Strategic Funding Concepts

Lenders are having a hard time quenching investors thirst for the Fixed HECM loan product. With property values down, many senior home owners are finding it more difficult to qualify for the reverse mortgage, while others are apprehensive to sign up because of the closing costs. Many lenders are now dropping the requirement for the home owner to set aside funds to pay the service monthly premium on some reverse mortgage loans.

“The zero Service Fee will only be on the fixed rate.  There is not enough spread paid to us on the variable loans to offer the same option for variable products.”, per my conversation with Brady Carlson, Account Executive for B of A. 

With Investors will to pay banks and lenders a premium to purchase their reverse mortgage loans, the same bank and lenders are now willing to pay the Fixed HECM loan’s Set Asides. That can be a savings of up to almost $6,000 for some reverse mortgage borrowers.

Investors and Lenders both hope that this kind of savings will increase the consumer’s demand for the Fixed HECM.

Reverse Mortgage lenders are eliminating the Fixed HECM Service Set Aside requirement. is a post from: Strategic Funding Concepts

©2010 Strategic Funding Concepts. All Rights Reserved.

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“It’s coming” said Joe Demarkey, Assistant Vice President of Strategic Business Development for MetLife, when asked about whether US Department of Housing and Urban Development (HUD) would start requiring lenders perform a credit underwrite for reverse mortgage borrowers.

HUD is concerned with HECM borrowers falling behind on their property taxes and home owners insurance, thus causing defaulting on the loan. HUD is looking to integrate additional underwriting overlays to the reverse mortgage that would provide guidance as to whether a proposed HECM borrower should have a property tax and home owner’s insurance set aside account.

Currently it is not known exactly what the guideline will be, on how much has to be set aside but for those borrowers looking to get a reverse mortgage after the change, it will likely mean less access to the equity in their home. The change will require Congress’s involvement and this may mean it could roll out in months or years.

Changes are coming again to the Reverse Mortgage is a post from: Strategic Funding Concepts

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This came from Larry, an associate in my office who spoke to Bret Dixon, one of the area directors for USDA housing programs. 

They expect to run out of money soon.  He has seen in writing both late April and early May as the time frames.

He also gave me some more interesting information:

· They have a rumor mill too and there is talk about the House (Congress) Appropriations Committee discussing extending their budget, which would fix this if passed. He then said ‘your guess is as good as mine as to what comes out of Congress”

· He said that there is a less formal way for them to get more money, up to 7% of their budget w/o Congress. That request has already been submitted but they don’t know if it will go through.  If it does they will have about 1 more month’s worth of funds.

· He said the reason was a huge increase in funded loans:

*  2008 was a record 700 loans (<$6B)

* 2009 they funded 2100 ($16B)

* 2010 YTD they have funded 1500 ($13.5B)

USDA Running short on funds used to guarantee their loans is a post from: Strategic Funding Concepts

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Recently I met with a Eugene, Oregon couple who are struggling to get by on what they currently have in savings, retirement funds and their social security income. They, like many others are struggling to cope with the realities of our present economy. The Eugene couple were very interested in the reverse mortgage mostly because of it’s ability to empower the trapped equity in their home to provide a guaranteed income stream for a minimum of 15 years, something that the reverse mortgage can help achieve in several different ways as we will explore.

All reverse mortgages are not created equal

Reverse mortgages, also known as HECM (Home Equity Conversion Mortgage), are offered as both a fixed rate loan and a variable rate loan. Currently the fixed rate loan features a fixed rate of 5.56% and requires the home owner to draw out all equity made available to them at the closing of their loan. While the variable HECM with a margin of 2.5% over the LIBOR index (London International Bank Offered Rate) is currently hovering at 3.35%, and allows the home owner to make a full draw on the equity line, make partial with drawls and even provide a guaranteed income stream for owner’s life time or for a specified period of time. Each options have their strengths and their weaknesses .  In this installment series, we’ll explore a strategy that may maximize a home owner’s income steam from a reverse mortgage, while also helping to gain greater control over managing that income.

Creating an income stream using a reverse mortgage is a post from: Strategic Funding Concepts

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Have your cake and ice cream too

In the case of the Eugene couple I recently spoke to, they wanted the safety of the fixed rate, the extra $15,000 it provided them with but they wanted to have it pay them monthly. In their case, I outlined two strategies that can provide an income stream for life and never run out. The two strategies were to invest all the funds into principle guaranteed investments, such as CDs, money market, short term annuities and savings. The other option was to set aside two years worth of income payments and ladder them in CDs so every month they receive their income and invest the rest into an investment property and benefit from many of the advantages of owning a rental property.

Structured and secure

One would take the money received from their reverse mortgage and ladder the $100,000 over several different investments based upon safety of principle and need of liquidity based upon expected time of use. The idea is to create an income stream that would provide a rate of return that provide an overall rate of return near to 5%. At that rate, they could draw $416 per month and never run out of money. The Eugene couple and I believe rates would eventually go higher and when they do, their income would increase as well. Of course they would always have access to the principle of the loan. The down side of this strategy is that they may be subject to income taxes, depending on the investment and their overall income.

Investing for cash-flow in real estate

There are few investments that can offer an income that grows with inflation, ability to defer income tax, through depreciation and has the ability to appreciate in value, like investment real estate. Unlike other investments such as stocks or bonds, investment property will always be worth something, especially if it generates income. You can see it, touch it and most people understand it, because at some point, they rented and may have owned a few homes in their past. Unfortunately many people lost money in real estate because they were buying based upon appreciation and not on the investments ability to generate income. In the case of the Eugene couple, if they were to set aside $20,000 in savings, they could assure themselves that for about 44 months of income available on demand at the bank. With the remaining $80,000, they could invest it into a property that already has a tenant who has a good history of paying rent. After turning the management of the property over to a management company, a home purchased for $150k would yield a 5% return on cash-flow and principle payments in it’s first year. Assuming a 5% appreciation on initial rents collected of $950, cost of the investment property appreciating by 2% , net return over 5 yrs would be$24,750 and by year ten, the total income received would be $65,877. Almost the amount of the initial investment. Not to mention that the actual property will no doubt have increased over that time. Assuming the home appreciated by 5% annually, by the 10^th year, the investment would have appreciated by over $94,000. So the total potential return after 10 years would be approximately, $159,877. About double the initial investment. This strategy not only produces income but has the potential to create real wealth.

Part 3 of, the Creating an income stream using a reverse mortgage series is a post from: Strategic Funding Concepts

©2010 Strategic Funding Concepts. All Rights Reserved.

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All reverse mortgages are not created equal

Reverse mortgages, also known as HECM (Home Equity Conversion Mortgage), are offered as both a fixed rate loan and a variable rate loan. Currently the fixed rate loan features a fixed rate of 5.56% and requires the home owner to draw out all equity made available to them at the closing of their loan. While the variable HECM with a margin of 2.5% over the LIBOR index (London International Bank Offered Rate) is currently hovering at 2.728%, and allows the home owner to make a full draw on the equity line, make partial with drawls and even provide a guaranteed income stream for owner’s life time or for a specified period of time. Each options have their strengths and their weaknesses.

Pros and cons of the Variable HECM

The benefit of this type of reverse mortgage is that you don’t have to draw all the equity available to you all at once. You can take what you need now and leave the rest in the line of credit and lines of interest don’t add interest to your balance because you haven’t actually borrowed the money. In fact, the variable reverse even offers payment options that can be guaranteed for life or for a specified period of time. Currently though, with the expected rate on this loan at 6.26%, the equity available to the home owner can be significantly less than the fixed option.  For my Eugene, Oregon couple, this option would provide up to $99,600 in principle limit funds.  We assumed that their home was worth $200,000.

Pros and cons of the Fixed HECM

Currently many of my most conservative clients are choosing the fixed rate option. They have seen their investments take a roller coaster ride and they don’t want to see their reverse mortgage do the same. For many, the fixed rate also offers the greatest access to the equity in their home. That’s because the fixed rate mortgage has a fixed rate of 5.56% and an expected rate of 5.56%. The expected rate is part of the equation in factoring what percentage of the homes equity can be offered through the HECM. The lower the expected rate, the great amount of equity you can tap into.  In review with my Eugene clients, this program would yield up to $115,200 in principle limit on their $200,000 home. That’s over $15,000 more equity for this home owner to access!

Creating an income stream using a reverse mortgage, part 2 is a post from: Strategic Funding Concepts

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A neighborhood can make your home a dream or a nightmare. Doing some research about where you’re buying can prevent future regrets. Here are some ideas that might help you.

· Talk to the neighbors. Who better to find out about the neighborhood than from those that live there. Not only can you learn about the area your buying but also about your neighbors too. Remember, you may not be able to pick your family, but you can pick your neighbors.

· Log on to the US Dept of Justice’s national sex-offender public registry (nsopr.gov). Enter the prospective zip code and it will provide you with the offenders that live in the area.

· Ask the police. Some departments have online databases that allow you to search by zip code.

· Look around. Sometimes you can choose a book by it’s cover, at least in real estate that may be true. Take a look at the neighbors. How are there lawn taken care of? What kind of cars do they drive? Are there a lot of rentals in the area? It’s very typical for renters to not take good care of the yard and home. Do you want to live near someone that doesn’t have pride in where they live?

· Plan a stake out. Neighborhoods can change very dramatically on a late night. Sit in your car on a late Saturday night and see what happens. Is there a lot of traffic? Who are the partiers? Any negative elements that come through?

As much as we need to rely on our real estate agent to help us with finding and purchasing a home, as a potential buyer, you need to do your due diligence too. Just remember, there’s a reason why they say in real estate,” it’s all about location, location, location”.

Research the neighborhood before you buy is a post from: Strategic Funding Concepts

©2010 Strategic Funding Concepts. All Rights Reserved.

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Reverse mortgages, also known as HECM (Home Equity Conversion Mortgage) can be a very helpful tool in helping some senior home owners, with not only maintaining financial independence but also can empower some to even promote the growth of their wealth before and during their retirement years. HECMs are gaining in popularity with the senior community because of the many guarantees provided within the loan and insured by the Federal Housing Authority, such as the deferment of principle and interest payments for life and potential income for specified period of time or life. However, the many guarantees provided by HECMs are only for those on the loan.

What if your spouse is not old enough to qualify?

Then he/she would not be allowed on the HECM and therefore, none of the guarantees would extend to them in the borrower’s passing.

Should my spouse and I both be on the loan?

Those considering a HECM need to ponder this question very carefully. Having specialized in offering HECMs for over 7 years, too often my clients automatically assume that both need or should be on the loan. Not always the case. In many cases, having both homeowners on the loan is not necessary and can even diminish the potential benefits of the HECM loans. As yourselves the following:

If one of us were to pass away, would I still want to continue living in this home?

Many times senior couples will realize that without the other, the home becomes too big and often requires too much work to maintain. Those that realize this will want to see if there is any advantage with having only one spouse on the loan. Others that are of similar age, unsure or are positive about wanting to continue on residing in the home should opt to, both being on the loan or wait till they can qualify together.

Sometimes one is greater than two.

The average age difference of a typical couple in the US is about 5 years. With the HECM calculating the principle limit of the loan on average life expectancy tables, the older you are, the more equity you can access. 5 years difference can cost a HECM borrower 6% of equity access. For an owner of a $245,000 home, that would mean a difference of $8,820.

Spouses and reverse mortgages, things to consider is a post from: Strategic Funding Concepts

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Creating the opportunity to grow

There are a great many ways to grow your equity; we’ll discuss shortly some options that I have my clients consider with their financial advisors – but how does a person obtain equity?

Often in the past, seniors tapped their equity in the home by either getting an equity line, new mortgage or out-right selling the home.  Unfortunately, these choices can result in a rental payment, a higher mortgage payment or loosing future home appreciation in their home. 

Another option I think all seniors should consider if they are planning on staying in their home for a long time is a reverse mortgage.  For many senior, a reverse mortgage can provide access to the equity in their home without creating a monthly payment obligation.  In fact, it is guaranteed by the Federal Housing Authority that a borrower can live in the home for the rest of their lives and they will never have to make a mortgage payment.

Be the bank and grow your wealth

There is a vast array of options for seniors to improve or grow their wealth.  I have worked with clients and their financial planners to develop plans to enhance or improve their financial well being.

Asset management-  Consider the money you have in retirement savings. How much have you lost over the past few years?  For many, they are down 20-40% in their 401Ks and IRAs.  So if your are drawing income from that investment, you are selling and accepting that loss.  What if you could minimize what you have to draw from your investment by drawing from your reverse mortgage?  Currently the interest rate on a reverse is 5.56%.   That’s a difference of 15-35% considering what you would lose to sell.

Social Security Maximization-  Use the equity to guarantee yourself up to 40% greater income on your SSI for you and potentially your spouse too, regardless of whether or not you are already drawing on it.  Please read my earlier post detailing this strategy.

Real estate-  Real estate investments are one of the few assets that you can buy that provides income that tends to grow with inflation and also has the benefit of being an appreciating asset.  Not very many investments offer that one, two punch that investment property offers.  As for property management, you can do it yourself or have a professional company take care of it. 

Tax management-  The money that you receive from your reverse mortgage is tax free to you, so long as you have lived in the home for two of the past five years.  If you currently find yourself in a particularly high tax bracket but expect to be in a lower bracket in the future, getting income from your reverse mortgage may allow for you to defer the withdrawing for funds from tax deferred sources, like IRA’s, annuities and 401Ks.

Learn and grow

Today there are millions of people, both those who are near retirement or in it who have been hit hard by the current state of the economy.  They have seen their retirement assets shrink while the cost of groceries, goods and medicine increase.  Perhaps now it is time to reevaluate your options and consider this strategy with your trusted advisor. 

Reverse mortgages and financial planning, part 2 is a post from: Strategic Funding Concepts

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Reverse mortgages are often an overlooked financial planning tool by those considering retirement and the financial planning community.  Reverse mortgage seem to suffer the stigma that they are only intending for those that have little to no assets or wealth to turn to. For those with that misleading predisposition, they may be missing out on opportunities to better maintain or even grow their wealth during retirement.

Lazy assets

What is a lazy asset?  It’s an asset that offers 0% return as an investment.  Equity trapped up in a person’s home is a lazy asset.  Think about it. 

Does your equity grow in your home because it remains in your home?  Nope.  Equity grows because you’ve ether paid down the debt on the home, or the home has gained in value through appreciation.  What’s worse, equity isn’t safe.  You can lose equity in your home through loss of the home’s value and even loose the home altogether because default you loan.  We are seeing these risks come to light right now.

Would you invest your money in an investment that offered 0% return and risk of loss?

Empowering equity to work for you and not the other way around

The main ingredient to get your equity working for you is a bit of arbitrage.  It’s the practice of borrowing at a lower cost, than investing at a higher rate of return.    Banks and insurance companies do this all the time.  They borrow from you, the depositor/annuitant by promising a low return rate on your money, then lend the money or invest for a higher rate of return.  My savings rate currently is 0.75% APY, and my auto loan with them is at 5.25%.  That’s a spread of4.5%, pretty good considering that none of the money my bank is using is theirs.

Reverse mortgages and retirement planning, part 1 is a post from: Strategic Funding Concepts

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