Stock markets have recovered partly from their previous losses, although the indexes aren’t back to their pre-crash highs. Consequently, retirees who depend on withdrawals from their portfolios for income face a choice between reducing withdrawals and increasing the risk of portfolio depletion. For retirees with significant home equity, however, utilizing that equity through a reverse mortgage could be a solution.
According to the National Reverse Mortgage Lenders Association (NRMLA), reverse mortgages continue to be one of the few areas of growth within the mortgage industry. The industry closed 112,100 Home Equity Conversion Mortgages or HECMs in Fiscal Year (FY) 2008, which ended September 30, 2008, surpassing the record loan volume for FY 2007, according to data provided by the Department of Housing and Urban Development (HUD). That loan volume continues a steady uptrend for the industry each year since 2001. Most recently, loan production has grown from 43,131 in FY 2005 to 76,351 in FY 2006 before climbing to 107,558 in FY 2007.
The personal-finance news media often criticize reverse mortgages because of the contracts’ fees, but they can provide genuine value in the right circumstances. Richard Hoe, ChFC, CLU, AEP with Richard Hoe Investments, LLC in Tulsa, Okla., cites a case where a reverse mortgage helped preserve a client’s investment portfolio.
The client was in her late 70s and her trust fund was being depleted rapidly through poor investment performance. By reversing her mortgage, she was able to reduce the amount of income withdrawn from her trust fund, preserve the corpus and allow some investment growth, while receiving a monthly income until her death, six or so years later.
Neil Sweren, CEO of American Home Loan, Inc./Allymac Mortgage Services in Owings Mills, Md., points out that there is nothing inherently good or bad about a reverse mortgage. “It is an incredibly versatile borrowing tool that allows senior homeowners to stay in their homes and remain independent longer,” he says. “Funds can be accessed in a lump sum at closing, in the form of monthly payments or in a line of credit. Borrowers can access funds using any combination of those three methods.”