An Emerging Market for Privately Insured Reverse Mortgages

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"We now have reverse mortgages up to $4,000,000. You'd be surprised how many our industry is doing for people with that 3, 4 million dollar house that wants to get rid of that $2,000,000 mortgage. So it's opened up a totally new door." -Michael Banner

On this installment of Financial Planning Innovation, I’m joined by Michael Banner. Michael is in the reverse mortgage industry. Michael’s story of how he entered the industry is quite fascinating, mostly because he was very cynical about reverse mortgages and their efficacy until his family was directly affected by one.

It wasn’t until Michael’s uncle died an early death that he would come to realize the power of a reverse mortgage. His uncle brought in a majority of the income for his family, and his aunt, seemingly without options, urged Michael to look into a reverse mortgage for her. 

Though he always swore off reverse mortgages as terrible products, his aunt’s persistence led him to do some research. What he found was that this option was actually an excellent solution for his aunt, who into her 80s is still living in her same home, living off of the credit line that the reverse mortgage afforded her.

This personal experience inspired Michael to go into an industry that he was originally skeptical about. That’s a powerful shift to make, so I wanted to pick Michael’s brain about the power of reverse mortgages beyond just how it has helped his family.

A reverse mortgage allows a homeowner to borrow money against their home, like a traditional mortgage. The difference is that a reverse mortgage may be able to eliminate the monthly payments that exist under traditional mortgages. Though there’s interest and fees added to a reverse mortgage, there’s no obligation for the mortgage holder to pay back the debt in their lifetime. Debt is typically repaid when the borrower doesn’t live in the home anymore. The debt will still need to be repaid, but there’s no obligation to do it until the death of the homeowner.

Michael believes there’s a lot of power in this concept when used properly. For Michael, reverse mortgages can be a strategy for an older homeowner to eliminate their forward mortgage payments to open up a disposable income stream.

Though he’s convinced of the power of reverse mortgages, Michael makes sure everyone knows that they’re not a one size fits all product. He notes that reverse mortgages have some income-based suitability. Someone who has a very comfortable retirement income and plenty of assets in the bank doesn’t need a reverse mortgage. The ideal client is someone who is of lower income and/or assets who would immediately benefit from an elimination of their mortgage payment.

Reverse mortgages have been around for a long time. Where’s the innovation? That answer comes when I asked Michael about how financial planners can use a reverse mortgage to free up money to find necessary insurance solutions for clients.

I hinted at, and Michael affirmed, the fact that for the last decade or more, it has been more or less illegal to use the proceeds from a reverse mortgage for the purchase of any insurance product. This comes from the HERA regulation passed in 2009. Michael states that this has impeded the strategy of using reverse mortgages to fund long term care policies for millions of seniors who couldn’t otherwise afford it. What’s worse is that the legal language is so ambiguous that for a long time, companies just stayed away and discarded the strategy out of paralysis.

The innovation comes from a bit of a loophole in the legal language. The language of the HERA regulation makes clear that the rules only apply to HECMs, FHA insured reverse mortgages. This means that reverse mortgages that are not FHA insured don’t apply to the HERA regulation.

This realization paved the way for institutional investors to create proprietary reverse mortgages that are not FHA insured, but carry all of the other great benefits that we’ve come to know. Since these reverse mortgages aren’t FHA insured, HERA can’t regulate what the proceeds can be used for.

This is a huge development for the reverse mortgage industry, as well as the senior insurance industry. Since there’s more freedom in use of proceeds in these reverse mortgages, the door is back open for funding necessary insurance purchases using these products. 

A client can enter into a proprietary reverse mortgage and freely use their proceeds to buy traditional LTC, Single Premium LTC, and other products that aren’t allowed under HERA. This allows us to have this planning tool back in our arsenal when working with our older clients, which is a massive opportunity.

Michael does make concessions when asked about how a proprietary loan compares to an FHA insured loan. He mentions that the interest rate on the proprietary product is higher than those that are FHA insured, but is still very competitive. He also adds that there’s no MIP (mortgage insurance premium, which is present on FHA insured products) on the proprietary product, which results in a lot of savings for the client. The MIP for FHA insured products sits at 2% of the value of the home, and not the loan amount. That gets pricey, especially when your house is worth far more than your mortgage payment.

Michael’s wealth of knowledge is very helpful for those looking for creative solutions for their clients. The innovation with proprietary reverse mortgages should get us all thinking about possibilities in our existing book. There should, however, be caution exercised before jumping into this strategy. 

Abuses still do exist in the reverse mortgage industry, like any other. The recommendation is to make sure you’re working with the experts, and constantly make sure the move is in the client’s best interest. Make sure to watch the entire interview, where Michael outlines some of the abuses of the past, and tells us about what he’d like to see change in the industry from a regulatory standpoint. 

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