Do you have clients thinking of pulling out of equities due to bear market fears and volatility? A HECM “reverse mortgage” stand by line of credit can provide security that keeps them invested during trying times.
Any advisor that has served clients through the uncertainty and volatility of a prolonged bear market. Have seen a portion of their clients pull fully out of equities to the detriment of their financial plan and long-term financial security. I personally know several individuals that pulled completely out of markets after the 2008 fanatical crisis and never returned. Several of these are clients of mine that have completed a reverse mortgage. They fortunately saw their real estate value rebound and surpass the value they had prior to the 2008 housing bubble. Unfortunately, they did not get the benefit of seeing their stock portfolio fully recover and accede their losses because they sold their equities at or close to the bottom of the market, and were not given. To add insult to injury, the low interest rate environment that prevailed for more than a decade made investing in instruments like bank CDs basically moot.
After thinking of all of my clients that approached me for guidance concerning a reverse mortgage after their retirement resources had languished with little or no return for years. I started to ask myself a question. Would these clients be better off today if they would have leveraged a reverse mortgage during the down years of the economic cycle and held on to their equites in order to see them recover? I believe the answer is yes. Data that I am including from renowned retirement income researcher and author Wade D. Pfau, Ph.D., CFA, RICP(R), is the program director of the Retirement Income Certified Professional(R) designation and a Professor of Retirement Income at The American College of Financial Services in King of Prussia, PA. As well, he is a Principal and Director for McLean Asset Management helped me come to my conclusion. In the scenario that he lays out. In his book “Reverse Mortgages how to use reverse mortgages to secure your retirement 3rd edition-revised for 2022” In the section titled “Reverse Mortgages and the perfect Storm Facing Retirement Income in 2022” A client with 1 million invested in 1962 completes a reverse mortgage. The client lets the reverse mortgage line of credit stand by and grow until the market downturn of 1970, 1974 and 1975. In these years the client runs on the cash flow feature of the reverse mortgage while stopping distributions from their retirement portfolio. By using this strategy the sequence of return risk would have a portfolio valued at 2.25 million in 1995. The client that stays invested and maintains distributions during these down has a portfolio balance of “0”. All of this assumes a 3.95% withdrawal rate from the client’s portfolio.
In closing, all of your clients have heard the following statement through the years. “Don’t panic sell during downturns in the market stay invested! However, we all know that this logic can and does go out the window when the bear is scratching and clawing at the front door. Many of your clients may have been disciplined and or fortunate enough to have put back enough cash to use during down market cycles. I would dare to say that most advisors have just as many or more clients that have not. Many people solely depend upon qualified IRA or 401K account balances that they accumulated in their working years. For these clients I believe the standby line of credit reverse mortgage strategy deserves a hard look.
The coming credit crunch will not affect our client’s ability to access credit. Will it affect yours? Exploring your client’s options sooner rather than later could be critical.
The regional banking crises is real, despite what narrative is being painted by the Fed and we all know it. As consumer and business deposits continue to leave reginal banks for security and better returns, reginal banks are seeing their lending abilities wither. On top of that, the macro-economic uncertainty has led them to tighten lending standards Mid-sized banks, the Fed said in reporting the survey results, seemed particularly stretched.
“Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tighten lending standards over the rest of 2023,” the release said. “Mid-sized banks reported concerns about their liquidity positions, deposit outflows, and funding costs more frequently than the largest banks.” Most of the news concerning the credit crunch pertains to commercial lending. However, the consumer financing is next on the chopping block. The hot housing market that was induced by the covid-19 pandemic created billions of dollars in additional housing wealth for home owners across America. For instance, in Chattanooga TN the average home price has increased from 166,018 in 2018 to 275,056 in 2023. This is a whopping 64% increase! Nashville TN was just slightly behind with 56% over the same period of time. This unprecedented increase in home equity spurred homeowners to open or increase their existing home equity lines of credit or “HELOC” loans. Many large lenders are not offering HELOC loans due to current market conditions like Chase Bank who stopped taking HELOC applications as of April 17, 2020. However, small to regional credit unions and banks have continued offering these loans. As the credit crunch continues, it is almost certain that these smaller lending institutions will follow the lead of the MEGA banks. When this happens not only will new applications for HELOCs not be taken. Customers with exiting HELOC loans will lose access to their lines of credit because small and regional banks want to avoid the risk of people making a run on their home equity.
For individuals above the age of 62, there is a financing option that protects their ability to access their home equity regardless of economic conditions. Those individuals that have fully paid their home off or have a small mortgage balance can take advantage of the federally insured Home Equity Conversion also known as the “HECM” or “Reverse Mortgage” line of credit option. Unlike the traditional HELOC offered at banks, the HECM line of credit isn’t affected by the lending ability of a bank. Once the reverse mortgage line of credit is established, it is guaranteed to always be available to the borrower regardless of the circumstances of the lender or the economic environment at large. It is also guaranteed to grow for the client based upon the line of credit growth rate established in the loans initial terms. There are many other differences between the bank offered HELOC and the federally insured reverse mortgage. I only wanted to highlight the security that comes with the federally insured HECM in this blog post. The fact is, the reverse mortgage guarantees access to credit and there is no such guarantee that will be provided from a bank offering a traditional home equity line of credit. If an individual 62 or above wants a loan that offers guaranteed access to their home equity, a federally insured reverse mortgage should be explored.
You may have heard “federally insured” or “FHA insured” when talking about a reverse mortgage loan, but what does that actually mean? It is actually an integral part of the reverse mortgage and extremely beneficial to the borrowers.
A federally-insured reverse mortgage assures that, as the borrower, you will receive certain loan payments as agreed upon by the terms of your loan. Also, you or your heirs will never be forced to repay more than your home is worth to pay off the loan, regardless of the loan’s balance.
This is important because it ensures two things –
- The reverse mortgage insurance guarantees that these loan proceeds will be disbursed to the borrower as agreed upon under the loan terms. The loan proceeds are guaranteed even if the lender goes out of business. Similarly, with a line of credit, the lender cannot cancel or freeze the line of credit when this insurance is in place.
- The insurance protects all parties in the transaction, including the borrower, the lender, the borrower’s heirs, and the investors who buy the securities backed by the loans. The insurance makes the program possible for borrowers.
“While these [reverse mortgages] got a bad rap in the late 90s and early 2000s, they have changed what needed to change. A reverse mortgage can be an excellent option for qualified borrowers who need to access their home equity and may not have the income or life expectancy to qualify for a traditional first or second mortgage or even a HELOC,” says Eddie Martini, strategic financing and real estate investment advisor at Real Estate Bees, and wealth coach at Martini Legacy.
Like many Americans, you may be concerned about the economy and struggling to manage issues like high inflation and interest rates. At the same time, you may also have enjoyed home price appreciation over the past few years. In Chattanooga, home values have gone up 6.6% over the past year. In Nashville, home values have increased an average of 12.9% over the past year. This home price appreciation has given homeowners significant amounts of home equity to tap into. More home equity, as well as an insured reverse mortgage loan, may be the retirement security you are looking for. And we at Mortgage South want to help you see if a reverse mortgage can help you achieve retirement security. Mortgage South is local and you deal with a professional that has been doing these since their inception. Give Nathan a call, you will not be disappointed even if you find this is not a perfect fit, he can point you in a direction that might help. If you are in Chattanooga or the surrounding area, please call (423) 624-3878. If you are in the Greater Nashville area, please call (615) 657-5878.