Reverse Mortgages 101: A White Paper For Professionals 4/18/2008

Reverse Mortgages 101: A White Paper for Professionals

This white paper was authored to teach and educate accountants, attorneys,financial planners and insurance advisors about an exciting “new” financial program thatis so powerful, it is changing the lives of our senior citizens. This course is limited in itsscope. I designed it to give you a “feel” for the program, while arming you with thesalient fundamentals. It does not cover all the reverse mortgage terms and concepts.The number of seniors who are using this program is increasing each year. Inthe not-too-distant future, more of the major financial institutions will be offering thisprogram. A purpose of this course is to provide advisors with another solution to helpthem differentiate themselves in the marketplace, while providing the best advicepossible to the client.Likewise, you must also become the sentinel for your client. The reversemortgage industry is changing - as many who were involved in the Alt-A and sub-primedebacle are looking for another revenue stream. The key to a successful closing is toensure that your client hires a very competent and caring reverse mortgageprofessional. As you undoubtedly know, not all reverse mortgage companies are thesame.This courser will help readers understand this country’s shifting senior demographics. It will also permit advisors to show senior clients how they can unlockhome wealth while still living in their homes for life.This course will enable advisors to be among the first in their community to talkto clients about a program many advisors heretofore have ignored. Should advisorscontinue to ignore it, they will do so at their own financial detriment and potentially leavethemselves open to E&O or malpractice suits. Today, seniors want to know about

all

their financial options.

REVERSE MORTGAGES

Introduction

This course will focus on what a reverse mortgage is, how it works, why it worksand why it should be considered for many clients over the age of 62. This material willcompare the various reverse mortgage programs to each other. The focus however, willbe on the government insured FHA/HECM program. This program represents over 90%of all reverse mortgage loans obtained.Proceeds from reverse mortgages can act as an emergency investment vehicle,an estate planning device or a retirement facilitator. In order to begin a discussion onthis topic it will help to have a good definition of just what it is.

Reverse Mortgages 101: A White Paper For Professionals 4/18/2008

What is a reverse mortgage?

A reverse mortgage is a special and different kind of loan that is easy to obtain if you are at least 62 years of age and own your own home, condo (PUD) or co-op (only ina few jurisdictions). A reverse mortgage converts a portion of the value (equity) of ahome into instant cash. The pool of money that is created by a reverse mortgage can bereceived by a senior homeowner(s) in a variety of ways.One of the key aspects to a reverse mortgage is that the client is NOT required topay monthly mortgage payments. (The borrower can make voluntary payments shouldhe/she desire). Additionally, there is NO personal liability attached to the loan. A reversemortgage loan is non-recourse. The home serves as collateral just as with any loan.One other key feature to a reverse mortgage is that there are

no income, assetor credit requirements

to obtain the loan

That means you could have a client that haspoor credit, no income and no other assets besides a home with equity and the clientcould obtain a reverse mortgage to raise money for a variety of needs.The concept of reverse mortgages is easy to understand once properlyexplained. Have your clients picture themselves shaking hands with their home. “I’vetaken care of you all these years,” they say. The home replies, “It is now my turn to takecare of you.” This is the essence of the program. The home is simply returning its love.

Who can use reverse mortgage?

Age “62” is one of a few “magic numbers” you will see in this material. Eachhomeowner must be at least 62. If one spouse is 62 and one is not, then the “couple”can not obtain such a loan.On the other hand, should the younger spouse come off title, then this reversemortgage borrower can proceed. However, his wife would still have to be counseled (Iwill cover counseling later) and will have to sign a disclosure form. Pay close attentionto the following example:Let’s take a case where the husband and wife are 68 and 60 respectively andeach owns the home. If the husband dies first, the reverse mortgage loan will becomedue and payable. (Remember, in order to get this reverse mortgage, the 60 year oldspouse has to agree to be taken off the deed. Also remember, when 2 or more peopleof reverse mortgage age own the home, the loan becomes due upon the death of thesurvivor. Other maturity events include sale and the home is no longer the primaryresidence of any of the borrowers.

Reverse Mortgages 101: A White Paper For Professionals 4/18/2008

This maturity event could be bad news for the non-borrowing spouse if her intentwas to remain in the home, after the passing of her husband. (The maturity event couldbe manageable if the husband had a life insurance policy with a large enough deathbenefit).Home ownership can be accomplished in a variety of ways. A home that is aprimary residence can be owned in severalty (individually), jointly, in trust or with a lifeestate. If one sets up a revocable trust, a reverse mortgage can still be an optionprovided the beneficiaries are the seniors. The children can be beneficiaries upon thedeath of the surviving parent. Title to the property must be in the trustees and thetrustees do not have to be the borrowers (seniors). The trust will be amended at closingto permit the reverse mortgage.An irrevocable trust on the other hand is more troublesome. Typically, such atrust is created as an asset protection device or estate transfer tool. Whenever such atrust is used it generally precludes the senior from accessing the corpus (assets) of thetrust.The amount of money that can be created or manufactured (as a salesmanwould say) from a reverse mortgage is dependent upon the program used. Generallyspeaking, it can be said that three things will determine how much a client can receivefrom a reverse mortgage: 1. The age (of the youngest borrower).2. The value of the home (up to a certain limit for some programs).3. The interest rate.It is important to note that the older the youngest borrower is, the greater thebenefit amount will be. This means that a 72 year old will receive more than a 62 year old. This assumes that both the maximum claim amount and the expected interest rateis the same. (The maximum claim amount is the lesser of the appraised value or theFHA/HECM lending limit.The pool of money that is created from a reverse mortgage can be received in avariety of ways. Again, the ways will vary under the differing programs. The FHA/HECMprogram provides the most options. The options include a lump sum, initial advance,monthly payment (term or tenure), line of credit or a combination of same.One of the key things that sets a reverse mortgage apart from any other kind of loan is that its is a

non recourse loan

. There is no personal liability to the borrower,their estate or to their heirs upon an arms length transaction sale.