Forward on reverse: Retirement finance in the age of HECM: Pick "reverse" brain cellsAtare E. Agbamu, CRMSreverse mortgages, home equity products, finance counselors Part II of a non-sequential series on how reverse mortgages are changing retirement finance Author's note: The series "Retirement Finance in the Age of HECM" looks at how reverse mortgages (HECMs) are changing our notion of retirement finance. In retirement finance, we believe the 21st century is the Age of HECM. Reverse mortgages will play a critical role in the new retirement finance calculus, and we must understand this vital role to aid intelligent individual and societal planning. Retirement finance advisors should consider a refresher in reverse mortgages. The education which provided their guidance on real estate finance in retirement now requires review and revision. A new course should address questions such as: What are reverse mortgages? How do they fit into their clients' retirement finance calculus? What are the nuances among reverse products? What, for example, are the costs and benefits of using a reverse mortgage to buy a retirement home versus paying 100 percent cash? On a value and cost basis, how do reverse mortgages compare with alternative home equity products? Based on a client's life planning needs, when is the best time to begin tapping home equity via reverse mortgages? What is the value of reverse mortgages' tax-free cash flow in comparison to other cash flow sources? How do reverse mortgages interact with public healthcare benefits? How are reverse mortgages redefining our notion of real estate inheritance? What are the estate planning implications of reverse mortgage debt? Addressing these questions could help retirement and finance counselors better serve their clients. What used to be solid retirement and finance advice, when real estate and mortgages are involved, must be re-evaluated as reverse mortgages evolve into pillars of modern retirement finance planning. Some big-name finance and investment columnists have been dishing out housing finance advice as though reverse mortgages do not exist. The few who accept the importance of reverse mortgages often miss their meaning for retirement finance. Our premise in this non-sequential series, which began in January, is that the presence of reverse mortgages in the mortgage lending marketplace has altered retirement finance forever. Those who traffic in retirement finance counsel should bring themselves up to date before speaking or writing for public consumption. A recent case that comes to mind involves advice which a nationally syndicated financial columnist gave to a couple in an early November 2007 column in a Twin Cities newspaper. Let's look at the information presented. On the strength of more than $500,000 in assets, the couple intends to retire this year to a smaller house in a smaller community on a budget of $40,000 a year. They plan to spend $150,000 for a new, smaller home. In the couple's narrative, there was no indication that they are selling their current house. We assume that cash from sale of their present, larger home is included in their $500,000 in assets. Here is the question they posed to the prominent financial expert: When we purchase a house in the new community, should we use part of our investments to purchase a home free of a mortgage, or would this deplete too much of our assets for providing income during our retirement? Before giving his advice, the financial guru rightly asked the couple to consider whether investing their money (cash price of new house) will yield them a higher rate of return than the interest cost on a mortgage. With mortgage rates averaging 6.5 percent at the time of the advice, the financial expert counseled the couple in the following way: In order for you to get that high [of] a return on investments, you'll need to take a fair amount of risk—you'll need a portfolio with a healthy helping of stocks. Remember that in your pursuit of a high investment return, you can fall short if the markets have a prolonged slump. At your station in life, I would guess you do not want to take great investment risk, so consider paying cash for your house and not taking out a mortgage. Although this will deplete your assets, the lost investment income will be more than offset by the lack of a monthly mortgage payment. One final point to consider: If your money for the house purchase would have to come from retirement accounts, then you would need to pay income tax on the withdrawal. If this is case, that might tip the scales in favor of taking out a mortgage. This is good counsel for this couple in a pre-Home Equity Conversion Mortgage (HECM) era. However, in the age of HECM, its value is dubious because it omits a reverse mortgage perspective. A reverse mortgage informed angle could have shown the couple how they could: •Use tax-free reverse mortgage cash as downpayment for their new home; •Borrow only a portion of their new home's price and not have a monthly mortgage payment obligation; •Save on income tax and asset liquidation costs from withdrawing less than $150,000 from their assets; and •Increase potential investment income from liquidating less than $150,000 of retirement assets. In addition, a reverse mortgage slant could have shown the flip side of the above benefits and improved the quality of advice for the couple. As mortgage professionals, we can add value to our relationships with financial planners, certified public accountants, elder law attorneys, geriatric care managers, and other elder-focused professionals by supplying the often missing informed reverse mortgage perspective in these situations. Think reverse. Move forward! Atare E. Agbamu, CRMS formed ThinkReverse LLC to help originators address demographic change via reverse mortgages. A specialist with Credo Mortgage and a member of the BusinessWeek Market Advisory Board, Atare is the first to propose reverse mortgages as risk-management tools for forward originators. Besides marketing, originating and researching reverse mortgages since 2001, Atare has authored more than 90 articles and a book on reverse mortgages. He may be reached by phone at (612) 203-9434 or e-mail [email protected].