“Reverse Mortgages & Aging In-Home”

by Daniel J Turner NMLS#1016716; Geneva Financial LLC NMLS#42056

Copyright 2020 Daniel J Turner. All rights reserved.

 

By this point, we’ve addressed almost all of the objections offered by the financial planning “profession”. We’ve covered the “high fees” argument, The “lose your home” and “eats all your equity” arguments, and other nonsensical fallacies that are accepted as truth by those of you who should know better.

Now, we turn our attention to the “End of Life” issues and how the Reverse Mortgage (HECM HELOC) provides valuable solutions that cannot be replicated with any other product, and certainly not in any affordable or cost efficient way.

People lose their health suddenly, situationally, or chronically. Regardless, we are all on the same glide path towards our eventual destiny with the end of life.

That said, the Reverse HECM HELOC provides numerous advantages (quite literally) at no additional cost to the Borrower. The main point of consideration is that when your health becomes compromised, most of the “common place” solutions are taken off the table. Fortunately, A reverse mortgage is not predicated on one’s health to qualify, and the benefits are the same as if you were a “marathon runner” or other healthy sort of person.

This entry will attempt to address the realities of end of life circumstances, and show the Reverse  program as an intellectually competent choice for both the Borrower AND the Planning Professional. I am not suggesting the Reverse program is able to replace a long term care product. The Reverse is not structured for that. In fact, for extended care requirements (e.g. Alzheimer’s, etc) with regard to (1.) a single borrower or (2.) if both borrowers require extended care lasting over 6 months outside their home) the Reverse mortgage won’t be of any help at all. It won’t harm the Borrower(s), but it cannot help them in these two situations.

 

MISCONCEPTIONS and MALPRACTICE

However, there are other merits beyond that which make this a worthy program to have in place well before the day it’s needed. Financial Planners well recognize the truth-in-fact that most all financial planning tools require time to develop internal values and structures to be considered extremely efficient. Furthermore, health considerations will also dictate that a Client must “dig this well before they’re thirsty” in order to reap any substantial benefit. In virtually no circumstance is there any validity to waiting to the last minute to acquire a financial tool to provide for unseen future exposures. Yet, the reverse mortgage is still used today by Planners as the “loan idea of last resort” and they poo-poo the values of the program that could have been started DECADES before the need exists.

Here’s a great example of my point-waiting to initiate a Reverse HELOC robs and compromises your Client.

I recently watched a teaching video for my Retirement Income Planning (RICP) class. A “learned Planner” was discussing how he had used a reverse mortgage to help solve an income shortage for a couple in their late 70’s (78) and early (84)’s. The couple had an income shortage due to a substantial market correction that had severely depleted their portfolio and made continuing the same draw amount imprudent. They needed to make up about $1,000/month for the rest of their lives. The Planner suggested the use of a reverse mortgage, and had the cash at close provide a “Tenure” income life income stream. The rationale for this was it would allow more of the portfolio to remain liquid and growing as less money would be needed to be converted to an income stream annuity. He noted (to the audience) his disappointment “the payout was not going to provide any kind of Cost of Living increases”, but, the reverse could provide a guaranteed monthly joint life income of $431.00. This allowed the Planner to use a much smaller sum from the remaining portfolio to make up the difference. It also allowed him to select an income stream annuity for the remaining income solution that did provide COLA protections.

The problem with this solution? If the reverse were initiated when the youngest borrower was 62? There would be enough equity from Line of Credit growth to create over $1,400/ month guaranteed for both lives. for LIFE. Literally, waiting for advanced age harmed the Client and forced additional strain on a portfolio that was needless. If the reverse were initiated at 62? There would not be any issues with income.

***Another “fatal flaw” in this was product selection. The Planner used a fixed rate reverse instead of the adjustable rate. The “fixed rate” program does have an income (tenure) capacity. It does not have an index or Cost of Living Adjustment (COLA) growth capacity. The Adjustable rate plan does provide new equity at the same rate as the mortgage interest rate for the life of the program, and does so without needing ongoing appraisals to validate the new credit. That is one of the many values provided the Borrower by the (so-called) “expensive fee” that the reverse has. (Never mind the fact the fee makes this program extraordinary, and provides benefits like free additional equity without an appraisal). This is an effective hedge (although it is not driven directly by inflation). Additionally,  if inflation is 2% and the mortgage rate of interest is 4.5%? It’s actually BETTER than an inflation rider. There have been years in the past few decades that have had very low or non-existent inflation that a COLA would not be triggered. Regardless of inflation, the interest rate is a constant, and can be relied upon to add new value to the HELOC, the Tenure, or both.

Over the past 20 years in question, this average accrual rate for new equity was approximately in the 4-6% range per year. Tax free. Federally insured. Federally regulated. Immediately liquid. This means the $100,000 of equity from a 78 yr old @$431/ month for life would have grown to an astounding (est.) $350-400,000 and provided well over $1,400/month of lifetime income guarantees…with money left over. Additionally, (unlike income annuities?) if the Client needed cash, they could still withdraw from their line of credit. If the Client wanted more income? They could convert more of the line of credit to income. if the needed a lump sum? They could suspend the payment, request a lump sum of any amount up to the full value of the remaining account plus account equity growth. They could then request the remaining balance as term payments and/or transfer from the portfolio to the Line of credit to replace the funds and return to a life income stream.

 

***Planners, let me ask you something…If you purchase an annuity income stream program for a life annuity, can you stop the flow of income? (No). Can you take a lump sum from the program? (No). Can you suspend it and reactivate it at a later time and date? (No). Can you adjust the annuity payout without a cola rider? (No). Can you drop additional cash into it at a later date and get a preferred payout? (No).

ALL of these things are possible with a reverse mortgage. ALL of them. And, ALL of these points are vitally important to your Client.

 

Another methodology provided by a reverse HELOC is the ability to use equity for remaining in the home (particularly) end of life issues.

Scenario 1. “John & Mary” came to my office to discuss their retirement income needs back in 2016. He was 65, and she was 68. Their problem was they had not purchased long Term Care insurance, and Mary had just been diagnosed with “onset dementia”. (We all know where this is going). To complicate matters? Mary was an accomplished marathon runner. Her defining hope was to be able to live the remainder of her life in the home where she raised her children. This also makes a lot of sense with Alzheimer’s disease because familiar surroundings have a tendency to delay the advance of the disease. It also takes a lot more money to care for someone failing in this disease. The answer for them was a Reverse HELOC. We set the margin as high as possible so the line of credit could grow more effectively. Hopefully, in 8-10 years (when Mary would need a heavier level of care) the money from the HELOC growth could help pay for that care. They were also on the tail end of paying off their mortgage.

But, there were other benefits for this as well;

1. Think about this…they would be able to liquidate their investments and pay down debt and thereby shelter some assets from the Medicaid Spend down provision.This was very important to John, as he would most likely outlive Mary and after her passing, restore his investments instead of going broke with the Spend down requirements. After she passed on, he could repatriate those funds and continue on with his life.

2.   When Mary reaches a point of need? Either one of them, or a designated DPOA may act to establish income stream and equity availability from the HELOC. The money can be directly wired to the check book which may reduce the opportunities of malfeasance or elder abuse. Upon request for the remainder of their collective lives, the money may be accessed by email or fax, or snail mail. As circumstances change, new DPOA’s may be established. It is a fair thing to say that the Servicing Agencies do have a mindset of what is actually happening in that “real world” setting out there when access to funds is the difference between desperation and comfort. Don’t kid yourself-These Servicing Agencies are well trained and they understand what is trying to be accomplished. They see unique and creative uses for the reverse on a daily basis. They’re also trained to smell abuse, and are often the last line of defense for the Borrower.

To use the equity may require situational equity requests to prevent spontaneous recapture by Medicaid. This involves some back ground knowledge and skills for the Planner, and making a phone call to a Servicing Agency can really make a big difference for the Planner AND the Client.

3. If she gets to a point that she cannot be cared for in home, she may be transferred to a Long Term facility, and the income stream may be turned off. This will protect the equity for John’s use. It may be restarted again at any time in the future (depending) on John’s financial needs or desires.

4. Distributions from a Reverse are tax free, and have no surrender charges or fees. If the Lender does not act upon a legitimate request for funds with in 4 business days? They must pay the Borrower a Per Diem fee for every day past 72 hours. I have personally witnessed this several times; it averages $5-60/day x # of days late. and is wired directly to the account. It is not from their equity, and is a bona fide “fee” suffered from the Servicing agency checkbook. For this reason? Servicing Agencies have a very real sense of urgency to meet cash requests in a VERY timely manner.

5. With home Medicaid care, Spend down rules still apply. However, the HELOC may be accessed situationally to use equity for home modifications, implements that aren’t covered by Medicaid, Agency Home care, and other expenses. The Borrower calculates the money needed immediately, effects the transfer to his checking account, and pays the Bill by cashier check or wire transfer nor money order. I would avoid using checks. You really want to see that money move OUT of your account and over to the service Provider you’re trying to pay as quickly as possible.

 

“Otto” (My good friend) purchased a Reverse HELOC back in October of 2018. He was in failing health then, and has gotten progressively worse since. I received a call just yesterday (a Sunday, so I knew something was wrong).

I set his loan up as a 1 yr renewable rate HELOC. He needed money to continue living in his home. Otto was VERY “German” (thick accent), frugal to a fault. He was also very polite, and treated me with deep regard. His wife had died decades prior, and he lived alone in a nice home on the coast of the Big Island. He became familiar with an agency Home Health Aid who came to his home 3-4 times a week to assist him with activities of daily living. There is nothing evil or wrong about this; I’m just painting the picture for your benefit.

 

We paid off his remaining mortgage and freed up over $800/month of his income from 2 pensions and SSI. He had a small sum (approx $50,000) in savings and was going through this rapidly.

We also gave him and additional $70,000 cash at the close of the loan, and he has been using that to pay for his increased need for home assistance. He is now only receiving his income streams, and one of them will stop in a year (if he is still alive to receive it). The problem is that his care taker was relaying to me (Otto’s) concern about running out of money at this critical point. He is presently in hospice and not long for this world, yet he could carry on for months or even a year or more. Tough people die slowly.

 

There’s also another twist to this story- His day care helper who has been helping him for the past 3-4 years is also well liked by Otto. She is diligent and kind, and calls him “Papa” which (I’m sure) touches his heart strings. Otto set up an agreement with her. She lives with him full time, and he provides adequate room and board for her and her immediate family (3 people). She cooks and cleans and cares for him, and when he passes on? He established a Living Trust to transfer it all to her as a reward for her loyalty and service. This has worked out very well for all involved. She is also the Durable Power of Attorney for Otto, and now that money is scarce, she called to ask me what to do about it.

Refinancing is possible, yet improbable. If he dies too soon? The expense will not balance with the benefit. The time delay could catch us in mid-stream.  Additionally, reverse mortgages are extremely difficult to refinance. There are TWO ratio tests that must be met in order to refinance. Demonstrating a legitimate financial benefit in 2 dimensions is very difficult. So, I asked her to send me a text message of her recent statement for his loan so I can get a better idea of what is going on. She had tried to read them, and IMHO? Lenders make statements difficult to decipher as an effort to stem the wild use of equity for frivolous reasons.

There on the statement was the number-$76,000 of available equity; ALMOST the same sum we handed over 2 years ago! The HELOC balance had grown by over $8,500.00! She was elated!

 

Here’s what we can do now:

 

I spoke with the Lender servicing agent today and reviewed the circumstances. She must scan a copy of the signed and stamped (notarized) DPOA and let their legal team review it to make sure it’s not a “general” POA and that she is granted the authority by the document to act on his behalf as this is actually the act of arranging credit for Otto. If the DPOA does not provide for this action, she may not be allowed to request money. Additionally, now that a DPOA is enacted (assuming all goes well with the legal review), she will be added as the primary Borrower contact. According to this representative, she won’t likely be required to get/prove authorization again. This is a WONDERFUL advantage.

 

Upon her request and on Otto’s behalf, money in any sum she requests may be wired directly to Otto’s checking account. As DPOA, she may then use these funds on his behalf to help pay for home care beyond her capacities. When he eventually dies, I have instructed her to call ME immediately (within 1-3 days of his passing). I will help her strategically plan how she wants to pursue this debt payoff. She may want to sell the home, cure the debt (just like ANY OTHER mortgage) and take the equity and buy a more suitable home elsewhere. It is imperative to point out the obvious especially to our learned financial planners…MANY of you still believe the Heir must come up with cash out-of-pocket to pay off the lien. Yes, that is ridiculous, but many of you believe this. It is NOT true (of course). The reverse mortgage is a mortgage…just like any other mortgage.When you sell the home and the title transfers? Or, refinance? Or pay off the debt? The lien is cured. It is not required nor is it necessary for the Heir to come up with cash to pay off a Reverse. Please-do stop promoting this nonsense.

They may want to use values from the estate to cure the mortgage balance and continue living in the home. She may want to secure a mortgage for the balance of the debt (which is about 50% of the home value) and due to its inheritance status? Would not require any down payment or earnest money to refinance the debt. Any bank/Lender with half a brain will loan money at 50% Debt-to-Equity. Again, this is a WONDERFUL advantage for her.

At the 28-30 day point following Otto’s death, She must call the lender and let them know he has deceased. They will discuss the plans she worked out during the 30 day grace period following his death and will immediately grant her 6 months to act on the plan she chooses. As when working with ANY creditor, it is very important to proactively keep in touch with the lender and keep them in the loop of how things are progressing. If she needs more time after 6 months expires, she may request (and will be granted) an additional 3 months, and yet an additional 3 months more after that. That is a total of 13 months to cure the debt. During that time, there will be NO attorney or process fees or any legal charges whatsoever. The only cost will be the insurance and interest accrual. No payments will be required (but may be made) by the beneficiary as desired. It is important to understand that the HELOC is going to close immediately upon the death of a last Borrower (Otto) and no further access to equity will be allowed. If any payments are made, the home must be sold or refinanced to access that money again. The upside to making that payment is that if time is involved (Probate court comes to mind), paying down the debt reduces the growth of negative amortization significantly.

 

HINT: Buying Mortgage Life Insurance is a well established and customary use of Life Insurance. Do it for your Client.

 

LONG TERM CARE ISSUES WITH BOTH BORROWERS

 

My friend “Otto” brings me into a topic well worth discussing-Long Term Care (LTC) issues when a reverse mortgage is in force, and both Borrowers are residents in a long term care facility. Otto is a Widower, but the principles are the same.

 

The Deed of Trust in a Reverse mortgage states that “the Borrowers agree to keep the home as their primary residence” (among other mutual covenants and agreements), and “residency” means they must live in the home at least 6 months per year (extended vacations are very possible), but care must be taken to avoid triggering a default. As in any relationship? Communication is KEY.

 

WHAT HAPPENS?

 

It is the practice of every reverse loan servicing agency to make an annual effort to determine the status of every loan; They are quite good at it. DURING THE YEAR-there are several “canaries” in their coal mine that would indicate a potential default, and that is something the Borrower wants to avoid at all costs.

1. Annually (within 30-45 days of the anniversary the loan originally funded, and then whenever the new anniversary is if the loan is refinanced to another reverse mortgage), a letter is mailed to the residence address. It requires the Borrowers to complete the form and both (all signers) on the loan must sign. The death of a Spouse is reported and supported with a death certificate and therefore excused. 30 days is given to respond with the completed and mutually signed form. If that isn’t possible, the Borrower MUST CALL the servicing company (phone number is on the top banner of every single monthly statement and all other correspondence).

2. After 30-45 days from the first letter, if no response is received after the first letter, a second letter is sent to the address and phone calls to the listed “associated persons” (kids, neighbors, friends, etc.) to find the whereabouts of the Borrowers. At the end of that next 30 day period, if no contact response is received or document with signature(s) is received, the home enters a 6 month grace period.

3. If the Borrowers are BOTH in a nursing facility and not inhabiting the home, this triggers a 6 month grace period. At the end of that period, the reverse mortgage will enter foreclosure and begin accruing attorney fees and other “usual & customary costs”. This means the family has 6 months to do something about this problem and there will be NO attorney fees or other “customary” costs typical to a foreclosure. ***It is correct to note that while the reader may find this timeline to be a bit harsh? The typical conventional “1934” model of mortgage is not nearly this friendly, and requires the same residency elements, AND requires current ongoing mortgage payments of Principal and Interest and Escrowed amounts until the home is sold or refinanced, or the debt is paid in full. If the loan falls into foreclosure, there will be immediate legal fees and penalties that must be overcome in order to restore the mortgage until the home closes. This will rapidly eat up the equity of the home FAR FASTER than a reverse EVER could. 

***THIS is a PERFECT TIME for the Planner to work with the family to determine the outcome of the property. Sell, or pay off the debt by cash or refinancing to another type of mortgage are common options. The Lender does not care. They only want what they are entitled to (which is) Principal, Interest, and MIP Insurance fees. This is an ASSET, and deserves the planners attention and protection. Doing a great job for the family will undoubtedly bring you more Clients.

 

IF you are struggling with a Client in a reverse situation, please feel free to reach out to me for help. I will do what I can to help bring a best resolution to a situation that can get worse if it ever gets better.  Time is a critical ally, and a wasting asset. Use it correctly, and call me early on. 

 

Things to consider for the Planner and family:

1. The likeliness one or both of the Parents could return to the home (e.g. broken hip. Not a long term stay and returning to home may be possible within the windows allowed). If this is a good reality, the lender must be told in writing. They’re also not interested in calling in a “good loan” just because of a temporary circumstance.

2. If Parents are not coming back home, what do the Heirs want to do with the home? If this is in a trust, certain considerations may be added to help with familial issues like distributing heirlooms and other chattels.

3. Are any of the heirs capable of securing financing for the balance due?

4. Does anyone want to keep the home? (sentimental value, rental property, speculation, etc).

5. Is there enough wealth in the investments to make an emergency payoff if required? ***Note-this course of action should only be used if it is OBVIOUS the Parents are not returning and the children cannot afford to refinance the full loan balance. The problem is the home is subject to market prices. A lower-than-market price for the parent’s home is LEGENDARY. The estate would probably be better served to keep the money in the investment accounts and let the home sell for what it sells for.

Another critical point is the decision of whether to remove all remaining home equity from the HELOC account. First, one of the Spouses must be competent and capable of residing in the home. Second, If Medicaid is in the picture, this withdrawal will likely be construed as an illegal gift. Leaving the funds in their checking account will draw the attention of the Medicaid provisions and be used to pay for ongoing medical care until exhausted. Investing the borrowed equity is a compliance problem for most planners. The answer (I believe) is to pay all liquid resources on the reverse debt. This does 2 things-makes it easier to manage the debt; and also reduces the volumn of negative amortization growth substantially, and makes it easier to refinance the debt (smaller) balance.

6. The temptation is great…when you’re dealing with the servicing agency or the FHA or HUD…but, hear me well-Do not cheat. Do not lie. Tell the truth. ALWAYS tell the truth.