Thanks for the Article on Reverse Mortgages

I recently ran across your website while helping my wife's grandmother make a decision related to a reverse mortgage. It was very helpful, and I wanted to drop you a quick note that the info you publish is appreciated. Unfortunately, in her case a reverse mortgage is probably the best choice (even though the fees charged are absurd and I don't understand how the gov't allows it). I still have to figure out a way to keep her family's greedy paws out of her money. But, that is a seperate issue.

I am a financial planner with 8 years in the business, though over the past two years the majority of my time was devoted to business consulting. I'm finishing the CFP this month (March) and getting back to helping people make good financial decisions. Wish me luck.

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Pros and Cons of a Reverse Mortgage

Good, common sense article about the pros and cons of a Reverse Mortgage. I’ve been a RM loan officer for 12 yrs, and until 2-3 years ago, the lenders doing them were mostly reputable, but now, all the fast talking loan officers and their employers are flocking to the business, bringing with them the same slick, deceptive and misleading marketing that got them in trouble while trolling in the regular mortgage market.

The borrowers should be wary, seek advice from relatives and get another Loan Officer to discuss the products with them.

Good Job and thanks.

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Paid Up Insurance Value?

I enjoyed your very helpful columns about Universal Life insurance, Jeff--thank you. I've had one of these policies ($200K Face value) for quite a few years. I knowingly opted to stay involved because health considerations may have made other life insurance unavailable. I also carry a similar amount of term insurance with increasing premiums, our family is grown, and our retirement is fairly well provided for. I'd appreciate any suggestions you're willing to offer.

I'm now 60 years old, and would like to lose the $901 per quarter expense. I'm told that the current cost of insurance is $141.53 per month. The cash value is $29,712, $24K is available for withdrawal, and the loan value is about $23K (7.4% interest rate). I'm having a disclosure mailed to me; but, if I understand correctly, the policy does not have a "paid up insurance" value. Does that make sense?

The insurer is Life Investors Insurance Company of America.

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Capital Gains on Farmland

Q: A 93 year old widow is planning to sell part of her farm land.
The land she is selling is not part of her primary residence,
but a separate parcel of land. It was purchased by her family
years and years ago and she has had it in her family her entire
life. If she sells this property, will she have to pay the 8% capital
gains tax?

She plans to sell the property for $150K.

A: She will owe capital gains tax based on the difference between what she sells it for and her cost basis. The capital gains rate will depend on her income level but can be up to 15%.

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Pitfalls of Reverse Mortgages

A year ago I got my real estate license with the intention of selling Reverse Mortgages. I am a retired "senior" myself and I had researched the product and decided it was a good sensible option for the right client. Since then I have talked to a lot of seniors and listened to their plights and... problems. I can't get over the financial difficulties that many of these folks have gotten themselves into.

Most potential clients are widows in their mid 70's. A common statement I hear is "My husband used to handle all this". Some simply have never learned to live on a reduced income. Others are feeling the effects of inflation (higher than the government admits) and may also have shocking monthly prescription expenses.

Way too many have taken out Home Equity loans instead of Reverse Mortgages. Now they are stuck with monthly payments. One had been given a home equity line of credit with a whopping $250,000 limit. She had spent over $100,000 by the time she called me. That banker should be horse whipped. Where did he think this woman was going to get the money to make the payments? She went to the bank because she needed money, not more debt.

I have had to tell a number of seniors that they do not qualify for a Reverse Mortgage because they now owe too much on their equity loans. I took a call from a woman who did have a Reverse Mortgage but who had gone through $200,000 in just two years. She spent most of it helping her middle age "child" pay bills and rent. She hoped to re-finance! 

I took a call from a man who initially sounded lucid and competent. He wanted to know how much he was eligible for. I ran the numbers and we were talking roughly $200,000. But as we talked more I realized that he had no interest in receiving monthly payments or taking a line of credit. He just wanted that cash. I do not recommend that seniors take cash. I usually recommend a line of credit....that is if they seem competent or have a trusted advisor. Finally I got him to give me the phone number of a grown daughter. Her reaction...."Oh no, not again".  She had to get an attorney to get him out of his last Reverse Mortgage. She was trying to take control of his finances and get him into supervised care before he lost everything to some swindler.

In the last few weeks I have seen the refugees from the "Forward" or regular mortgage side pouring into the Reverse Mortgage Business. These people don't know a darn thing about the Reverse Mortgage program and they sure don't give a hoot about senior citizens. But they are spending money on mailings and advertising. I work in a small, ethical loan office where almost all of our business comes form referrals. We can't compete with national companies spending huge amounts of money on advertising. I may find something else to keep me busy, this is getting too crazy.

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In Support of Life Insurance and Equity Harvesting

Jeff,

No one is more cautious about telling clients the pros and cons of life insurance and about equity harvesting.

Your statements are far too finite in your article while the average reader won't understand that you do not understand the subject matter, I recommend you better educate yourself both about the proper use of life insurance and equity harvesting.

That way you won't have articles out there with misinformation or ones that are simply wrong.

You are also overlooking the living benefits of some of the new policies (free LTC benefits).

I find your following comments unprofessional and can state with confidence that they are made out of ignorance. I spent months tearing apart the math of books like Missed Fortune 101 and Stop Sitting on Your Assets. While their math is defective in a similar manner to your comments, if you really do real live and honest math with Equity Harvesting, the concept can work. It also might not, but telling people it's smoke and mirrors is totally irresponsible, misleading and inaccurate.

I was so put off by the books that I created two cautionary web-sites www.www-stopsittingonyourassets.com and www.www-missedfortune101.com.

I was so put off by the misinformation out there I wrote my own book telling advisors and readers the truth about this topic. I see you didn't get a chance to read my new book otherwise you would not make comments like the one below.

"One of the most egregious sales tactic used to promote universal policies as an investment is that you should take the equity out of your home and ‘invest’ it in a universal life insurance policy. The argument is that your home equity is an asset that should be used, not left dormant. The tax benefits are also touted—-the transfer is tax-free, the growth is tax-free and the distribution is tax-free! That’s triple compounding, they say."

"Do not fall for this trap. Frankly, those recommending it should lose their licenses. The arguments used to support this scheme are all smoke and mirrors. The tax benefits are bogus, you lose control of your money and the agent earns a big fat pay day."

If you want to do a cautionary article dealing with crooks in the financial/insurance/mortgage field, take on the mortgage acceleration plans that are running wild.

You can get a little education on it by going to www.heaplan.com.

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Refreshing Opinion

I would like to commend you on your article concerning reverse mortgages.

It was refreshing to know that there are individuals out there such as yourself who can give excellent advise to others without seeking any form of payment. Keep up the good work. I know you will be blessed for your honesty.

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Reverse Mortgage Stories from the Trenches

A year ago I got my real estate license with the intention of selling Reverse Mortgages. I am a retired "senior" myself and I had researched the product and decided it was a good sensible option for the right client. Since then I have talked to a lot of seniors and listened to their plights and... problems. I can't get over the financial difficulties that many of these folks have gotten themselves into.

Most potential clients are widows in their mid 70's. A common statement I hear is "My husband used to handle all this". Some simply have never learned to live on a reduced income. Others are feeling the effects of inflation (higher than the government admits) and may also have shocking monthly prescription expenses.

Way too many have taken out Home Equity loans instead of Reverse Mortgages. Now they are stuck with monthly payments. One had been given a home equity line of credit with a whopping $250,000 limit. She had spent over $100,000 by the time she called me. That banker should be horse whipped. Where did he think this woman was going to get the money to make the payments? She went to the bank because she needed money, not more debt.

I have had to tell a number of seniors that they do not qualify for a Reverse Mortgage because they now owe too much on their equity loans. I took a call from a woman who did have a Reverse Mortgage but who had gone through $200,000 in just two years. She spent most of it helping her middle age "child" pay bills and rent. She hoped to re-finance!

I took a call from a man who initially sounded lucid and competent. He wanted to know how much he was eligible for. I ran the numbers and we were talking roughly $200,000. But as we talked more I realized that he had no interest in receiving monthly payments or taking a line of credit. He just wanted that cash. I do not recommend that seniors take cash. I usually recommend a line of credit....that is if they seem competent or have a trusted advisor. Finally I got him to give me the phone number of a grown daughter. Her reaction...."Oh no, not again". She had to get an attorney to get him out of his last Reverse Mortgage. She was trying to take control of his finances and get him into supervised care before he lost everything to some swindler.

In the last few weeks I have seen the refugees from the "Forward" or regular mortgage side pouring into the Reverse Mortgage Business. These people don't know a darn thing about the Reverse Mortgage program and they sure don't give a hoot about senior citizens. But they are spending money on mailings and advertising. I work in a small, ethical loan office where almost all of our business comes form referrals. We can't compete with national companies spending huge amounts of money on advertising. I may find something else to keep me busy, this is getting too crazy.

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Wolves in Bushes

I am sure there are the wolves in the bushes in every industry. Thanks for putting a fair warning out to the most respected and under appreciated market, our seniors.

The largest safety factor that protects the seniors that you failed to mention is that before anyone can endure any of what you called high closing costs of obtaining a Reverse Mortgage, they must complete counseling with an approved HUD counselor. This counseling... mandatory from a HUD counselor assures the client and the FHA that the client has all the facts needed to make a wise business decision. No counsel with certificate, No Reverse Mortgage!!!

The main point I want to make to you is that as you compose an article to protect the seniors don’t make the ones that already have a Reverse Mortgage feel that they have made a big mistake. If you could travel with me over the past 6 years originating Reverse Mortgages for seniors and see how it has changed their lives and given them a piece of mind for their next day of “their Golden Years”, I feel you would have directed this article with a different approach.

I do not want to give you the impression that your info is wrong; it’s just that it didn’t have all the facts.

Thanks for hearing me out.

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You Are Right On

I have over 44 years experience doing taxes as a CPA and you are "right on" on the reverse mortgages. Everyone who has taken one in my practices has ended up wishing they hadn't. If you kept just one away from these traps, you have had a very successful day. Keep up the good work.

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Fees on Reverse Mortgages

I read your article "Pulling Back the Curtain on Why Reverse Mortgages are So Heavily Marketed Today" and agreed with much of what you pointed out. A couple that is netting only $38,000 (implying a property value of less than $85,000) should rarely if ever do a reverse mortgage.

However, when I consider the seniors who are netting... $100,000 or more and are using that money to stop making mortgage payments forever and significantly increase their quality of life, I believe they are benefiting significantly from this unique product.

That being said, the point I want to discuss is your statement, “It also helps that the fees on reverse mortgages are amazingly high.” The fees are high. However, I think it’s important to differentiate between the fees that a lender earns and the fees that go to the FHA and others.

On a typical $200,000 loan, the costs break down like this:

- 2% MIP ($4,000)

- 1.5% Origination fee ($3,000)

- Title, appraisal, etc. ($2,000)


That means of the $9,000 in fees, the lender is making $3,000.

There is a lot of pressure coming from AARP and other to reduce the fees on reverse mortgages by capping the origination fee at 1.5% versus the current 2% maximum. The reality of the market is that competitive pressures have already driven the norm from 2% origination fees down to 1.5% and in some cases as low as 1.25%. At these levels, lenders are making less on a reverse mortgage than they can make on forward mortgages (where they can make points on the back and mask how much they are truly making).

Which brings me full circle to my two arguments: First, the AARP and other observers should focus on reducing the MIP from 2% to 1.5% rather than the origination fee because the free markets have already accomplished their goal on lender fees. Second, when analyzing the reverse mortgage, use an average case: a 71 year old widow living in a $186,000 home with a $34,000 mortgage.

I appreciate your taking the time to write about this product and look forward to reading more of your work in the future.

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Broad Brush

Q: It seems you are painting all of us insurance agents with a “broad brush”. I am just starting into the annuity business as a seasoned agent of 25 years. I also worked with Allstate Financial Service and had a series 6. I would never advise... anyone to put all of their assets in one place. If you are not licensed as an insurance agent you can’t sell them and if you are then you will realize there is great place for these products that meet the need of many clients. Your commission nor mine should ever be the first objective but the last. Keeping the client’s, goals, objectives, time horizons, and personal needs in view of any recommendations should be our guiding motive. Your article makes it look like all of us “life insurance agents” are a bunch of heartless monsters. I found it quite offensive. Did an insurance agent “steal your client”? I don’t want to hurt any senior and I am sure you don’t either. So what do you suggest that I do differently with the public as far as annuities go, fixed or EIA’s? I mean that honestly. I am 58 years of age and have been in the business for 25 years.

By the same token Jeff with the market as volatile as it is I find it criminal to have a retiree have most his or her wealth exposed in the market. I am sure you have a balanced approach to anything you propose to your clients. At the same time you want to make a living too. There is a definite place for EIA’s for clients who have time and want to have some growth but not all the risk. The key is that a client needs full disclosure of what an annuity is and what it is not. You can’t legislate ethics and much of this has to do with good ethics as well as financial planning skills. I have lost more money with “your kind” than I have ever lost to an insurance agent but that would not be fair to blame all CFP’s.

I hope you will be fairer to insurance brokers and agents in your future articles. I certainly have friends just like you that are doing a great job and I would not want to drive them out of the business or cast them as “evil doers” looking only to churn and twist one’s wealth. Unfortunately it does exist in all financial professions but the public needs to know there are good agents and financial planners out there ready to give them good honest and ethical service.

A: I appreciate your comments and, if you’ve read any of my other articles, you will find that I have as many complaints with the traditional advisor.

Still, I do not like EIA’s at all. Rarely have I seen them work out as projected and it’s the client who takes all the risk if things don’t work out.

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Thanks for Your Article

I would like to commend you on your article concerning reverse mortgages.

It was refreshing to know that there are individuals out there such as yourself who can give excellent advise to others without seeking any form of payment. Keep up the good work. I know you will be blessed for your honesty.

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Your posted comments on this and other questions are welcome.
If you have a question for Jeff an answer is just a click away.
Find a wealth of information at Jeff's website.