Reverse Mortgage Guide

I came across the news release below and it made me wonder: Just how many people have sufficient assets to buy annuities and why there must be a “shift from accumulating assets to monetizing them.”

After all, is it not possible to do both? If you have an investment that produces a growing return over time, does not the value of the investment increase?

Think about investment real estate. If you have owned single-family homes in my community the rent most likely has doubled in the past decade. Even as income has increased, so has asset value. Homes cost a lot more today then ten years ago in my area.

Rather than worrying about “dissaving” I suspect most people are better served worry about good, old regular “saving.” It’s something we don’t do very much of any more, and that’s a core reason why so many people have trouble retiring and need a reverse mortgage in the first place.

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NEW YORK–(BUSINESS WIRE)–The financial services industry in the U.S. is not keeping up with the changing needs of the 76 million people approaching retirement. According to a report by financial industry consultants Oliver Wyman, providers need to shift their focus from helping Baby Boomers accumulate assets to enabling them to draw down assets and generate income from their assets.

The report, “The New Retirement Landscape: Reaping the Rewards,” outlines how financial services providers need to realign product lines and rethink distribution channels to compete effectively in the market to serve the financial needs of retirees in the U.S.

The primary challenge for the financial industry is developing new products to help retirees shift from accumulating assets to monetizing them, what the firm calls “dissaving.” The most effective solutions, according to Oliver Wyman will transcend the traditional boundaries between banking, insurance, health care and asset management.

“Financial services providers should enable people to leverage their entire personal balance sheets during retirement,” said John Colas, managing director and head of the North American Corporate Strategy Practice at Oliver Wyman. “Retirees will need to tap the equity in their homes, protect against an array of risks, and make a fundamental shift from accumulating assets to generating income. The solutions needed cross traditional financial industry boundaries and will require innovation in both product design and service delivery.”

Priorities for the industry:

Oliver Wyman advises that providers of financial services focus on actively helping retirees meet their needs to: generate cash for basic needs; maintain a desired quality of life; and transfer wealth to heirs or other parties. The firm predicts growing demand for solutions like reverse mortgages that meet both financial and lifestyle needs. Likewise, for innovation in products like single premium immediate annuities and target date funds that can be reformulated to optimize income. Providers also need to help retirees manage a range of risks and opportunity exists to create new hybrid products, like variable annuities with living benefits that address multiple risks faced by retirees (market risk, inflation, longevity risk, the increasing cost of health care, and liquidity risk).

More broadly, the industry needs new distribution models to market and deploy these new solutions. Oliver Wyman identifies the Web, alliances, and affinity relationships as among the ways providers need to alter their distribution channels and corresponding infrastructure.

According to Steven Kauderer, managing director at Oliver Wyman and head of its Insurance Practice, “The Baby Boom generation’s increased longevity, its collective need for income protection, and rising healthcare costs will present unique opportunities. At stake for the financial industry are a host of new revenue streams and the chance for leaders to create distinct competitive advantage.”

Implications for financial sectors:

The complex needs of retirees demands the industry respond in innovative ways, creating opportunities for providers:

Wealth and asset managers need to build expertise in longevity risk and liquidity management and expand their focus beyond high net worth individuals. Acquiring the skills of retail bankers and insurers or by partnering with firms gives them a better understanding of the mass market and mass-affluent market.

Insurers can capitalize on the opportunity to offer guaranteed lifetime income streams to retirees through annuity-like products. Insurers have a long history of being a trusted provider of retirement services and now must consider partnering with banks and other institutions to enhance distribution.

Retail banks can offer liquidity and platforms for wealth management and insurance distribution, but they often struggle to combine these offerings across segments, and lack expertise in risk protection. Retail banks need to evolve from a short-term transactional focus to a broader, advice-based approach to retirement services.

Securities firms can create innovative structured products that provide risk protection similar to insurance. Many have already structured their accounts to provide substitutes for some retail banking services – the challenge is to extend their range of offerings.

About Oliver Wyman

With more than 2,500 professionals in over 40 cities around the globe, Oliver Wyman is the leading management consultancy that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation and leadership development. The firm helps clients optimize their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is part of Marsh & McLennan Companies (NYSE: MMC). For more information, visit www.oliverwyman.com.

Jonathan Clements, writing in The Wall Street Journal, says there are six bad reasons not to save for retirement.
I guess you could call these the “big six” or maybe “six among hundreds.” It seems to me that saving is a core obligation for anyone hoping to achieve financial stability and success.
How much should one save? […] read more

In response to the posting on the disappearance of cheaper reverse mortgages we received a comment which went like this:
Juneboarder Says:
September 24th, 2007 at 9:29 pm
“Reverse mortgage closing costs consist of a few items: 1. Mortgage Insurance Premium; 2. Loan Origination Fee; and 3. Fees associated with the loan.
“1. Mortgage Insurance Premium: This is 2% […] read more

One of the big financial issues which dominates the news concerns the mortgage meltdown. The point is NOT that we have a subprime problem, but rather than we have a problem with toxic loan products in general. No one with a fixed-rate loan is worried about negative amortization, stiff payment re-sets or rising mortgage rates.
This brings […] read more

The decision by the Federal Reserve to reduce the federal funds rate may well have importance for reverse mortgage borrowers.
The reason? While the Federal Reserve does not directly influence mortgage rates, as it lowers the discount and federal funds rate other loan rates are often impacted.
With a little luck, we may see interest levels for […] read more

The idea of helping people to stay in place whether with or without a reverse mortgage seems like an eminently desirable and attractive idea. If homes can be more habitable for longer periods that should be seen as a social good.
How many times have you seen people move […] read more

The “HECM 100″ is being phased out by most FHA insured reverse mortgage lenders, says Joffrey Long, a 30-year veteran of the mortgage industry and the President of Southwestern Mortgage in Granada Hills, CA.
Long, the 2007-2008 President of the California Mortgage Association, says the interest rates on FHA insured reverse mortgages are determined by adding […] read more

When it comes to savings Americans have flunked Economics 101. As a nation we don’t save.
Figures from the Bureau of Economic Analysis show that personal savings amounted to $72.2 billion in July, 0.7% of disposable income and not a lot in the context of personal income worth $11.7 trillion. However, the BEA points out that […] read more

The Census Bureau reports that more of us are working after age 65.
Nationally, nearly one in four people between the ages of 65 and 74 (23.2 percent) were in the labor force (either working or looking for work) in 2006, an increase from 19.6 percent in 2000. States with some of the lowest rates of […] read more

There’s a lot of discussion regarding reverse mortgages, but what really defines such a loan?
In an odd way, a reverse mortgage is more than the opposite of a “forward” mortgage. It has a number of characteristics which make such financing unique.
Probably the best way to understand why reverse mortgages are different is to look at […] read more

Who would you trust if you were going to get a reverse mortgage?
Forget about degrees and credentials, says the 2007 Financial Freedom Senior Sentiment Survey, the fourth annual survey from Financial Freedom, the nation’s largest originator of reverse mortgages.
“Being an expert in a field just isn’t enough,” says the company, “Professionals can’t rely on their […] read more

In the past we have looked at the Rex reverse mortgage program, a kind of equity sharing arrangement — see our posts from July 9th and July 18th.
Another example of an equity-sharing reverse mortgage comes from EquityKey. The basic arrangement is that you get cash from EquityKey and they get a 50 percent interest in […] read more

They have people over 62 in a lot of places and it follows that reverse mortgages are offered in many countries.
One of the most active reverse mortgage markets seems to be Australia, and their Senior Australian Equity Release Association of Lenders (SEQUAL) recently came up with an announcement that raises an important issue for anyone […] read more

One of the most interesting discussions I have seen regarding reverse mortgages appears on Calculated Risk, a remarkably logical and well-written blog about finance and economics. (And that, of course, is a neat trick in itself.)
The posting that caught my attention should be required reading for anyone with an interest in reverse mortgages or has […] read more

The idea of the FHA Home Equity Conversion Mortgage — an HECM or a reverse mortgage — is to allow those 62 and older to obtain equity from their property without selling.
Of course, when it comes to loans — reverse, forward or sideways — there is the little matter of costs. HUD reverse mortgages typically […] read more

The link between reverse mortgages and estate taxes is fairly clear: Once a reverse mortgage is repaid there is a smaller estate and thus less to tax — although virtually all estates are too small to merit attention under the federal tax system.
There is, however, the “problem” of those with big estates. The current estate […] read more

I like people who speak plainly, so you can imagine that I was interested when I received some information regarding a new book, Eight Barriers to Bypass on the Road to Retirement, by F. Bill Billimoria
Billimoria says “many Americans today are unable to retire at age 65 and have to keep working just to be […] read more

With National Grandparents Day coming up — mark your calendars, it’s Sunday, September 9th — AARP Financial has released a “first-of-its-kind nationwide research among grandparents on their relationship with, and support of, their grandchildren.”
The survey “results demonstrate grandparents’ affection for their grandkids as well as their concerns regarding their grandkids’ money values.”
The survey shows that:
* […] read more

Given that reverse mortgages are available to those 62 and older, it follows that a lot of reverse mortgage borrowers and potential borrowers are also grandparents.
That introduction brings us to the “Grandparents Cost Index” put together by Liberty Reverse Mortgage and Sacramento State University.
The 2007 edition of the study shows there are 56 million grandparents […] read more

With the mortgage meltdown growing, how has the market for reverse mortgages been impacted — if at all?
The answer seems to be that reverse mortgages are a lush isle of tranquility in the midst of unsettled seas. Figures from HUD show that year-to-date — by which they mean the fiscal year (October 1, 2006) until […] read more