HECM 101 Presented by Mark Schumacher NMLS # 519754 For Financial Professionals Only Presented by Mark Schumacher NMLS # 519754

This is where financial planning counts Help your client conserve this asset / do not plunder this asset! Identify the strategies that help secure retirement

What is Home to the Retiree? Source of security and comfort Connection to family and friends Likely the largest asset US CENSUS Bureau

Research Demonstrates Housing Wealth Contributes to Retirement Security

What is a Reverse Mortgage ? A Home Equity Loan with Special Features 1. Payment deferred until no longer live in home 2. Proceeds aligned with life expectancy 3. Available to homeowners 62 or older 4. Liability limited to home value 5. Loan is in effect to age 150 6. Lender CANNOT cancel, freeze or reduce

What is a HECM ? A Home Equity Conversion Mortgage 1. Most popular reverse mortgage > 95% 2. Insured by the full faith and credit of US Government 3. Regulated by the Federal Housing Authority (FHA) 4. A non-recourse loan “no deficiency judgment may be taken against borrower/estate” 5. Borrowing capacity grows every month at the same percentage rate as the loan balance

Why Such a Bad Reputation? Generally misunderstood : 4 NEVERS * 1. Never give up title : Bank does not get the house 2. Never owe more than home value, any remaining equity belongs to homeowner or estate 3. Never have to move, even if all the money is used 4. Never have to make a payment on principal/interest * Until the last borrower dies, moves, or sells and tax and insurance obligations are met © 2000 Giordano

How has the HECM Changed? Beginning with 2013 Reverse Mortgage Stabilization Act 1. Cannot borrow too much too soon 60/40 2. Reduced loan to value 3. Protect Non-Borrowing Spouse 4. Reduced Overall Cost a. generally lower interest rate margins b. lower on-going FHA mortgage insurance 5. Underwriting assures that the loan is suitable for the client

What is the Process? Establish eligibility and proceeds available http://rfslends.com/calculate/

What is the Process? Proposal Stage Is there a mortgage to pay off? What payment plan makes the most sense? Lump sum Tenure Term Growing Line of Credit Combination What are the costs? Origination Fee Third Party Fees FHA Mortgage Insurance Fee

What is the Process? 3. Counseling Stage

What is the Process? Processing Stage FHA Appraisal Title Search Confirm Insurance/Property Taxes Underwriting Is the homeowner willing and capable of meeting homeowner obligations? An escrow of taxes and insurance may be a condition : LESA

What is the Process? 5. Closing Similar to any mortgage closing If there is a lien, it is paid off with the HECM proceeds ~chose how to draw remaining proceeds

What are Effective HECM Strategies?

Wade Pfau, PhD, CFA 1. In retirement, must plan for your client living beyond life expectancy. 2. Volatility makes distribution decisions difficult. The fewer fixed expenses, the better able for your client to withstand sequence of returns risk. Reverse Mortgages, How to Use a Reverse Mortgage to Secure Your Retirement, 2nd Edition

Wade Pfau, PhD, CFA Replace mortgage with HECM BEST WORST Reverse Mortgages, How to Use a Reverse Mortgage to Secure Your Retirement, 2nd Edition BEST WORST

Avoid Adverse Sequence of Returns Following Bear Markets, allow the portfolio to recover. Draw from HECM instead. When times are good, resume draws from portfolio.

Avoid Adverse Sequence of Returns

©. 2016. Giordano. All rights reserved. Shannon Hicks Liquidity Shock Portfolio Shock Divorce Shock Health Shock HECM Inflation Shock Housing Value Shock 2/19/2019 ©. 2016. Giordano. All rights reserved.

©. 2016. Giordano. All rights reserved. Growth of Line of Credit Borrowing Power Compounds Monthly at Contractually Established Rate Cannot be cancelled, frozen or reduced Grows even if housing value does not www.toolsforretirementplanning.com 5% 4% 2/19/2019 ©. 2016. Giordano. All rights reserved.

HECM for Purchase “H4P” The Last Time Home Buyer…

H4P: Potential Revolution in Financing Real Estate in Retirement Years Beginning January 1, 2009: FHA allows the reverse mortgage to be used as a primary financing tool for home purchase HECM no longer limited to refinancing of existing residence

What does this mean? Seniors 62 or over are able to purchase real estate by combining a down payment with a reverse mortgage at the closing table and have no monthly payment

In this case study, the client will bring $236,900 to the closing table. The remaining $163,100 (41%) is provided by an H4P lump sum. No principal or interest payments are due until the last homeowner dies, moves or sells. *Other property obligations such as tax and insurance must be met, no different than any homeowner.

Wade Pfau, PhD, CFA BEST WORST BEST RESULT : HECM for Purchase/Coordinated Strategy : Voluntary Payments Except in Years Following Bear Market WORST RESULTS : Paying Cash or Take Out a 15 Year Mortgage Reverse Mortgages, How to Use a Reverse Mortgage to Secure Your Retirement, 2nd Edition $300,000 house 65 year old For a 15 year mortgage, this requires $60,000 upfront and payments of $20,838 (3.5% rate). Or Take out a H4P for $137,700 BEST WORST

Conclusions HECM has evolved to provide even greater consumer safeguards HECM reduces the fixed expense for home financing/reduces exposure to SORR HECM improves cash flow where labor income is not longer available HECM improves retention of investable assets HECM is flexible and allows voluntary payments at client’s discretion HECM is safe, backed by the full faith and credit of the US Government HECM gives you the power to solve your client’s housing challenges