“It’s a Liquid Thing”

Reverse mortgages creates liquidity

By Mark Schumacher, NMLS ID 519754, Mutual of Omaha Mortgage, Inc., NMLS ID 1025894

When our family was serving a 3-year tour in Atlanta (no, I wasn’t military) we purchased a brand new home. Several months after moving in I noticed the carpet was wet in the hallway. I thought someone spilled water until I realized it kept re-wetting. Turns out a trim nail pierced a water line behind the wall and once the nail started rusting it created a space for water to leak out. It was the first time I’d experienced a water leak like that and it served as a reminder, the home is no place for loose liquid.

Merriam-Webster online dictionary defines “liquid” a number of ways. Coming in at #4 on the list is “consisting of or capable of ready conversion into cash.”

Consistent with the example above this kind of liquid also is not commonly found in the home, though in this case it’s unfortunate. Given that for many retirees their largest asset is their home, the fact that it’s not a liquid asset makes it more difficult to pay the bills over the years.

Also, our home is usually our largest expense. It’s an asset that behaves more like a liability.  Not only is it not generating cash for us but it’s actually using up the other assets that we have. The only time it feels like an asset is when we sell it. But what if we don’t want to move?

Jeanne Calment, a woman living in the south of France found a solution to this challenge. In 1965 at age 90 she agreed to sell her home to a local attorney named Raffray who in exchange for the home agreed to allow her to stay there the rest of her life while he paid her 2500 francs each month. Upon her passing he could take occupancy of the home. If Ms. Calment died soon after the agreement took effect she (or her estate) would have given up a very valuable property for next to nothing. If she lived a long life thereafter, Mr. Raffray was at risk of paying far more than the home was worth.

Ms. Calment was a woman of amazing longevity. To date she is the only recorded person to surpass 120, passing away at age 122 in 1997. Mr. Raffray paid double what her home was worth. To add insult to injury, he died before she did! (1)

The Federal Housing Administration (FHA) reverse mortgage is designed to eliminate the risk of either party losing out as was the risk of happening in the Calment/Raffray agreement. For starters, under FHA’s rules, Ms. Calment would have remained owner of the home all her life. Had she died shortly after the reverse commenced her estate could have then sold the home and had a rather small loan balance to pay off and pocketing the rest of the sale price. Had she lived a long life as she did, Mr. Raffray, playing the part of the lender, would have been made whole thru the insurance collected by FHA.

A reverse mortgage is a loan. It doesn’t involve a transfer of ownership. The money that is borrowed has interest charges. That interest is added to the loan balance because the borrower isn’t required to make monthly loan payments. The loan matures once the borrower is no longer living in their home. If the heirs want to keep the home they can pay back what’s owed and the home is theirs. Most heirs don’t want to keep it so they sell it and get the equity from the home.

When a reverse mortgage is originated, any loans or liens on the home must be satisfied because the reverse must be in 1st lien position. The homeowner’s responsibilities include paying property taxes, maintaining a homeowner’s insurance policy, paying the association fee if they have one, and maintaining the home. It can only be used on a primary residence.

There are different methods of accessing money from a reverse; cash-out at the start of the loan, monthly payments from lender to borrower, and as a line of credit. The minimum age is 62 although there are non-FHA reverse mortgages that allow borrowers as young as age 55. These are called jumbos because they typically are for homes valued at greater than $1 million.

A reverse mortgage is different than what most people think it is before they learn about it. It creates liquidity in the right place – the pocketbook. They’ve been used for a long time to help people age in place more comfortably.

(1) Giordano, Shelley. What’s the Deal With Reverse Mortgages? 1st ed., PeopleTested Media, 2015.