“For most retirees, two-thirds of their wealth is in their home or the average American retiree. So proportionately there's all sorts of networks but still around a lot of their wealth is in their home and that's great except for, one, it's your last home it just becomes this piggy bank you can't really touch, you have to refinance or sell it to get access to it. And if you sell it, you still got to live somewhere and so you got to have a roof over your head. And so that's where we go, "Can we keep the main purpose of the home?" Which is to have a roof over your head; shelter. There's a lifestyle there depending on where they're at in that range and then draw some of that wealth back out in a way that secure, meaning you get to still live there...
Even if 2008 happens, as long as they're living there, paying the property taxes, homeowner's insurance, it doesn't matter if the loan balance has gone over the value of the home because it's FHA insured and it's a true non-recourse loan, meaning we cannot come after any other assets to collect that shortfall. So they still have a roof over their head, same home, and that kind of thing.”
- Mitch Cooper, Certified Reverse Mortgage Professional CRPC® and CRCP®
Mitch Cooper is a Reverse Mortgage Advisor for Mutual of Omaha Reverse Mortgage. In 2021, he became the youngest person in history to earn the Certified Reverse Mortgage Professional (CRPC®) designation.
This episode will give you an insider’s guide to reverse mortgages, the myths vs. the facts, a breakdown of the up-front and ongoing costs of reverse mortgages, whether the reverse mortgage process and products have evolved, and how and when to use them as part of a comprehensive retirement plan for you or your loved ones.
Listen to the episode on Apple Podcasts, Spotify, Deezer, Podcast Addict, Stitcher, Google Podcasts, Amazon Music, Alexa Flash Briefing, iHeart, Acast or on your favorite podcast platform. You can watch the interview on YouTube here.
Brought to you by Prepare for Medicare – The Insider’s Guide book series. Sign up for the Prepare for Medicare Newsletter, an exclusive subscription-only newsletter that delivers the inside scoop to help you stay up-to-date with your Medicare insurance coverage, highlight Medicare news you can use, and reminders for important dates throughout the year. When you sign up, you’ll immediately gain access to seven FREE Medicare checklists.
Most brokers maybe have done one, people that don't specialize in reverse. There are brokers that do both and they really do well. I know a few where I'd be comfortable with someone going with them because I know they do a significant amount of reverse.
But most typically, if you find someone that does reverse only, that's going to give you a lot better odds.
There are companies that separate it out like we do. I specifically do reverse only. I think that's a great idea to find someone like that and again, if they have their CRMP even better because that shows they took the time and they're doing CE every year for reverse, spending the money on that designation so that means they're all-in on reverse mortgages.”
- Mitch Cooper, Certified Reverse Mortgage Professional CRPC® and CRCP®
“…the cash flow position, the efficiency position that puts them in can help make the retirement a lot more sustainable because they now have a roof over their head for as long as they can live there, pay the property charges but not have that negative cash flow, the payment.
That scenario is by far our most common client. It's all we're doing is paying off the traditional mortgage and getting rid of that mortgage payment. That by far that's probably 70% of our clients are doing that scenario because more retirees than ever have a mortgage in retirement. It's doubled since the eighties. And so if we can just free up that cash flow, that's a big deal for a lot of people.”
- Mitch Cooper, Certified Reverse Mortgage Professional CRPC® and CRCP®
00:02:27 Mitch’s background and Certified Reverse Mortgage Professional status
00:03:37 What are reverse mortgages?
00:04:59 How a reverse mortgage comes into play with home equity
00:05:54 FHA loans and reverse mortgages
00:08:02 Cash flow in retirement and reverse mortgages
00:08:44 “Free and clear” housing and reverse mortgages
00:09:42 Reverse mortgages and HELOCs
00:11:13 Long term care costs and reverse mortgages
00:11:54 More on HELOCs and variable rates
00:13:51 “The last house” and reverse mortgages
00:14:39 Typical profile of a reverse mortgage client
00:16:01 Average age of someone who gets a reverse mortgage is 74
00:18:06 Reverse mortgage as an asset protection tool
00:20:27 Average net worth of someone with a reverse mortgage
00:23:48 Reverse mortgages and poor reputation
00:25:25 Reverse mortgage improvements over time
00:28:43 Can anyone ever get kicked out of their home because of a reverse mortgage?
00:30:34 Costs associated with a reverse mortgage
00:32:53 Use a reverse mortgage specialist
00:33:55 Reverse mortgages and awareness in the financial planning and wealth management space
00:36:14 More on fees and FHA reverse mortgages
00:39:24 HELOC vs reverse mortgage and proper use
00:41:28 Mutual of Omaha Reverse Mortgage, how to contact
00:43:49 How to interview a reverse mortgage specialist
00:47:45 Show close
00:00:00 / 00:50:00
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Matt Feret (00:02):
Hello, everyone. This is Matt Feret, author of the Prepare for Medicare book series, and welcome to another episode of The Matt Feret Show where I interview insiders and experts to help light a path to a successful retirement.
Come say hello at https://themattferetshow.comfor YouTube videos, show links, notes, websites, reference, quotable quotes, and the complete show transcript. You can also check out https://prepareformedicare.com and my new site, https://prepareforsocialsecurity.com. Both websites support the books, Prepare for Medicare: The Insider's Guide to Buying Medicare Insurance and Prepare for Social Security: The insider's Guide to Maximizing Your Retirement Benefits. Each website has a spot where you can sign up for my monthly newsletter. I cover Medicare, Social Security, of course, plus wealth, wisdom, and wellness topics in or nearing retirement.
The topic of reverse mortgages is really intriguing to me and to be transparent, I was a bit skeptical of the concept in general and quite frankly had some preconceived notions going into this interview about the product, the way it's marketed, and stories about its reputation for misuse, abuse, and got you foreclosures. But as I learned, and you will too, as always, perception isn't normally reality.
Mitch Cooper is a reverse mortgage specialist with Mutual of Omaha Reverse Mortgage. He is well versed in not only the ins and outs, positives and negatives of reverse mortgages but also how to use them and when, and at what age and stage. He walks us through when not to use them and how they compare to other types of real estate loans and other tools to address cash flow requirements in retirement.
This episode will give you an insider's guide to reverse mortgages, the myths versus the facts, a breakdown of the upfront and ongoing costs of reverse mortgages whether or not the reverse mortgage process and products have evolved, and how and when to use them as part of a comprehensive retirement plan for you or your loved ones. Enjoy.
Mitch, welcome to the show.
Mitch Cooper, CRMP, CRPC (02:19):
Yeah, thanks. I'm excited to be here. So thank you for having me on.
Matt Feret (02:23):
So tell everybody what you do, how long you've been doing it, and how you help people.
Mitch Cooper, CRMP, CRPC (02:27):
Yeah. So I'm a certified reverse mortgage professional which is about 200 across the nation. But really what I help do... What I spend my days doing is educating whether it's financial planners or tax professionals or insurance or their clients on how to use housing wealth strategically and also responsibly in retirement and in retirement income planning. And that's really what I spend my time doing is educating and educating and more educating. Yeah.
Matt Feret (03:02):
So you said 200. You're a retirement... Oh, sorry. You're a reverse mortgage specialist. Is that a special designation?
Mitch Cooper, CRMP, CRPC (03:10):
Yeah. It's a designation from the National Reverse Mortgage Lending Association.
So yeah, I think it was August of last year there was about 185 so assume some growth in there is probably around 200 nationwide certified reverse mortgage professionals. So it's a little higher ethical standards and things like that.
Matt Feret (03:31):
Yeah, that's not a lot of people when you think about the population-
Mitch Cooper, CRMP, CRPC (03:34):
Matt Feret (03:34):
... in the U.S. Right?
Mitch Cooper, CRMP, CRPC (03:36):
Sure. Yeah. Absolutely.
Matt Feret (03:37):
So let's dive in here. Reverse mortgages. What are they?
Mitch Cooper, CRMP, CRPC (03:42):
Yeah. So there's a lot of information out there. Some of it's good, some of it not so good. Definitely, reverse mortgages have had a bad name for a long time. But broken down as simply as possible, foremost important words are, it's just a mortgage.
So a lot of people think we take ownership of the property or we take title of the property. Oh, no. It's just a mortgage like any other mortgage. We're going to be a lien on the property so that if you go to sell, we get paid which brings a lot of people think they can't sell. No, you put it on the market and sell and pay off the loan, the rest is yours just like any other loan. And so that's the foremost important things is first off, it's just a lien on the property.
The difference is we don't require a monthly mortgage payment for as long as the borrower is living in the house, is their primary resident, paying property taxes, homeowners' insurance, and then if there are HOA dues, paying those as well on time. And so you're paying all those in time, you're living in the property, then there's no monthly mortgage payment and we're just a lien on the property and we'll get paid when they're done with the home. Or a lender that's patient.
We don't get paid every month, we get paid when they're done. That's the simplest way to think about it or define it in a couple terms.
Matt Feret (04:59):
So there are no monthly mortgage payments. So help me. Walk me through this as if I were thinking about this. Let's just say a house, it's paid off or mostly paid off and I have, oh I don't know, a quarter of a million, half a million dollars' worth of equity built up and I've retired and maybe I'm thinking about going on a trip or I'm going into assisted living or I've got some unexpected expenses or I just want some cash to feel good.
Let's pretend for a second I've got 250, 500,000 somewhere in there, equity built up on my house. It's either all paid off or mostly paid off. What do I need to start thinking about here?
Mitch Cooper, CRMP, CRPC (05:38):
So if you think of a traditional loan and they have loan to values and so the normal conventional 80% loan to value, so you have $500,000 house, they can loan up to 400,000. We're also based off of value.
Now 95% of reverse mortgages today are actually an FHA loan. So they're... All the parameters, the rules, regulations, insurance is all run by the FHA and that started in 1989. This act of congress signed under Reagan to put the FHA reverse mortgage in place.
And so now you think of a traditional loan, they loan 80% and you make payments and every month your loan balance goes down. Well, we're going to start a lot lower.
Usually, we use 50% for rough math. I think for most clients are actually going to be less than that. They're probably going to be... A young borrower for us is 62. Sixty-two is the minimum age. They're probably going to be closer to 30% loan value. So we're loaning significantly less up to maybe 60% if they're in their nineties. And that changes every week as rates change. It's a factor of interest rates.
So if we can use 50% just for the conversation, 500,000 home, maybe we can loan 250,000 total. And so it's not necessarily a function of the equity but of the value. So if they owe 200 still on their mortgage, then all the proceeds, most of the proceeds anyway would go to pay off that mortgage first. We have to pay off all the liens.
And so for them, it's a cash flow thing of, "We paid off your mortgage. You no longer have that 1800 a month or 1500 a month or 800 a month," whatever that is for people.
Housing's statistically the number one cost in retirement for most people. And so now we're not generating income, we're not doing anything. All we did was pay off whoever that loan was with maybe Wells Fargo or [inaudible 00:07:39] Mr. Cooper, whoever that was, they're gone, they're out of the picture.
Now you have a loan with Mutual of Omaha and we don't require monthly mortgage payment. So they get to live in the same home, they don't have that 1500 a month of negative cash flow, and of course, if that's coming from an IRA, now they don't have the tax complication [inaudible 00:07:59] for that IRA, 1500. So they're actually saving a little bit more.
And so really the cash flow position, the efficiency position that puts them in can help make the retirement a lot more sustainable because they now have a roof over their head for as long as they can live there, pay the property charges but not have that negative cash flow, the payment.
That scenario is by far our most common client. It's all we're doing is paying off the traditional mortgage and getting rid of that mortgage payment. That by far that's probably 70% of our clients are doing that scenario because more retirees than ever have a mortgage in retirement. It's doubled since the eighties. And so if we can just free up that cash flow, that's a big deal for a lot of people.
Free and clear clear house, that's where it gets really interesting and a lot more complex and flexible. Free and clear clear property or somewhere in between if there's money left over, it can all be in a line of credit. So you do not have to take a big lump sum. Actually, we discourage it unless there's a real need for it because it is in that line of credit, it's liquid, you can access it and the FHA even limits 60% of what's available in the first year. So they don't want you taking a hundred percent of the proceeds unless we're paying off a mortgage, that's the exception.
So that line of credit is there. If we use that example 250, now let's say they have a $250,000 line of credit, just they're available to them and different than a home equity line, one, we still don't have the payments. So if they're going to draw on that line of credit, we're not adding more negative cash flow, but we cannot reduce, freeze, lock, or cancel that line of credit.
Unlike a home equity line, if you remember 2009, all the home equity lines went away or they were like, "Nope, you can't take another penny. Start making payments on what you have taken." That kind of a thing. We cannot do that and that's a rule of the FHA.
And again, I'll say this 800 times, but as long as they're living there, paying their property taxes, homeowner's insurances, and HOA dues, that line of credit's there. And that's true even if the value of the property declines significantly, as long as they're meeting the loan requirements, that line of credit's there insured by the FHA.
And so that's the biggest thing. It's a little more secure and it's liquid for them and you're not accruing interest on it until you start to borrow. And so that's one of the reasons we say, "Do you need a hundred grand sitting in your bank to start accruing negative interest on the loan or can we just leave it in the line of credit and you can use it as you need it?" And help them structure it in a way that makes the most sense for them.
And then to confuse everyone, the line of credit actually grows and it grows at the same rate that the loan does. And so it's not earning interest, it's just more available borrowing power. So if you think of a credit card that's mailed you a letter one year and said, "You used to be able to borrow 2500, now you can borrow 3500." Well, that's what happens on the line of credit every month say, "You can borrow 250, now you can borrow 253, and then 255." As you let it sit there, it grows.
And so that creates a really powerful tool if you plan ahead and so you put the line of credit in place and leave it alone and it's growing, then 10, 15 years down the line, you have this huge bucket that you can draw from without incurring monthly payments and having negative cash flow.
And so we like to use that for long-term care planning and things like that where we can go, "Look, now you have 500,000 available to you when you're 80 and we can start kicking that on at five, six, 7000 a month." It's not going to last forever. But you let the home pay for the in-home care once you reach that point and then it's just going to come out of the home when you're done, when you sell.
Matt Feret (11:55):
Yeah. That's a lot to unpack and I want to get to that all. But you mentioned a couple times in there and I was unclear so I'm going to ask the question. How is this different than a HELOC of it's just a line of credit?
Mitch Cooper, CRMP, CRPC (12:10):
So traditional home equity line, 10 years typically of interest only payments for the first 10 years and then it's going to kick onto a fully amortizing loan after the 10 years for the next 20. And so it's a great tool.
One of the things is reverse mortgages and one of the reasons you want to meet with a professional that's going to help you see if it fits, not try to sell you on a product, is it's a more expensive loan, a reverse mortgage is. And the value is there if used properly but if...
So that's typically why it's not a great short term loan. You don't typically want to pull money out to fix it up and sell it because it's just no, that's where the home equity line or a cash out refinance, that's where that tool fits. But reverse mortgage just tends to be... It's more expensive and so it's better for the long haul of the positive cash flow.
So home equity line's a great tool when you get into retirement or... We see a lot of retirees take out home equity lines because they're trying to... "I need some money. I need some cash and I'm hurting." And the problem is you're hurting now, you're on fixed income, what is the likelihood of you being in a better position 10 years from now when that turns into fully amortizing loans?
And statistically, for most HELOCs, that payment when that changes is about five times what the interest only payment was. So they're making interest only payment and now take a five times more negative cash flow on that payment. It's not typically the best tool for retirement. A rate tool for a lot of use is very inexpensive tool, quick, easy cash.
But when you get into retirement and you're trying to solve for cash flow, that's where a reverse line of credit.
And once someone knows... If they're ideally in their last house, that's when a reverse mortgage works best. It doesn't have to be your last house, like we said at the beginning, you can sell it, you can move, go do another one. But it does tend to work best once you go, "Yeah, this is where I want to live the rest of my life out," and life happens. We never know if that truly is, but at least it should be the goal for people.
And then that growth feature. That's something that's completely different that it just grows and grows as you leave it there.
Matt Feret (14:21):
So you said earlier in the show that you spent a lot of time doing educating, you educate clients, you educate wealth management, you educate financial planners, insurance agents, etc., all these people that are involved and I'm assuming caregivers as well looking out for mom or dad.
Mitch Cooper, CRMP, CRPC (14:36):
Matt Feret (14:39):
What is the typical profile of someone who might best be served by a cash out, or not a cash out refinance, who might be... Let me ask the question again. What's the typical profile of someone who's looking at a reverse mortgage that makes sense? You mentioned the HELOC makes sense for different uses, a 30-year traditional mortgage make sense for others, and keeping your house paid off might make sense for others. So what does a household income? What does a family look like? What's a house value look like in terms of percentage paid off? What's the typical sweet spot for a product like this?
Mitch Cooper, CRMP, CRPC (15:18):
Yeah. There's a few and that's why every reverse mortgage looks different. We're solving different problems and things like that and that's why you really want a professional who specializes in reverse and because a typical broker would be able to... It's just the same mortgage license so they could do it but you really want someone who has a deep understanding of the different ways to cater it and adjust it and plan ahead.
So cash flow is the biggest thing that a reverse mortgage provides. **is cash flow whether that's creating income from a free and clear house where we can dissipate that line of credit or getting rid of a mortgage and paying off the mortgage and creating cash flow that way.
And so typically, our average client is 74, 62 is the youngest age, but our average client's 74.
To me, I think that that makes a lot of sense. I think 62 is very, very young. It's a cliché but it's also true 60 is the new 40. People are just very young, they're very healthy, they're active, a lot of them still working.
And so I think lifestyle wise, they're not really sure that they're in their last house at that point. There's still a lot of life happening. Whereas when you get into 74, that's when people start to settle in. "Yep, I found my single level. I can live here. I can retire." Maybe it's a 55 and up community, whatever their choice is, it tends to be a better place.
So one of the key things I try to say is, "Are you here for a long time? Ideally, it's your last house, but are you here for at least five years or more?" For most people.
And then just, "Are we solving cash flow or can we make the retirement more efficient and for longevity's sake?"
We work with financial planners and I go, "Look, they're fine." Sometimes, it's a buffer or a shock absorber. Sometimes, they go, "They're fine as long as everything goes perfectly fine. They're going to make it." But if we have a long-term care event or if he dies too soon and we lose his pension, then things go south pretty fast.
And so it's not necessarily a need based today but if we can get rid of that mortgage payment, now if we lose his pension, they're okay, we're not going to draw down the IRA so fast so there's going to be more assets there for her and that kind of a thing.
And so planning ahead everything tends to work a lot better. And so you can always learn about it and say, "Yeah. With where you guys are at, maybe not today." But you can't go back five years and go, "I wish we did it five years ago because we could have saved us a lot of that IRA," and things like that. So it's really a cash flow and efficiency.
So I say it's an asset protection tool. It's not an asset accumulation tool but an asset protection tool similar to insurance.
And so I use a fuel mileage analogy. If you're on a road trip and you're out of gas, it doesn't really matter what miles per gallon you're getting, you're out of gas. You can be in a Prius getting 50 miles a gallon, it doesn't matter you're out of gas. But if we had put that gas mileage at the beginning of the trip, if we got you 50 miles a gallon instead of 25 at the beginning of the trip, now we can go a lot further, right? Because we can use that gas more efficiently throughout the whole trip.
So that's similar to retirement where we go... If we can get rid of your mortgage payment sooner and not have to spend that money over 20 years, that's a lot of money that didn't have to leave our pocket. It's liquidity and cash flow and cash flow is king in retirement.
So that's what we're really trying to do is preserve the other assets, keep the IRA doing well. Right now, the market's way down, it's a terrible time to make draws on your IRA. You want to let that market recover.
So there's even strategies can we pull from the reverse while the market is down, take that income, I'm not a tax professional but it's a loan so it's not taxable income, doesn't mess with provisional income for social security. And so you have this tax-free bucket to pull on, let that market come back a little bit and then you could turn the income back off the reverse and go back to your IRA, right?
And just use more buckets strategically, safely, and use them together in conjunction with one another and that's when you get the most benefit.
Matt Feret (19:46):
Is there... Thank you for that. You mentioned cash flow, you can use it as a draw much like some financial advisors might use certain types of life insurance for not only that whole when the market's down, don't pull it out, draw off your cash balance and let it go back. And the same thing with long-term care and long-term care riders on life insurance policies. It sounds like there's some similarities in terms of how that's used. Am I getting that right?
Mitch Cooper, CRMP, CRPC (20:14):
Yeah, absolutely. Very similar to that strategy. Yeah.
Matt Feret (20:18):
So what in terms of... You said age 72 or 70. What'd you say? 74 or 72?
Mitch Cooper, CRMP, CRPC (20:24):
Yeah, 74 is our average-
Matt Feret (20:25):
Mitch Cooper, CRMP, CRPC (20:26):
Yeah, is the minimum.
Matt Feret (20:27):
And is there a typical net worth or cash flow or social security only, social security plus? What's your... Or is it all over the map?
Mitch Cooper, CRMP, CRPC (20:39):
It is really all over the map.
A lot of people do think it's for that bottom income. Maybe it can work for the lower income. There is income qualifying. But there's a lot of people that don't have enough equity, they still owe 60, 80% on their house and we could still do it technically, but they'd have to bring in all that extra cash that they can't get from the reverse.
And so sometimes, it's worth 500,000, they owe 400 and maybe we can give them 250 but, well, you're still 150,000 short, do you really want to bring that in and get this? Most likely not. That's where we send them back to the planner and you go, "This is how it would look." Most people are not going to do that. If it's 20,000 short, then okay that's 10 mortgage payments or 15 mortgage payments. Maybe that makes more sense. You can look at... Do the math and see if that makes sense for you.
And so... Yeah, I forgot where I was going with this. But there are...
So sometimes, you get on that lower end and it doesn't make a lot of sense. Statistically, I think it's that mass affluent, middle class, upper middle class, maybe a few hundred thousand in the IRA.
So for most retirees, two-thirds of their wealth is in their home or the average American retiree. So proportionately there's all sorts of networks but still around a lot of their wealth is in their home and that's great except for, one, it's your last home it just becomes this piggy bank you can't really touch, you have to refinance or sell it to get access to it. And if you sell it, you still got to live somewhere and so you got to have a roof over your head.
And so that's where we go, "Can we keep the main purpose of the home?" Which is to have a roof over your head, shelter. There's a lifestyle there depending on where they're at in that range and then draw some of that wealth back out in a way that secure, meaning you get to still live there...
Even if 2008 happens, as long as they're living there, paying the property taxes, homeowner's insurance, it doesn't matter if the loan balance has gone over the value of the home because it's FHA insured and it's a true non-recourse loan, meaning we cannot come after any other assets to collect that shortfall. So they still have a roof over their head, same home, and that kind of thing.
And we do do a lot of high net worth... I've got clients with million dollar homes in California and as long as the percentages work out, it still makes a lot of sense.
Sometimes, the high net worth are in a worse position percentage wise. They have a 3200 a month mortgage payment and you're just like, "Oh, man, you're draining your retirement." And so if we can make those work, sometimes, it makes a bigger difference than some of the lower.
So it's more of a percentage thing and doing it sooner rather than later. Don't wait and draw your IRA to zero then turn on the home equity piece because we'd rather keep the money liquidated in the IRA and keep a growing asset continuing to grow.
Matt Feret (23:48):
Why do these things, and maybe it's my own bias misperception or perception, have a bad reputation? And I know you can find a bunch of other financial management products that can have pros and cons. Nobody likes the acronym HMO in Medicare, people go annuities, and there's always some publication out there that says, "Watch out." Oh, okay. But they're out there and they're being used and they're used for reasons. Why do reverse mortgages have some sort of a reputation as being... I don't know.
Mitch Cooper, CRMP, CRPC (24:21):
Matt Feret (24:21):
Why... You know what I mean, right? I don't even know the word but you know what I mean.
Mitch Cooper, CRMP, CRPC (24:26):
We hear that it's a scam. You're stealing from old people, you're stealing from the kids, all sorts of things that we hear.
So if you understand the history, reverse mortgages started in the sixties. They're started by insurance companies and when they did it, they were truly buying the home off of their clients. So they'd say, "You're free and clear on your house. I'll pay you 500 a month. You can keep living there, I'll pay you 500 a month." But they would take title.
And what happened was it actually worked for a lot of people pretty well, this very similar to our reverse. But what happened was people started outliving their life expectancy and the insurance company said, "We paid you in full for the house. You need to move out now."
So typically you have single women in their seventies, eighties now getting kicked to the curb. So-
Matt Feret (25:19):
Yeah, that's not good PR.
Mitch Cooper, CRMP, CRPC (25:19):
There's not really a better way to give yourself a horrible name. That's a pretty good way to do it.
Matt Feret (25:24):
Mitch Cooper, CRMP, CRPC (25:25):
That changed in '89 when the FHA took over and they put out theirs and now like I said, we do not take title of the home. We're just a lien on the property.
And then there was still some things that it took the FHA a while to get right. That was the biggest change and the biggest benefit. That was a big shift to where now it's a true non-recourse loan.
You could owe a million on your reverse and it'd be worth 500,000 as long as you're living there, paying your property taxes and insurance, you're still living there and even then if you pass, your heirs are not liable for the shortfall. They would sign a deed and we'll mail the keys. You could have a million in the bank, we can't touch it. So the debt is limited to the home. And so that was the biggest change, it was when the FHA took over.
But there was still some things around non-borrowing spouses where one spouse is 62, the other one was maybe 55 so they were a non-borrowing spouse and when the borrowing spouse passed away, then the loan was due. And so that could have happened 30 years later and they've been living there a long time and now that spouse is much older and all of a sudden now the loan's due and maybe they're upside down or they can't refinance, that kind of thing. And so that was also leading to people getting kicked out.
And so those things got changed to where now there's a deferral period. If the borrowing spouse passes away, the non-borrowing spouse is eligible for deferral period, meaning they can stay there, the loan is not due, line of credit's turned off if there's monthly income, that's turned off but the loan is not due.
And then there was still stuff if that borrowing spouse moved to assisted living long-term care, then the loan was due. And that just got fixed last year to where... And they backdated it to 2014 that no, if they move to assisted living then they're also eligible for deferral period.
And there's still some of these old loans out there that are under the old rules pre 2009. And that's something...
I'm always happy to help someone that's going through the end of a reverse too. I don't care who did the loan just because there's very few people that really understand them. So I'm happy to help if someone's going, "I'm getting this letter."
Because we had one that was old pre rule and they called the service, they were getting attorneys involved and I said, "Well, just call the servicer first, ask if she's eligible for a deferral period." And they ended up, she was, right? And so they got it fixed and now she gets to stay there without a mortgage payment.
So communication is key on that front. But there's still some of those out there that also didn't help give them a great name. People that didn't fully understand the consequences of having a non-borrowing spouse and those things have gotten fixed.
So there's few things. Every year, it changes a little and they improve it, make it safer and safer. A lot of changes in '09 and 2013. So it still took them a while.
But we say if you're going to buy a cell phone today, you don't picture a cell phone from 30 years ago that weighed two and a half pounds that only called and received calls. Now, we have supercomputers in our pocket and everything we do with them except make and receive calls usually. And so that not only has the product changed a lot, the uses have changed a lot. And it's the same with reverse.
What we did 30 years ago versus today are very different and so don't assume it's the same as 30 years ago but they were not as good of a product.
Matt Feret (28:43):
What would... Thank you for that history. And yet, is there a way anybody can get kicked out today? Straight up kicked out?
Mitch Cooper, CRMP, CRPC (28:50):
Yeah. The biggest thing is not paying the property charges. So when you hear a reverse mortgage foreclosure, it's most likely from not paying property taxes.
Which is true of any loan. They will eventually foreclose but we don't have a monthly mortgage payment. Most people when they think of foreclosure on a traditional loan, they're not making their mortgage payment and thus, their property taxes and insurance, we don't have a mortgage payment so you still have to pay the property taxes and insurance and then the HOA dues because ultimately, you would get foreclosed on. And so the lenders held responsible and so they have to.
Like I said, all the rules are set by the FHA and because the FHA isn't guaranteeing it, we are... That pushed into it. We have to foreclose. Those are the terms of the loan.
And the other one is not living there.
Matt Feret (29:36):
No one wants to kick anyone out of the house ever. That's the worst case scenario, right?
Mitch Cooper, CRMP, CRPC (29:40):
Matt Feret (29:41):
No reverse mortgage companies going, "Oh, great. We're kicking grandma out of her house."
Mitch Cooper, CRMP, CRPC (29:45):
And honestly, most of the foreclosures in reverse are actually from a death because that begins the foreclosure process when they're no longer permanently living there. And so that most of them... The CFPB has data and things on that.
But that's how when you hear about that and there'll be an article every so years that comes out about how terrible it is and you read through it, it's got big scary headline and when you get down into it, they didn't pay their property taxes for two and a half years. It's terrible. And no one wants their life to be so unaffordable and run out of money. But it's just the reality.
Matt Feret (30:24):
You didn't pay property taxes for two and a half years, something's going to happen that won't be good.
Mitch Cooper, CRMP, CRPC (30:28):
Yeah. And none of us want to see anyone have to go through that but that's how it ends up happening.
Matt Feret (30:34):
Thank you for that and thanks for the transparency as well. And then I'm going to ask you to keep that spirit with what are the pitfalls of doing this? What do you have to watch out for [inaudible 00:30:46]?
Mitch Cooper, CRMP, CRPC (30:46):
Yeah. Costs are probably the number one in the... And just the reason most of the costs are financed into the loan and then you have accruing interest over the years. That's the reverse part that the loan amount goes up every month instead of down. That's why it's a reverse.
So that's where you go, "We're going to move in two years." You go, "This is a very expensive way if you're going to pay it off in two years." It's really not typically designed to be paid off in a short amount of time. There's never prepayment penalty. It's just about wasting those costs that are going to come out at the end.
And so I had a client last month that they said, "Well, we just need the money right now and then we're going to sell our condo in three years and pay it off." I was like, "Don't do this," because that's not what it's designed for.
On the flip side of that, we had a client and they had a two-year outlook but they were free and clear. Husband has Alzheimer's, they needed 15,000 a month to care for him in the home and they owned this property since 1957 in Napa, California. So they built the house for 70,000. Now it's worth almost two million. And so if they were to sell, they would have a huge IRS bill and not to mention the realtor normal transaction fees.
And so this actually ended up being one of their cheaper options because we're like, "Okay, look..." And they wanted to keep him there. They're like, "He's going to be happier here. He's less stressed. If he leaves the house, he's worse. So if we can keep him here, draw 15,000 a month from the reverse for a couple years and then at the end of that, once he passes we can have [inaudible 00:32:28] sell and move out."
So for them, it was the cheapest option. And so that's where I say every reverse is so different. But the biggest thing is finding a professional that's going to help educate you, is...
I always get nervous if clients are like, "Let's go." And I go, "Okay. But you haven't asked all these questions. You really need to understand the costs and the interest because you really want to understand what you're buying."
So you need someone... You need to find a professional that's going to be honest and help find the truth and what's going to work best for you.
We want our clients to be happy 20 years from now that they did this. We don't want it to be the last ditch effort or a Band-Aid on a problem. There's sometimes where it'll work and we say, "We can do the loan but two years from now you're in the same boat. This is not really solving the problem. And so maybe selling and downsizing and then doing the reverse and that kind of a thing is actually the better option." We're really trying to find the best option for them.
And so I think finding a CRMP or certified reverse mortgage professional and NRMLA has a list on their website. NRMLA is the National Reverse Mortgage Lending Association and finding someone that can really sit down and go through and look at your scenario.
But I think timeline is one of the bigger ones. Three-story homes with steps everywhere. Really try to put this on your last house.
Matt Feret (33:55):
Do you think there's enough awareness in the financial management or the wealth management community around this piece or does the old historical stigma still apply there as well?
Mitch Cooper, CRMP, CRPC (34:09):
It's getting a lot better, but no, not enough. And it's not going to be for everyone but it should be another tool to consider.
And FINRA who regulates that industry years ago said it's okay as a last resort and then some leading thinkers got together and went, "Why is a last resort?" And they said, "Well, we don't know. It's just what we put."
So they did the math and Wade Pfau and the insurance side is pretty iconic in this area but he did the math and go, "Using a reverse mortgage as a last resort is actually the worst way to use a reverse mortgage. It makes a lot more sense to put it in place sooner and get the benefits throughout the retirement than to wait and use it at the end."
And so they changed that, gosh, it's probably almost nine years ago, FINRA changed their statement and said, "It's okay to consider not just as a last resort."
So there have been changes but even though FINRA changed that almost a decade ago, there's still quite a few planners that we come across that they just don't know.
And we think the number one reason people don't use them is they have no idea what they actually do or how they actually work. That's the biggest reason. No one really understands what they truly are.
And we gave a presentation to Financial Planning Association here in Sacramento, California and the advisor came up after and said, "I didn't want to come to this. All the myths you went over at the beginning, I thought all of those were true," and just totally flipped and went, "This is an incredible tool. It almost seems too good to be true." And we're like, "Yeah, when you say that is when you get it. You really understand it."
And the reason it's not too good to be true, it's because the costs upfront and the FHA and mortgage insurance is the number one cost. And again, it's finance into the loan.
So people have tried to recreate it for less costs and you just can't do it. There's so much value there, it has the cost.
Matt Feret (36:14):
If I were considering this myself or I was taking care of mom or dad or both, what costs should I look out for? Let's pretend that I'm not using you for a second because I know you're going to list them out. But let's pretend I was already halfway thinking about this or I was going online and looking for various quotes and trying to compare shop. What do I look out for? What are these... What are the fees that are variable and the fees that are typically fixed?
Mitch Cooper, CRMP, CRPC (36:40):
Most of the fees are going to look really similar lender to lender. And this is talking about the FHA reverse mortgage which is what? Ninety-five percent of reverse mortgages today are the FHA reverse mortgage. So it's called the home equity conversion mortgage or HECM is the FHA reverse mortgage.
So on the FHA reverse mortgage, there's upfront mortgage insurance and it's always 2% of the appraised value up to the FHA cap on value which is going up in January to 1,089,000. I think 300. They can never pick an easy number. So-
Matt Feret (37:14):
Yeah, it's the same way with Medicare either, it's always-
Mitch Cooper, CRMP, CRPC (37:16):
Matt Feret (37:17):
The $112.92 cents.
Mitch Cooper, CRMP, CRPC (37:19):
Right. It can-
Matt Feret (37:20):
Mitch Cooper, CRMP, CRPC (37:20):
Do we call it 115 or 110? I know.
Matt Feret (37:23):
Mitch Cooper, CRMP, CRPC (37:23):
So just make this easy honest... But usually I always say by the time I memorize the final number, they change it.
So a $500,000 house, that's $10,000 day one. It's a onetime fee, like I said, finance into the loan, but that's $10,000. That's not an insignificant amount of money. So a million dollar home is 20,000. So depending on the value of the home, it can be significant.
Other than that upfront mortgage insurance, you have an origination fee which can be anywhere from zero to 6,000. Six thousand, that's the cap.
Matt Feret (38:01):
Origination fee, is that the synonym for what the advisor or the person putting it together makes?
Mitch Cooper, CRMP, CRPC (38:08):
Yeah. Not necessarily. It's what the lender is charging and we don't have points like a traditional loan. We can't say, "You can pay a point. Lower your rate." The origination fee though works the same. Not identically but it's a very similar lever. So we can do a $0 origination fee, it's going to be a higher interest rate.
So most of our clients do the full cap because it's the lowest interest rate and therefore, the most available borrowing power, which is what our clients are... That's typically their goal. "I want to get the max out of my home as possible whether that's in a line of credit or to pay off a loan."
And then you can also do the math of, "Yeah, well here's your interest rate. So we would've reaccumulated that 6000 in loan balance after a few years anyway." Right? Because the interest rate would be higher if we waive that fee.
And then you have your typical title escrow appraisal costs. So your normal refinance costs which in California we're somewhere between 2500 and 4500 on those fees. So it can be 500,000. A house can be $20,000 in costs that are financed into the loan.
So that's where I say I think a HELOC is in the neighborhood of $500 for cash out.
And so that's where using each tool correctly comes into play. There's definitely a space for HELOCs. Definitely a great tool but then there's also, "Now we want to be in this house for 30 years or have the ability to not having that mortgage payment changes the whole picture and now we get to stay here," and that kind of a thing. "I'm just using it correctly but..." Yeah.
They can be up... Now with the new cap, I'm sure we'll see because of that 2% fee on the mortgage insurance, we'll probably see loans if they go up that high on value over the 30,000 mark in closing costs.
Matt Feret (40:05):
Wow. But part of the... It's not like you can take out a mortgage without any fees. It seems like everyone comes out of the woodwork with their handout when you're trying to buy a new house and get a new mortgage.
Mitch Cooper, CRMP, CRPC (40:20):
Yeah. And how much would you pay for 1800 a month cash flow for the rest of your life? A lot, right?
Matt Feret (40:26):
Mitch Cooper, CRMP, CRPC (40:27):
That's where you go, "Is the value there?" Cost isn't really an issue unless there's no value. So it's like everything. Starbucks is a waste of money. Well, it's delicious and I want it so I'm going to pay $6 now for a Starbucks. It's the same. Everything's just cost and value and is it there or is it not, and if it's not great, then it's not the tool for you and that's not a problem. Doesn't make it a good or bad product. Just means it's not what's for you at this time.
Matt Feret (40:53):
You've been very generous with your time. I've asked you a ton of questions and you've answered them and then some. So thank you very much for that. But what questions should I have asked or topics should I have covered that I didn't?
Mitch Cooper, CRMP, CRPC (41:05):
Yeah. It's one of those things that's probably better in sips anyway because otherwise, we'll talk for four hours and no one will know what we're talking about.
But yeah, the biggest thing I think is it's just a tool to consider. It's not going to be for everyone. And then finding that professional that's going to educate you and help you find what's best. Not someone that's going to sell you.
Yeah. So the key is just finding the right professional. Mutual of Omaha's is in 48 states. And we separate out our traditional mortgage and reverse. So I don't do traditional loans, I don't do home equity lines, I just strictly do reverse. And that's what we find best because they're just two different animals.
Matt Feret (41:47):
So you have to be licensed in the state which the person is in, it's like an insurance license?
Mitch Cooper, CRMP, CRPC (41:53):
Yeah. It's a national mortgage license or NMLS, but it's state specific, yeah.
Matt Feret (41:59):
Okay. So how do we find you on the internet? California's a really big state so I'm sure a lot of people listening might be interested in contacting you. And then tell me a little bit more about the company you work for and how we get in touch with them. And I know you rattled off a couple of things, some organizations that give that licensing actually right in the beginning of the show you did. So how do people find you? How do people find experts like you?
Mitch Cooper, CRMP, CRPC (42:24):
Yeah. My website is mutualreverse.com and then slash Mitchell, M-I-T-C-H-E-L-L- Cooper. That's my specific website.
You can also go to mutualreverse.com. That's going to be Mutual of Omaha's Reverse Mortgage team there.
And then there's the National Reverse Mortgage Lending Association and you Google that and they have a list of the CRMP, certified reverse mortgage professional.
Like any designation, there's going to be maybe some bad CRMPs and there's some great people that are not CRMPs. So it's not in stone, but I think your odds are maybe a little better if they are CRMP.
And you can shop around. Mutual of Omaha's an amazing company. I'm very excited to be with them. I've been with them for over four years. Very ethical, over 110 years old, not publicly traded. So we don't have to have short term thinking. Everyone's trying to work for what's best for the client. So I'm thrilled to be a part of them. Yeah.
Matt Feret (43:29):
Thank you. If I'm interviewing somebody or someone doesn't live in California wants to find a professional, you mentioned it, and I say this in my book and I say this everywhere, you have to find a Medicare insurance expert. That's not everybody.
Mitch Cooper, CRMP, CRPC (43:47):
Matt Feret (43:49):
And I encourage people to interview, call someone up and go like... It's how we started the show. "What do you do? How long you've been doing it?" Get a little interview, try to figure him out how would someone determine... What's your advice to people looking for that expert and that professional and how to identify him or her?
Mitch Cooper, CRMP, CRPC (44:06):
Yeah. So it is tough in that today's mortgage market, every broker in the country now all of a sudden does reverse whereas last year they're doing 20 refinance a month and they're losing their mind. A lot of them would say, "No, I can't handle those." But times have changed and I understand.
So you really want someone with experience. "How long have you done reverse?" You can ask them how many reverses they've done in the last year or two. Of course, they don't have to be honest, but-
Matt Feret (44:38):
Oh, I hope so.
Mitch Cooper, CRMP, CRPC (44:40):
Most brokers maybe have done one, people that don't specialize in reverse. There are brokers that do both and they really do well. I know a few where I'd be comfortable with someone going with them because I know they do a significant amount of reverse.
But most typically, if you find someone that does reverse only, that's going to give you a lot better odds. You're going to find someone that have really...
And there's companies that separated out like we do. I specifically do reverse only. I think that's a great idea to find someone like that and again, if they have their CRMP even better because that shows they took the time and they're doing CE every year for reverse, spending the money on that designation so that means they're all in on reverse.
And it's the same with insurance, with anything, right? You can feel that salesman, they're pushing you to move forward instantly, or it's just that salesman that's personally I don't want to work with. And so there are some reasons to maybe not hesitate because rate market is crazy but ultimately, has to be a decision of is this something you want to do, is this the house you want to be in.
If it's the person that's just pushing you to do it instantly, I think that's probably not the right person. But I think asking about reverse specific experience is big.
Matt Feret (46:07):
Mitch, this was awesome. Thanks very much.
Mitch Cooper, CRMP, CRPC (46:09):
Yeah. Thank you, Matt. It was a pleasure and reach out at any time.
Matt Feret (46:14):
Thanks, Mitch. Make sure to hit The Matt Feret Show website for links and show notes. Until next time, to your wealth, wisdom, and wellness, I'm Matt Feret and thanks for tuning in
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