presentation was created by Finance of America Reverse, LLC FAR Learning and Development