Finance of America Reverse | Slide 1

HECM Training

Using HECMS within a

Comprehensive Retirement Plan

August 9, 2019

Baby Boomers!!

• 78,000,000 Total Boomers

• 10,000 per day becoming age eligible for retirement.

• 79% own a home with Equity

• Equity is Equal to nearly half their total assets.

With 30 years or more to fund, wouldn’t it make sense for Boomers to include home equity as part of the retirement planning process?

**** https://reversemortgagedaily.com/2017/12/21/seniors-home-equity-keeps-rising-hits-6-5-trillion/

Questions Advisors Should Consider

Do your Clients:

• Have alternative funding sources to draw from during depressed markets?

• Have enough Long Term Care protection?

• Need additional cash flow to keep distribution rates at a safe level?

• Want to create a legacy while still alive?

• Have parents who may need financial assistance?

Primary Uses for a Reverse Mortgage in a Comprehensive Retirement Plan

1. Manage Asset Risk

(provides liquidity to protect against anything that threatens asset and income longevity).

2. Income Planning

(strategic tax and cash flow considerations)

3. Right Sizing the home

(1 in 3 boomers plan to move)

4. Legacy and Estate Planning

The Basics

What Is a Home Equity Conversion Mortgage ?

• A non-recourse loan that allows homeowners aged 62 or older

to access a portion of their home equity.

• No payments required until the last borrower permanently

leaves the home.

• Wealth Management Tool to help older Americans fund a successful longevity and legacy plan.

• Provides opportunity to incorporate home equity within the planning process.

• Also known as a HECM.

Borrowers always retain Title to the Property

HECM Eligibility Requirements

All Borrowers must:

- Be age 62 or older

- Live in the subject property as their primary residence.

- Demonstrate Financial Capacity and Credit responsibility.

- Attend an FHA approved consumer counseling session.

What Types of Properties are Eligible?

• Single family homes

• Condominiums (HUD Approved)

• Two to Four family homes- must be owner occupied.

• Manufactured homes meeting HUD guidelines (FHA Products Only)

Must be their primary residence

HECM Product Options

FHA-Insured Products

• 2019 Lending limit is $726,525

Proprietary Program

• FAR’s HomeSafe® jumbo program with a maximum loan amount of $4,000,000.

Fixed Rate

Monthly Adjustable (10 pt. cap)

Annual Adjustable (5 pt. cap)

How Much Value is Available?

Formula:

Max Claim Amount x’s Principal Limit

• Max Claim Amount is lesser of FHA Lending limit ($726,525 nationally) or appraised value.

• Principal limit is published by FHA and based on the age of the youngest borrower or non-borrowing spouse and the Expected Interest Rate, which is Libor 10 year swap rate plus lender margin.

Age 62 Age 76 Age 90

Available Value $293,901 $347,447 $436,398

Principal Limit Factor 46.2% 54.6% 68.6%

Available Value, Ex:

• The amount of available value increases with the age of the borrower at application.

• Available value increases with a lower expected rate at application.

• Example assumes an MCA of $726,525 for these calculations, and expected rate of 4.25%.

How Can Value Be Accessed?

All Existing Liens Must be Paid off First.

Remaining Balance Available As:

• A Line of Credit guaranteed to grow and compound.

• Tenure Income payments for as long as living in the home.

• Term Payments for specific amount and period.

• Cash

• Any Combination of These (Libor Products only)

Fixed products have cash

at close option only.

Program Features

HECM Feature - Line of Credit

• Guaranteed to grow at the same rate as the interest and FHA Mortgage insurance premium that is being charged on any outstanding loan balance.

• Cannot be called due to a change in home value.

• Has no term limits or balloon payments.

• Funds can be accessed, paid back if desired, and accessed again at a future date.

• Any payments on outstanding loan balance automatically become accessible in the line of credit.

Excellent risk management feature for

fluctuating real estate values, stock market

volatility, and long term care events.

Liquidity Risk

Having a Reverse Line of Credit available provides protection against major, unplanned expenses that could otherwise derail a safe income distribution strategy, including:

• Unexpected major repairs

• Home Improvements to better allow aging in place

• Family assistance

• Loss of Income from death of spouse

Credit Line Example – RE Value Hedge

• In 2007, the median Las Vegas home value was $275,000.

• A 62 year old could get a HECM line of Credit for $127,505 (based on current factors).

• By 2012, the median Las Vegas home value was $119,000.

• The HECM Line of Credit would be $156,900.**Assumes total annual growth rate of 4.23%

HECM Feature - Tenure Payments

• Reserve some or all available equity for guaranteed payments as long as the borrower is living in the home.

• Unlike an Annuity, payment plans can be changed at anytime with a $20 fee to the servicer.

HECM Tenure Payment Example

Pete is retiring and qualifies for a $195,600 Reverse LOC, and has a $500,000 retirement investment portfolio.

• He has a $150,000 pension distribution available from his employer with two options to take the funds –annuitize or rollover.

• He needs both additional income, and to boost retirement assets

Tenure Payment Ex., cont.

Let’s review his options.

Available Assets /Income

OPTION 1

Annuitize Distribution – No Increase in

Savings

OPTION 2

Rollover Distribution to Increase Savings – Take Income from the

Reverse

Pension Distribution $150,000 $0 $0

Monthly Taxable Annuity Income $0 $717* $0

Available HECM Line of Credit $195,600 $195,600 $45,600

Monthly Tax-Free Tenure income $0 $0 $727**

Retirement Savings $500,000 $500,000 $650,000

*Lifetime benefit quote from AIG, 3/1/2016, with 100% survivor benefit.**Assume a 4.25% Expected Rate, payments for life of loan.

HECM Feature - Term Payments

• Define a specific dollar amount to be received for a specific period of time.

• Subject to available proceeds.

• Calculation for reserved proceeds includes the age of the borrower and a growth rate.

Social Security Planning (HECM)Dave is 62 and planned to work until age 70. His company relocated and he now has a lower-paying job.

Now, he wants to wait until at least age 66 before starting social security because taking social security before full retirement age:

• Decreases survivor benefits

• Is subject to reduction if earnings exceed $17,640;

($1 per every $2 earned over the limit).

Social security at 62 = $1,800 per month; $648,000 over 30 years Social security at 66 = $2,400 per month; $748,800 over 26 years

Social Security Planning, cont.

If he draws $1,800 per month from his portfolio from ages 62-66:

Portfolio value at 70 is $644,760**

If he draws $1,530 per month tax-free from a HECM LOC from ages 62-66:

Portfolio value at 70 is $767,343**

Note: Growth Rates, Taxes, Life Expectancies can all impact the benefit of delaying Social Security.

**This assumes a 5.5% CAGR and an initial value of $500,000.

Finance of America Reverse | Slide 23

Other Details

1st Year Restrictions

Greater of Mandatory Obligations plus 10% of Principal Limit, or 60% of Principal Limit.

Ex: $293,901 PL

• $176,340 = 60% of PL Avail 1st Year

• OR

• $200,000 = MO Example

• $ 29,390 = 10% of PL

• $229,390 = Avail 1st Year

Life Expectancy Set Aside

• Lenders can create “Lifetime Expectancy” set-asides at closing that are payable ONLY toward taxes, assessments, and insurance (hazard and flood).

• Can be required due to insufficient qualifying profile, or optional at borrower’s request.

The Costs

Consumer Protections• Mandatory FHA Counseling sessions are required for

borrowers, non-borrowing spouses, and POAs. This screens for competency and comprehension of the loan program.

• Financial Assessment determines if the borrower has the financial capacity to pay taxes and insurance, and ongoing maintenance of the property.

• Non-Borrowing Spouse Rules (HECM Only) make it possible for a qualified non-borrowing spouse to remain in the home even if the borrower dies.

• Non-Recourse Property Protection for borrowers and heirs ensures the loan payoff is secured by the property. Borrowers and heirs can never owe more than the house is worth when the loan is repaid.

• No Pre-payment Penalty provision means the borrower can pay down the loan at any time or defer payment.

What Happens When Loan is Due?

3 Options:

• Repay the loan and keep the house. Family will not need to pay more than 95% of the appraised value.

• Sell and repay loan balance, keep remaining equity.

• If the loan value exceeds home value, deed home to servicer and walk away. FHA Insurance covers the lender for any losses.

Heirs have 6 months to satisfy the loan, and up to two 90 day extensions, granted by HUD, provided they are actively pursuing satisfaction of the loan.

Strategic Use Managing Invest Performance andLong Term Care Risks

Asset Risks Can Include

Anything that could cause investment distributions to exceed a safe withdrawal rate such as:

• Poor Investment Performance (in particular during first 10 years of distributions)

• Excessive initial distribution rates (4% is generally considered a safe rate).

• Long Term Care Events

• Liquidity Needs (unplanned expenses including loss of income from death of spouse)

Sequence of Returns Risk

What is Sequence of Returns?

- Order in which annual returns are credited to an investment.

- Does not impact Average Annual Return (AAR) or Compounded Annual Growth Rate (CAGR) with a buy and hold position.

- Greatly impacts CAGR if distribution phases has begun.

Incorporating Home Equity as an alternative funding source during bear markets can dramatically improve the odds of a

successful long-term distribution plan.

Manage Investment Performance Risk with HECM LOC

• Assume a $500,000 portfolio in the S&P 500 Index.

• Client withdraws 4% per year, and increases each year by the Consumer Price Inflation Index.

• Funding Source A shows HECM LOC withdrawals in the year following a negative investment return, or when portfolio value is less than original value.

• Funding Source B shows all withdrawals from the portfolio.

Initial Portfolio Value $500,000 $500,000

Year Rate of Income Income

Return Source A Source B

2008 -37.00%Portfolio Portfolio

2009 26.46%Reverse LOC Portfolio

2010 15.06%Reverse LOC Portfolio

2011 2.11%Reverse LOC Portfolio

2012 16.00%Reverse LOC Portfolio

2013 32.39%Reverse LOC Portfolio

2014 13.69%Portfolio Portfolio

2015 1.38%Portfolio Portfolio

2016 11.96%Portfolio Portfolio

2017 21.83%Portfolio Portfolio

Ending Portfolio Value $958,502 * $671,213

LOC Bal $140.886 *** Does not include transaction or management fees.

**Based on scheduled withdrawals and accrued fees calculated with annual Libor

index, 2.25 lender margin and 1.25% MIP.

Control Long Term Care Risk

Use a Reverse Mortgage to:

• Fund a life insurance policy with a Long Term Care (LTC) benefit rider.

• Supplement an existing LTC plan by including home equity as an addition to the policy coverage.

• Self-fund LTC risk protection. Some benefits to this are:o No “premiums” other than initial closing costs if applicable.o With HECM, have an increasing benefit as an unused LOC

grows.o It is a great option if the borrower does not qualify for

traditional insurance products, or if they have longevity and good health.

Control Long Term Care Risk

Situation:

A 62 year old couple is planning to retire.

• They have an investment portfolio but no long term care protection.

• Are concerned that a long term care event could drain their portfolio.

• Own a home worth $450,000

• Considering (2) $300,000 Life policies with LTC rider, but premiums are $14,978 per year.

HECM Long Term Care Example, Cont.

• Premium = $14,978 per year.

• $600,000 Death or LTC Benefit is a constant benefit for as long as the premiums are paid.

• Premiums paid = $299,560 after 20 years.

$499,340 after 30 years.

• Premium $17,500 (estimated closing costs)

• Initial Available Credit Line = $162,700

• Available Credit Line (year 20) = $455,648*

• Available Credit Line (year 30) = $762,513*

*Assumes 5% Growth Rate

Life Insurance / LTC Rider

Reverse LOC to Self-Fund LTC Risk

Strategic Use:Right Sizing with a HECM(1 in 3 Baby Boomers Intend to Relocate)

Reverse for Purchase Benefits• Borrowers have the opportunity to spend less money out of

pocket, and preserve more of their savings.

• Opportunity to get more home for their money.

• Opportunity to “right-size” their home, relocate to a more suitable neighborhood, or move closer to family.

Ideal product for Grey Divorce settlements. Use a reverse to refinance the original home and with the proceeds do a reverse purchase for the separating spouse. Both parties now have a home with no payments required, saving household cash flow and other reserves.

HECM Reverse Purchase, Ex:

Jim and Sandy, age 68, are purchasing a $600,000 home in a Florida golfing community. They will clear $460,000 from the sale of their current home.

*Based on Expected Rate of 4.25%

Traditional Purchase FHA Reverse for Purchase

Purchase Price - New Home $600,000 Purchase Price - New Home $600,000

Proceeds - Old Home $460,000 Proceeds - Old Home $460,000

Loan Proceeds $0 HECM Proceeds* $286,800

Cash Required from Savings $140,000

Cash Available for Savings $146,800

Strategic UseIncrease Household Cash Flow

Income Planning Considerations

• All reverse proceeds are income tax free (loan proceeds)

• Eliminate a Mortgage Payment to instantly boost household cash flow

• “Pick-a-Pay” feature in that you can make repayments if / when desired but never required.

• Delay Social Security or tax-deferred investment withdrawals with a tax-free alternative income source.

• FHA Products include Tenure (annuity-like payout) or Term options.

• All FHA payout options can be changed (unlike traditional annuity products)

Increase Household Cash Flow

Supplement Investment portfolio income to keep withdrawal rates at levels that historically insure portfolio longevity.

- 4% is historical “safe” rate, client needs 6%.

- Draw extra 2% from HECM to preserve portfolio

Payoff existing mortgage to increase monthly cash flow.

- If still working, make monthly HECM payments

to grow line of credit for future use.

Payoff Home Example62 year old, $400,000 home, existing $70,000 loan balance. Refi to HECM, $184,000 PL, Initial Rate 4.23%, Home Growth 2%

• Make no payments, save $1100 per month. LOC in year 20 is $241,130

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

EOY BALANCES

EOY: Loan Balance EOY: Available LoC

EOY: Hme Value

• Make $1100 per month payments for 7 years. LOC in year 20 is $429,829.

-$100,000

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

EOY BALANCES

EOY: Loan Balance EOY: Available LoC

EOY: Hme Value

Strategic UseLegacy and Tax Management

Manage Tax Liabilities

Situation:

Patti inherited a $150,000 portfolio from her mother in 1996. By

2016 the portfolio value is $497,697. She wants her children to

inherit their grandmother’s stocks.

• She has always taken dividends from the account, but now

needs to supplement her income by $1,000 per month.

• She is 68 years old and owns a home valued at $525,000.

Tax Liabilities (Cont.)

Solution:

• She is eligible for $264,075* in HECM proceeds.

• Can take tax free HECM Tenure payments of $1,218 per

month.

• When she passes her children will inherit the portfolio at a

date of death valuation with no current tax liabilities.

*4.25% Expected Rate

Education Expenses (HECM)

Couple would like to help fund Grandchildren’s higher education expenses, without impacting household cash flow. Use Reverse proceeds to:

• Purchase Cash Value life insurance products for new-born grandchildren.

• Fund 529 Plans

• Pay institutions directly for tuition expenses and avoid gift-tax restrictions.

• Make payments on existing student loans from HECM

Fund Education

Situation:

Charlotte is an 82 year old widow who wants to help fund

her 2 youngest granddaughters college education.

• She has a modest $300,000 portfolio.

• Enough social security and pension income, and has a

Long Term Care Insurance policy.

• Owns her home worth $186,000.

Fund Education (Cont.)

Solution:

• Charlotte is eligible for $125,364* in HECM proceeds.

• The granddaughters have a total monthly student loan expense of $2,100 for 10 years.

• Charlotte can draw $1000 per month from her HECM LOC and send the payments directly to the loan servicer, and pay for nearly half their monthly debts.

* 4.25% Expected Rate

Fund Charitable Contributions

Situation:

• Thelma is 78 years old, owns her home worth $300,000, and has volunteered at her local hospital for 37 years.

• Has long term care insurance, a modest portfolio but more than enough income from her pension, IRA and social security to live a comfortable life style

She would like to make donations to the hospital while she is still alive and can see the benefits.

Fund Charitable Contributions (Cont.)

Solution:

• Thelma has her IRA trustee send $20,000 per year directly to the hospital as a Qualified Charitable Deduction (QCD).

• She will save $4,200 per year in income taxes

• Will draw an equivalent after-tax amount of $15,800 per year from her HECM Line of Credit.

This is Today’s HECM

Solutions For:

• Managing Investment performance and Long Term Care risks.

• Right sizing your home.

• Income Tax Planning.

• Social Security and Distribution Planning.

• Creating Legacies.

• Improving household cash flow.

Final Thoughts

Maybe We’ll Do This In a Few YearsDelaying Could be Problematic:

• FHA has changed the PL Factors 4 times, and the insurance rates 3 times in the past 10 years.

• When interest rates rise, Principal Limit Factors decrease resulting in lower available funds at loan closing.

• If borrower’s residual income or credit declines, they may no longer qualify for a HECM.

• Real Estate and stock market are at all time highs. This is an ideal time to put a Line of Credit in place to hedge against flat or declining real estate and investment values.

What Financial Advisors Should /Should Not Do

Should

• Identify a need.

• Discuss an overview of the program.

• Refer them to a HECM specialist.

• Include family members in your conversations.

Should Not

• Request compensation

• Invest the loan proceeds.

• Require your client to get a reverse mortgage.

It Just Makes Sense

“The Reverse program provides a way to create liquidity for the home, which is otherwise an illiquid asset.

Removing the constraint about how home equity can be used affords a more efficient retirement-income strategy.”

Source: Pfau, Wade. 2014. “The Hidden Value of a Reverse Mortgage Standby Line of Credit.” Advisor Perspectives.

©2018 Finance of America Reverse LLC is licensed in 50 states and D.C. | Equal Housing Opportunity | NMLS ID # 2285 |www.nmls.consumeraccess.org | 8023 East 63rd Place, Suite 700 | Tulsa, OK 74133 | Not all products and options are available in all states | Terms subject to change without notice |AZ Mortgage Banker License #0921300 | Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act | Georgia Residential Mortgage Licensee | Illinois Residential Mortgage Licensee | Kansas Licensed Mortgage Company | Licensed by the Mississippi Department of Banking and Consumer Finance | Licensed by the New Hampshire Banking Department | Licensed by the N.J.

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Thank you.To learn more please contact:

Marcia Honz

Reverse Mortgage Specialist

NMLS # 923102

(317) 696-9787

mhonz@FAReverse.com