Follow the HECM Brick Road
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We’ve all watched the classic scene in The Wizard of Oz where sweet little Dorothy and her friends cheerfully skip along the proverbial road to a better place. But, if you’ve ever enjoyed the book or play Wicked, you’d attest there’s a whole other side to its subverted story...
2020 turned out to be quite a year—and certainly not among those we’d endearingly catalogue with glee or fondness. Despite being well over the pandemic situation and its related discourse, there are many folks dealing with its financial consequences. So again, they’re yearning to survive the impact of lost wages and somehow piece back together what’s left of their shattered finances (and lives).
It didn’t take long for society’s financially feeble to quickly predict and feel what was coming. Semi-retirees on fixed incomes experienced job and income losses that became permanent while others were forced into an early retirement. Seniors who were otherwise freed up to venture out and enjoy their leisure years, became house-arrested by imposed ‘stay-at-home’ mandates, personal safety fears, or both. Whether drastically or slightly affected, the need for financial rebound will be evident to a notable number of the semi- and fully retired.
Seemingly at the worst time possible, banks not only axed credit card limits, but applied the brakes to home equity lines of credit applications. Countless folks who had technically ranked highly among the equity rich population, suddenly had to reconcile with the hovering threat to their equity access and ultimate security potential. According to data collected by Black Knight and reported by Forbes, “About 45 million American homeowners have about 6.3 trillion [in] available equity,” but without the ability to tap into the supposed resource, what does it all mean?
Last year’s barrage of events severely impacted the semi-retired and they’re desperately needing reparative answers. With little to no retirement reserves, any savings were diminished by what has played out. It was reported by the Institute for Fiscal Studies that “Almost a third of those [older adults] in work report that their financial situation is now worse than before the pandemic, and over a third report that they have faced a fall in their household income.” In order to fill the gap on income shortfalls, older Americans found it necessary to draw from savings accounts and pensions or borrow from banks or relatives.
But what if seniors were presented a loan that could work for them?
After spending most of their adult lives paying down or off a mortgage, the idea of circling back into any loan—let alone an HECM (Home Equity Conversion Mortgage)—might provoke a little kicking and screaming, and understandably. Years of hard work and sacrifice carved the path to an envisioned financial freedom, and with the coveted ‘retirement goal milestone’ finally realized, few would choose to look back. It’s not particularly difficult to imagine why another mortgage might initially seem unappealing or even illogical to an elderly homeowner.
The HECM Line of Credit is a loan often misunderstood. From the outside, it might appear to be a run-of-the-mill LOC—but there’s more to its story. The HECM LOC product is uniquely designed to offer a benefit to borrowers they’re not accustomed to seeing.
Standard credit lines are scarcely available, but payment cycles ensue following a first draw. And while there are similarities between the traditional home equity line of credit and HECM Loan, there are also distinctions that might tip the scale in a borrower’s final decision.
Typically, both LOC options offer flexibility in accessing portions of the subject’s home’s available credit, and for preventative measure or in times of need, retirees/semi-retirees with paid off mortgages are often apt to obtain a traditional ‘go-to’ line of credit.
Sadly, a good number of LOCs are decided upon without exploring or considering an HECM LOC. But should the unpredictable strike—as it cyclically tends to do—borrowers might be devastated if their ‘trust fall’ into a traditional LOC is no longer an option.
What distinguishes the HECM from its LOC counterparts?
The HECM is a government-backed, non-recourse loan product which means, despite market conditions, the loan’s established mortgage insurance makes possible a rock-solid safety net: a borrower can never owe more than their property is worth nor lose access to its available proceeds secured by the HECM LOC. Another perk worthy of mention is the HECM’s ‘no monthly mortgage payments required’; with any forward LOC, no such option advantage exists. Simply put: a borrower who draws is a borrower who’s called out to repay.
HECM LOCs offer the option to draw or not draw, worry-free. Proceeds are preserved by the loan’s built-in borrower protections. Cash can be drawn without fear of
triggering the traditionally required monthly payments, and fortunately, HECM relief remains intact, so long as the home continues to be the borrower’s primary residence.
The HECM LOC boasts growth potential...
Unique to the HECM LOC is its compounding growth feature. In basic terms, the unused portion of the borrower’s available line of credit (principal limit) is structured to continually grow according to the loan’s interest rate and margin plus MIP (.5%). Over a span of time and increase in interest rates, there’s even potential for a credit line to outgrow the home’s value!
Know of any other credit lines out there working for the borrower’s best interest?
In addition to its growth and revolving loan advantages are several benefits to the HECM LOC. To name a few:
Liquidity: home equity that is quickly and easily accessed and converted to cash.
Security Protection: a federally-backed credit line that’s fire-proof and unthreatened by fluctuating market conditions.
Flexibility: borrower has the options to make payments or remain ‘payment-free.’ To sweeten the pot, any accrual of fees would only apply to what’s been drawn.
Tax Advantage: HECM proceeds are not considered ‘earned income’ and thus, are not taxable.
A few details to remember while engaging your prospective senior clients:
Borrower must be 62 years or older (younger spouse does not need to meet this requirement).
LTV at approximately 50% or less
Reverse Mortgage Counseling by a HUD approved agency is required.
Property must be borrower’s primary residence.
Property taxes, insurance and upkeep must be maintained as per FHA’s HECM Loan guidelines.
It’s a great time to begin informing your clients about the HECM Program!
With PRMG’s HECM Division under new management, accessible and practical support is available. Newest division managers include Merritt Barber and Ron Krueger. The seasoned duo are professionals with expertise in (among many others): market performance, Reverse Mortgage lending, and branch support management. In addition to Merritt and Ron is a full HECM team built with account executives and supporting members ready and equipped to help steer your HECM Loan business and success.
Free from overwhelm is an opportunity to originate HECMs for your senior-aged clients—and it’s easier than ever before. From one-on-one coaching to scenario question support to loan originations/referrals, we are here to assist you. And the best part? HECM Certification is NO LONGER REQUIRED!
Struggling seniors need to first realize the restorative potential of an HECM to understand its personalized advantages. Imagine presenting hope to a borrower who had presumed his/her situation as optionless? Now imagine HECM allowing a way out of the financial burden of accumulated debts and/or mortgage payments?
Inform and empower your clients as to the benefits of HECM today. Your borrowers seek a solution that might seem to them far over the rainbow, but the good news is, you know the way to something even better. This is not a time for seniors to agonize and fear losing all they’ve worked so hard to secure; this is a time to relax and enjoy all they’ve earned.
There’s no need for your borrowers to embark upon some long journey or click red ruby slippers to find what they’re looking for—invite them instead to consider the HECM. And while there’s little that is certain and much to explore, the words of “Home Sweet Home” nostalgically resonate to seniors from years past: “...though we may roam, be it ever so humble, there’s no place like home. There’s no place like home.”
For more information about the HECM program and its products, reach out to HECM411@prmg.net.
