Reverse Mortgages - Benefit or Trap??

What is a reverse  mortgage?

A reverse mortgage is a loan to an over-62 homeowner secured by the existing equity in their home.    The debt increase over time becaue the borrower does not make any principal or interest payments on the debt and it will rise over time.  However, it is not repaid until the borrower dies, sells the house, or moves out permanently.   The reverse mortgage is a tool to allow seniors to cash out equity while they are still alive, without requiring any additional payments.  

As long as you live in the property they cannot foreclose on the property or attach any of your other assets should the value of the property not be sufficient to payoff the principal and interest on the reverse mortgage. ( You would have to continue to pay the taxes and insurance, just not the mortgage.)  In areas where values are declining getting a reverse mortgage can lock in your equity.   

An applicant has to be 62 or older to qualify for a Reverse mortgage and would have significant equity in their home due to paying off  the traditional mortgage or because the value increased since they bought it.  

Almost all reverse morgages are backed by the US government through the FHA under the Home Equity Conversion Mortgage Program (HECM).    The Home Equity Conversion Mortgage (HECM) program was authorized by Congress in 1988.  FHA insures the lender against loss in the event the loan balance at termination exceeds the value of the property. It also assures the borrower that any payments due from the lender will be made, even if the lender fails.

Only 157 loans written in 1990 and about 130,000 HECMs will be originated in 2009. The reverse mortgage market seems to have come of age.  

The mechanics of Reverse mortgages are simple.  The applicant has to be 62 years old and have a minimum amount of equity in their home.   Based on the amount of equity there is a formula based on the borrowers age that determines how much you will be able to borrow.  

On the positive side, the reverse mortgage market has not been impacted by the crisis-induced tightening of credit standards, because there are no credit requirements or income documentation required for reverse mortgages. 

However, declines in home values reduce borrowing power.   If a house declines in value by 30 percent, the amount that can be borrowed against it also declined by 30 percent.

Funding of HECMs under pressure: Fannie Mae had been the major source of HECM funding since the program began, but the financial crisis raised doubts about whether this would continue. 

To de-emphasize its role and hopefully attract other investors, Fannie Mae in March increased its rate margins on adjustable-rate HECMs. This shocked many seniors because higher-rate margins reduce the amounts they can borrow, and it traumatized many lenders who had to explain the bad news to seniors who had HECMs in process.

Congress has taken action as part of broader efforts to support the housing market have partly offset the adverse consequences of the financial crisis. In 2008, the system of setting maximum loan amounts on HECMs for each county was replaced by a uniform national limit of $417,000. Early in 2009, the limit was raised temporarily (through 2010) to $625,500. This has helped fill the void left by the loss of private reverse mortgage programs.

If you are over 62 with equity in your home and are looking for a way to get cash to imrpove the quality of your life, reverse mortgages can provide good benefits. 

To Roth or Not To Roth, that is the Question.

Roth IRAs, despite their attractive features, have yet to match the popularity of traditional individual retirement accounts.  One reason Roths constitute such a small percentage of total retirement assets (5%) is that many wealthier individuals -- who potentially stand to benefit the most from them -- have been 1.) ineligible to contribute to a Roth or 2.) convert their existing traditional IRA to a Roth.

As of January 2010, the IRS income ceiling for Roth conversions disappears, presenting investors of millions with an interesting quandary: if they convert they will accelerate taxable income into an earlier year, which flies in the face of the cardinal rule that you pay no tax before it is too.  On the other hand, a Roth, unlike a traditional IRA, would enable both tax-free withdrawals and the avoidance of required minimum distributions.  This allows more wealth to grow tax-free for a longer period of time and is not an easy decision.

Research suggests that the best conversion candidates are those who can afford to pay the cost of conversion from their taxable assets and fit any one of the following criteria:

-- They don't expect a significant decline in their of effective tax rate in retirement;

-- They are making the conversion at a younger age;

--  They don't expect to spend meaningfully (or at all) from their IRA or will begin drawing from it only much later in retirement; or

-- They intend to transfer their IRA at death to beneficiaries who will then "stretch" it.

The math for calculating the benefits are based on comparing the ultimate return received in the future for the Roth account balance versus the net present value of the withdrawals from a taxable IRA net of tax.

The cashflow streams would be:

Roth = Value of Account - (Tax Cost of Conversion) + Compound tax free earnings until future withdrawal

Traditional IRA: Value of Account + Compound Tax Free earnings until 70 1/2, withdraw approx. 5 - 7% per year - Taxes on Withdrawals

The basic math suggsts that the best candidates meet three criteria, 

1.  They can afford to pay the conversion tax out of non IRA assets

2.  They do not intend to use the money in the IRA for living expenses but only future reserve and capital appreciation.

3.  They are young enough to earn back the cost of the tax on the conversion.

California Bans Divorce

Will California ban divorce?

As reported by the Associated Press on November 30, 2009 there is a grass roots movement is underway in California to ban divorce.

Activists at the local levels are collecting signatures on petitions to place a measure on the 2010 California ballot which reads as follows:

SECTION 1. Title. This act shall be known as the “2010 California Protection of Marriage Act.”

SECTION 2. Section 7.6 is added to Article I of the California Constitution, to read:

No party to any marriage shall be restored to the state of an unmarried person during the lifetime of the other party unless the marriage is void or voidable, as set forth in Part 2 of Division 6 of the Family Code.

This "family values" proposal is based on the logic that if it is impermissible for same-sex couples to marry because of the sanctity of the marriage relationship, it makes sense also to ban divorce for the same reason.

If the measure passes, California would become the first state to ban divorce and would join nations such as Malta and the Philippines.

Maybe they should just make it harder to get married instead?

Nursing Home Residents receive Futile Care

Study says many nursing home residents receive futile care

A surprising number of frail, elderly Americans in nursing homes are suffering from futile care at the end of their lives, two new federally funded studies reveal.

One found that putting nursing home residents with failing kidneys on dialysis didn't improve their quality of life and may even push them into further decline.

The other showed many with advanced dementia will die within six months and perhaps should have hospice care instead of aggressive treatment.

Medical experts say the new research emphasizes the need for doctors, caregivers and families to consider making the feeble elderly who are near death comfortable rather than treating them as if a cure were possible — more like the palliative care given to terminally ill cancer patients.

"We probably need to be offering a palliative care option to many more patients to make the last days of their lives as comfortable as possible," said Dr. Mark Zeidel of the Beth Israel Deaconess Medical Center in Boston, who was not involved in the studies.

Palliative care focuses on managing symptoms of a disease and a main goal is to relieve pain at the end of life. End-of-life care became a divisive issue in the national health care reform debate this summer after one proposal included Medicare reimbursement for doctors who consult with patients on end-of-life counseling. The new studies are published in Thursday's New England Journal of Medicine.

Preparing for Incapacity

Incapacity planning is a broad area of law that covers how you are cared for if you become physically or mentally unable to care for yourself. The type of care could range from simple tasks like buying groceries, paying bills, and handling financial matters to more important decisions such as selling real estate or gifting assets to your children.

Within the realm of incapacity planning, there are also arrangements that deal specifically with decisions regarding steps taken to obtain Medicaid benefits. A Trust with "Medicaid triggers" comes into play in this regard by moving forward with decisions that you would have handled yourself, if you were still legally competent to do so. The types of decisions required in this area of planning can vary. For instance, you may outline instructions for a nursing home stay or the repositioning of assets to allow you to qualify for Medicaid without completely extinguishing the value of your estate.

At a minimum a good set powers of attorney, one for property usually referred to as a Durable Property Power and a power of attorney for healthcare decisions are essential to preventing delays in treatment and protecting your assets while you are alive. These "living" documents protect you from guardianship and conservatorship, a "living probate".

Wills only take effect at death and therefore don't do you much good if you are alive but incapacitated.

Along with these there are a variety of more specialized documents you can put in place to run a business, manage property, handle specific assets or take on other responsibilities you have. But at least with the minimum you have some basic protection.


When you determine that you want to move forward with this type of planning, it is necessary to work with a qualified estate planning attorney. This attorney will find the optimal solutions for you in the event of your legal incapacity (defined as the inability to manage your own affairs). Because there is a 50-50 chance that the average adult will spend at least one year in a long-term care facility, it becomes painfully clear this type of planning is not only extremely important, but requires immediate attention to ensure you and your family protect your assets

Curious Wills & Gifts - The Oldest Written Will

William Matthew Flinders Petrie, the famous English Egyptologist, unearthed around the turn of the century at Kahun a will which was forty-five hundred years old; there seems no reason to question either the authenticity or antiquity of the document. The will therefore antedates all other known written wills by nearly two thousand years.

The 1911 Irish Law Times, speaks of the will so entertainingly that its comments are here reproduced:

"The document is so curiously modern in form that it might almost be granted probate to-day. But, in any case, it may be assumed that it marks one of the earliest epochs of legal history, and curiously illustrates the continuity of legal methods. The value, socially, legally and historically, of a will that dates back to patriarchal times is evident.

" It consists of a settlement made by one Sekhenren in the year 44, second month of Pert, day 19, —that is, it is estimated, the 44th of Amenemhat III., or 2550 B.C., in favor of his brother, a priest of Osiris, of all his property and goods; and of another document, which bears date from the time of Amenemhat rV., or 2548 B.C. This latter instrument is, in form, nothing more nor less than a will, by which, in phraseology that might well be used to-day, the testator settles upon his wife, Teta, all the property given him by his brother, for life, but forbids in categorical terms to pull down the houses 'which my brother built for me,' although it empowers her to give them to any of her children that she pleases. A "lieutenant Siou" is to act as guardian of the infant children.

"This remarkable instrument is witnessed by two scribes, with an attestation clause that might almost have been drafted yesterday. The papyrus is a valuable contribution to the study of ancient law, and shows, with a graphic realism, what a pitch of civilization the ancient Egyptians had reached, — at least from a lawyer's point of view. It has hitherto been believed that, in the infancy of the human race, wills were practically unknown.

There probably never was a time when testaments, in some form or other, did not exist; but, in the earliest ages, it has so far been assumed that they were never written, but were nuncupatory, or delivered orally, probably at the deathbed of the testator.

Among the Hindus the law of succession hinged upon the due solemnization of fixed ceremonies at the dead man's funeral, not upon any written will. And it is because early wills were verbal only that their history is so obscure.

Indeed, until the ecclesiastical power assumed the prerogative of intervening at every break in the succession of the family, wills did not come into vogue in the West. But Mr. Petrie's papyrus seems to show that the system of settlement or disposition by deed or will was long antecedently practised in the East."

So it is written, so it shall be~~

Estate Tax Reform

The estate tax currently in place is scheduled to go away in 2010 and then return to 2001 levels in 2011. If you recall 2001 levels only provided a $1,000,000 tax exemption amount and a 55% top rate.

There are a number of proposals in Congress to make the current $3,500,000 exclusion and 45% top rate permanent.

The Office of Management and Budget has to follow the law as it is so by leaving the present law in place the future revenue is counted in the budget. This additional revenue, whether it is real or not helps reduce projected deficits by several hundred billion. Because of this positive impact on federal revenue politicians seem to agree that until health care reform and some of the other high revenue problems are resolved the estate tax will remain in place with possibly a quick amendment at year end.

So don't panic, just one more political game to resolve.