Increasing lifespan coupled with earlier retirement poses a challenge for many individuals and couples trying to figure out how to make sure their financial resources will last their lifetime. Longevity is a gift on the one hand, but it also requires forethought and planning to make sure one’s finances will sustain them through the duration of their life.
While the U.S. has an extensive social safety net with Social Security benefits and other resources available to those in need, it is really the smart use of savings, investments and other assets, that will contribute to a comfortable retirement for many Americans. There are a number of tools and strategies to help one’s financial assets last as long as possible and retirees need to familiarize themselves with all available options.
This presents a need for broad public discussion of the challenges and opportunities faced by America’s aging population.
To stimulate such discussion, National Reverse Mortgage Lenders Association (NRMLA) is launching a consumer education effort this week, a pilot program in three cities entitled New Reverse Mortgage and built around the theme that a reverse mortgage can be a Smart Choice in planning retirement funding. This educational program is designed to encourage retirees to project their future needs, examine all resources available to them, and consider whether the wealth they have built up by owning their home for many years might be a significant factor in planning for their needs.
The educational campaign now in progress in Philadelphia, Denver and Seattle features television commercials, print ads in major newspapers, a dedicated website at www.newreversemortgage.org, brochures, public information forums, outreach to financial planners and an opportunity for individuals to contact NRMLA or its members to ask questions and get more insight on how home equity might be incorporated into strategic plans for funding longevity.
Many authoritative voices, including noted financial planner Harold Evensky, personal finance columnist Jane Bryant Quinn, and Alicia Munnell, director of the Center for Retirement Studies at Boston College have suggested that, for many older homeowners, a reverse mortgage might be a way to tap their housing wealth and preserve other assets for greater long-term growth.
A reverse mortgage is a financial instrument that enables homeowners, aged 62 years or older, to draw down their equity as cash as needed, without having to make any monthly mortgage payments, sell the home or move out. Cash advances received from a reverse mortgage, plus the interest that accrues on any outstanding balance, become due and payable when the homeowner permanently leaves the home, either by selling and moving or passing away. Almost all reverse mortgages available in the U.S. today are FHA-insured home equity conversion mortgages, often referred to as a “HECM” (Home Equity Conversion Mortgage).
“A reverse mortgage is a uniquely flexible tool that has been used by nearly a million homeowners since Congress created the HECM program in 1988. Homeowners have used HECMs to pay-off their existing mortgages and eliminate their monthly payments, draw additional cash when needed, make improvements to their homes that help them age in place, or avoid selling other assets such as stocks and mutual funds allowing those assets to continue to grow and generate dividends,” explains Peter Bell, President & CEO of NRMLA.
“Unfortunately, many homeowners don’t fully understand how and when a reverse mortgage might be beneficial,” explains Otto Kumbar, CEO of Rancho Cordova, California-based Liberty Home Equity, one of six companies funding NRMLA’s educational effort. “That’s why some of the leading companies in the reverse mortgage business have pooled our resources to develop this educational program.”
Throughout the history of the HECM program, HUD has responsibly observed the behavior of reverse mortgage borrowers and made adjustments to the program based on the borrower experience. Over the past nine months, as a result of the passage of the 2013 Reverse Mortgage Stabilization Act by Congress, HUD has been implementing a series of adjustments that makes this retirement funding option safer for borrowers. The recent changes include limitations on upfront draws, which is aimed at prolonging the life of borrower assets, and financial assessment, which will indicate if borrowers have the means to fulfill their financial obligations.
“We recognize that a reverse mortgage is not a solution for everyone, but with sensible changes to the HECM program being implemented by HUD, we thought it’s time that homeowners take a fresh look to see if a reverse mortgage might be useful to them. Our goal is to give consumers an opportunity to make an informed decision, not stay away because of outdated misperceptions,” said Bell.
The NRMLA New Reverse Mortgage Educational Campaign will run through October 5, 2014 in the three pilot markets. Consumer opinion research was conducted before the launch and will be ongoing throughout the campaign and upon its conclusion.
Remarks from companies sponsoring the New Reverse Mortgage Educational Campaign
“We’re trying to arm our prospective customers with knowledge and information so they can make a pragmatic decision on how best to manage their financial matters through retirement,” according to Steve McClellan, President & CEO of Urban Financial of America (UFA), Tulsa, OK.
“Talking to consumers who call our company, we find that there are many misperceptions about reverse mortgages that often lead to a negative opinion of them. However, when you talk to homeowners who have incorporated them into their personal finance plans, they report a very high rate of satisfaction,”according to Reza Jahangiri, CEO of American Advisors Group (AAG), Orange, CA.
“We’re seeing more and more future-oriented homeowners examine reverse mortgages as they project their income and expenses, savings and investments, and cash flow out into the future and recognize that the wealth they’ve built up in their homes is a significant resource that could be an important factor for retiring comfortably,” according to Colin Cushman, CEO of Generation Mortgage Company, Atlanta, GA, who before joining his company was a Director at the U.S. Department of Housing & Urban Development working on the HECM program.
“Recent changes and new program guidelines make the HECM program a choice worth considering as a part of our customers’ comprehensive retirement plan,” said Scott Clarke, President of Reverse Mortgage Solutions, Inc., Spring, TX. “Education is one of our core values and our hope is that this initiative will provide prospective customers with the ability to have a wider, more informed choice.”
“Reverse mortgages have come a long way but most people aren’t aware of how a reverse mortgage can positively impact their retirement years. The recent changes have not only strengthened the program but broadened its application,” says Gregg Smith, President and COO of One Reverse Mortgage, San Diego, CA.
Comments from Researchers and Reporters
“The SRM (Standby Reverse Mortgage) strategy is appealing for four primary reasons: it diminishes the size of the cash bucket and consequently the opportunity cost of holding cash; it provides flexibility in that the investment bucket is not sold during bear markets; it allows the retiree to decide how much home equity is used to meet needs if the investment bucket is exhausted; and most importantly, it increases the life expectancy of an investor’s nest egg.” (“Standby Reverse Mortgages: A Risk Management Tool for Retirement Distributions” by John Salter, Shaun Pfeiffer and Harold Evensky, Journal of Financial Planning, August 2012)
“I’ve got a financial proposal that is probably going to surprise you. Take out a reverse mortgage at age 62, even though you don’t need the money. In fact, take it especially if you don’t need the money.” (“A Great Reverse Mortgage Idea: Take a Credit Line Now” by Jane Bryant Quinn, JaneBryantQuinn.com, August 15, 2013)
“Given the relative unimportance of asset allocations, financial advisers will be of greater help to their clients if they focus on a broad array of tools – including working longer, controlling spending, and taking out a reverse mortgage.” (“How Important is Asset Allocation to Financial Security in Retirement?” by Alicia H. Munnell, Natalia Sergeyevna Orlova, and Anthony Web, Center for Retirement Research at Boston College, April 2012)