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?