1. HECM 101 Presented by Mark Schumacher NMLS # 519754
For Financial Professionals Only
Presented by
Mark Schumacher
NMLS #

2. This is where financial planning counts
Help your client conserve this asset / do not plunder this asset!
Identify the strategies that help secure retirement

3. What is Home to the Retiree?
Source of security and comfort
Connection to family and friends
Likely the largest asset
US CENSUS Bureau

4. Research Demonstrates Housing Wealth Contributes to Retirement Security

5. What 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

6. What 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

7. Why 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

8. How 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

9. What is the Process? Establish eligibility and proceeds available

10. What 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

11. What is the Process?
3. Counseling Stage

12. What 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

13. What 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

14. What are Effective HECM Strategies?

15. Wade Pfau, PhD, CFA
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.
Reverse Mortgages, How to Use a Reverse Mortgage to Secure Your Retirement, 2nd Edition

16. Wade Pfau, PhD, CFA Replace mortgage with HECM BEST WORST
Reverse Mortgages, How to Use a Reverse Mortgage to Secure Your Retirement, 2nd Edition
BEST
WORST

17. 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.

19. Avoid Adverse Sequence of Returns

21. ©. 2016. Giordano. All rights reserved.
Shannon Hicks
Liquidity Shock
Portfolio Shock
Divorce Shock
Health Shock
HECM
Inflation Shock
Housing Value Shock
2/19/2019
© Giordano. All rights reserved.

22. ©. 2016. Giordano. All rights reserved.
Growth of Line of Credit Borrowing Power Compounds Monthly at Contractually Established Rate Cannot be cancelled, frozen or reduced Grows even if housing value does not 5% 4%
2/19/2019
© Giordano. All rights reserved.

24. HECM for Purchase
“H4P”
The Last Time Home Buyer…

25. 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

26. 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

28. In 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.

29. Wade Pfau, PhD, CFA BEST WORST
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
Reverse Mortgages, How to Use a Reverse Mortgage to Secure Your Retirement, 2nd Edition
$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
BEST
WORST

30. Conclusions
HECM has evolved to provide even greater consumer safeguards
HECM reduces the fixed expense for home financing/reduces exposure to SORR
HECM improves cash flow where labor income is not longer available
HECM improves retention of investable assets
HECM is flexible and allows voluntary payments at client’s discretion
HECM is safe, backed by the full faith and credit of the US Government
HECM gives you the power to solve your client’s housing challenges