- Getting a Handle on Reverse Mortgages Feeling at Home in a New Market
- Weathering the Reverse Mortgage Storm – Providing Clients with Solutions
by Kelly J. Carter and Monte Howard

The U.S. economy entered a long-anticipated era in 2008 when the first members of the largest generation in history, the Baby Boomers, began turning 62, the age of eligibility for early Social Security benefits. The nearly 80 million Baby Boomers, who have reinvented so many aspects of American life, appear poised to leave their unique mark on retirement and possibly transform the economy in the process.

Nearly three out of five middle-class new retirees can expect to outlive their financial assets if they want to maintain their current pre-retirement standard of living. To avoid outliving their assets, they will have to reduce their standard of living by 24%. Retirees would be much better prepared if they had a guaranteed source of retirement income beyond Social Security, according to a recent study released in July 2008 by Ernst & Young.

In order to meet the demands of this Baby Boomer generation, the use of reverse mortgages has become an integral part of the retirement planning discussion. Insurance and financial advisors are recommending these less-conventional mortgage programs to senior clients in ever-greater numbers. Their enthusiasm is based on the fact that these products can go a long way to enhance the financial security of many older homeowners when they are part of a more comprehensive retirement plan.
A reverse mortgage is a federally regulated variable-rate loan for homeowners age 62 and older. The amount of money a homeowner qualifies for is based on three factors: the age of the youngest borrower, current interest rates, and the home value. Title always remains with the homeowner and the property can be passed on to their heirs. There are no income or credit qualifications and no out-of-pocket origination expenses for the borrower. Interest rates can be variable or fixed and tend to be quite reasonable (currently in the high 3% range for the HECM 150, a variable-rate product and the most commonly selected reverse mortgage option).

The Home Equity Conversion Mortgage (HECM) is the oldest and most popular reverse mortgage product, accounting for about 95% of the total number written annually. Available since 1989, HECMs are insured by the federal government through the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development (HUD).

Distribution of the available proceeds can be structured to provide the following:
• Income through a monthly payment option.
• Cash flow relief from the elimination of a mortgage payment or other debt.
• Liquidity through a line of credit (except in Texas), which can be tapped for unexpected expenses.

Where Do You Go For Help?

While this practice provides tremendous opportunities to add value for your clients, it also requires constant attentiveness to due diligence and your fiduciary responsibility. As in the insurance industry, reverse mortgages are highly regulated and operate under their own guidelines. The Real Estate Settlement Procedures Act (RESPA) establishes the regulatory environment for all mortgage origination activity. Since RESPA violations can be a serious matter, you must have basic knowledge of the ground rules before attempting to incorporate reverse mortgage planning into your practice.
Some insurance advisors have accepted offers to become an employee of a lender so that they can be compensated for providing reverse mortgages directly to their clients. While this idea may seem logical, it is often impractical. Considering the current legislative climate, probably inadvisable. Regulators are looking closer at cross-selling activities by those involved in both the origination of a reverse mortgage and the sale of other insurance or financial products that may be funded from the proceeds of the reverse mortgage.

When working in the reverse mortgage arena, the primary issue to consider is compliance, compliance, compliance. This is the most important issue with mortgage origination, especially with FHA-backed reverse mortgages. The Real Estate Settlement Procedures Act is very clear. It calls for $10,000 fines and possible incarceration for every individual violation. Legally compensating originators that are outside of the industry is very complex and must be undertaken properly. HUD recently hired more than 2,000 compliance officers to look at originator compensation issues due to the rampant RESPA violations, in large part. It is imperative to get comprehensive training that focuses on these compliance issues. This training should cover how the reverse mortgage works and how to stay compliant.

Reverse Mortgage Links

You can increase your knowledge and understanding of reverse mortgages by visiting the websites listed below:
• NRMLA (www.nrmla.org) The National Reverse Mortgage Lenders Association (NRMLA) is the nation’s only organization devoted exclusively to the promotion of reverse mortgages; advocacy on reverse mortgage lending issues with Congress and the federal government; education and training for reverse mortgage lenders; and development and maintenance of ethical standards for reverse mortgage lenders.
• AARP (www.aarp.org) AARP is a nonprofit, nonpartisan membership organization for people 50 and over. They provide information and resources; advocate on legislative, consumer, and legal issues; assist members to serve their communities; and offer a wide range of unique benefits, special products, and services.
• Fannie Mae (www.fanniemae.com) As the leader of the housing finance system, Fannie Mae is working to expand homeownership opportunities by creating products and technologies that help more people own homes.
• HUD (www.hud.gov) U.S. Department of Housing and Urban Development
• Senior Resource (www.seniorresource.com) This website is dedicated to helping seniors and their families with accurate and up-to-date information on senior housing options, finance, insurance and related lifestyle issues.

Having effective debt management and financial planning are key predictions for achieving financial independence and a secure retirement, yet most people do not have a written financial plan. As a trusted advisor, you can provide your clients with an alternative solution that can help them stay in control of their short-term and long-term financial goals. Innovative alternatives are coming, which combine high levels of service for the client and minimal time investment as well as fully compliant income for the advisor. They keep the advisor completely out of the equation and appear to provide a solution to the issues of RESPA compliance.
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Kelly Carter is COO of the Wealthbridge Network and Monte Howard is the Director of the Reverse Mortgage division. The Wealthbridge Network was founded by insurance agents for insurance agents. Wealthbridge provides both a forward and reverse mortgage referral source for insurance and financial advisors throughout the country. They work exclusively with only the finest, highest quality, financially stable mortgage originators in the United States. For more information, call 800-366-5656, ext. 245 or 247 or visit www.thewealthbridgenetwork.com.