This document provides an overview of the Home Equity Conversion Mortgage (HECM) as a cash flow management tool for senior homeowners. Key points include: a HECM is a federally-insured reverse mortgage that provides tax-free funds to homeowners 62+ through a line of credit, lump sum payment, monthly payments or a combination; funds can be used for any purpose and are not repaid until the home is sold; and recent changes have expanded access and protections, making HECMs a viable option for enhancing portfolio longevity in retirement rather than a last resort. Case studies demonstrate how HECMs can be structured for different needs like healthcare costs or downsizing.

1. FHA’s
Home Equity Conversion Mortgage
(HECM)
UNDERSTANDING IT AS A CASH-FLOW MANAGEMENT TOOL
FOR MATURE HOMEOWNERS

2. Your Presenters: Mary Jo and Amanda

3. HECM Defined
A federally-guaranteed home loan with deferred repayment:
◦ primary residence
◦ single-family residence
◦ HUD-approved condos
◦ 1-4 unit buildings
◦ Co-ops, not yet….

4. HECM Defined
Insured by HUD
◦ non-recourse
◦ no personal liability
(only subject property is liable
for accrued debt)

5. HECM Defined
 Primary residence
 Borrower must be
62+
 Loan amount is lower
if NBS is younger

6. HECM Defined
Repayment deferred until Triggering
Event:
Death of last remaining borrower or
eligible non-borrowing spouse (NBS)
12 consecutive months of all
residents being out of the home
 Choose to sell, re-fi or transfer title
 Convert to rental property

7. Sequence of Returns &
Reverse Dollar Cost Averaging
A Different Kind of Cash Flow Management Tool:
 Variable interest rate (lender’s margin + Annual
LIBOR)
 Revolving Line of Credit (LOC)
◦ LOC restores if borrower ever chooses to make a
payment (always optional)
◦ Growth Rate of credit line is automatic and
federally-guaranteed
◦ regardless of home value or outside factors
available proceeds uncapped over life of loan
 Draws are tax-free

8. HECM Defined
Lump Sum
◦ Fixed-interest rate
◦ NOT a revolving LOC
◦ Extinguish existing mortgage
and consumer debt to reduce
draw rate from investment
portfolio

9. Availability of funds
Variable interest rate
(lender’s margin + Annual LIBOR)
◦Revolving Line of Credit
◦Tenure – lifetime payment to
borrower based on age
◦Term – choose number of
months or monthly amount

10. Flexibility of variable rate loan
Borrower can choose combo
of any/all options at closing
◦ LOC + lump sum + tenure
or term payment
Borrower can restructure at
any time and as needed

11. Amortization of 72 year old: $50K Lump Sum,
$50K LOC, Tenure payments $1,642/month

12. HECM vs. HELOC
The HECM loan is vastly more flexible and offers
protections not available in other types of lines of credit
◦ LOC cannot be arbitrarily frozen or reduced
◦ Non-recourse
◦ Never re-casts into a P&I payment
◦ Zero monthly repayment
◦ Open ended term (lifetime residency)
◦ Unlimited Draw period
◦ Federally-regulated

13. What’s new?
Lower IMIP for borrowers accessing <60% year
one.
Eligible non-borrowing spouse now protected for
life
Default reduction plan instituted by HUD
• Minimal financial and credit assessment done at
application
• LESA (set-aside) created for borrowers with
prop tax / home owner’s insurance delinquency

14. What’s new?
 Lifetime interest rate cap lowered from 10 to 5.
 Borrower has option for no set up fee loan
 Higher rate = faster increase in LOC funds

15. HUD’s formula
 10-year LIBOR swap (used in Expected Rate)
and
 Age of youngest borrower
determines
 Principal Limit Factor
(Percentage of 625,500 or home value,
whichever is less)

16. No Longer a Last Resort
Michael Kitces, recently spoke at
NAPFA May 2015, “Taking a Fresh
Look at Reverse Mortgages”
Barry Sacks, “Reversing
Conventional Wisdom”
Salter and Evensky, “Standby
Reverse Mortgages: A Risk
Management Tool for Retirement
Distrbutions”
Boston College Center for
Retirement Research, “Using Your
House for Income in Retirement”

17. Application Timing?
When LIBOR increases, $$ available to Borrower decreases.
Example: 73 year old
5% Exp Rate = 58% Principal Limit Factor
6% Exp Rate = 49% Principal Limit Factor
8% Exp Rate = 37% Principal Limit Factor
10% Exp Rate = 28% Principal Limit Factor

18. Case Studies
Sequence of Returns in Draw Period – Line of Credit
Drawing more than recommended – Tenure
Health care – Term
Combo (LOC/Term/Tenure)
Extinguish mortgage
Downsize
Divorce/inheritance – Settle the estate
Avoid Capital Gains - Stay in home

19. 62 year
old, Line
of Credit

20. 72 year
old,
Tenure
Payment

21. 82 year
old,
Term
Payment

23. What else?
Downsizing:
◦Eliminate existing mortgage
payments
and
◦Beef up Investment Portfolio

24. Downsizing scenario
Step One:
Sell existing home 1,650,000
Pay off existing mortgage (541,000) (eliminate monthly mortgage payments)
Sale fees estimated (95,000)
Capital gains (100,000) (check with your tax advisor)
Cash left over from sale $914,000
Step Two
Downsizing to put cash to work and eliminate monthly mortgage payments for good:
Cost of new home 700,000
HECM proceeds (350,000) +/- depending on age and interest rate at time of application
Buyer pays 350,000 from cash on hand (out of 914,000 from sale of current home)
$$$ Cash left over after purchase, to save or invest $564,000 +/-

25. No Longer a Last Resort
Based on current academic and
scholarly research, advisors may
have a fiduciary responsibility to
evaluate -- for each client entering
retirement -- the potential
effectiveness of the FHA’s HECM to
reduce the probability of untimely
portfolio exhaustion.

26. Enhance Portfolio Longevity
Protect Against Unfavorable Sequence of Returns in Retirement
with a HECM LOC
(Home Equity Conversion Mortgage) Line of Credit

27. All research posted on-line at:
www.FhaReverseBlog.com
Mary Jo Lafaye, nmls# 246222
415.259.4979
info@MaryJoLafaye.com
Thank You!