What I Wish Every Forward Loan Officer Knew: Part 1

The Cash-Out Refinance Trap

What I wish every forward loan officer knew about cash-out refinances is pretty simple:

You have to recognize when you’re looking at a potential reverse mortgage client.

And yes, for those of you who don’t live in reverse-mortgage land, we call loan officers who do traditional mortgages “forward loan officers.” I’ve learned this is apparently news to many of you. Welcome to what we’ve been calling you behind your backs for years.

Okay, moving on…

Let Me Introduce You to Bea

A few years ago, Beatrice (aka “Bea”), found herself in a pretty familiar situation.

Her monthly budget was getting tight.

So she did what most homeowners would do: she called her mortgage loan officer and asked for help.

And the loan officer “helped” her.

With her immediate problem, I suppose.

They did a cash-out refinance.

Bea got the money she needed, paid some things off, had some breathing room, and went on with her life.

Seems reasonable enough, right?

Okay. Freeze Bea right there for a minute.

Because this is exactly where forward loan officers need to start looking at these clients differently.

We Naturally Recommend What We Know

A homeowner in their 60s or 70s needs access to equity, so their loan officer reaches for something familiar: a cash-out refinance or a HELOC (more on that one in Part 2).

They know the product. The homeowner qualifies. On paper, the loan works and solves the immediate goal.

So, off we go (into la-la land), headlong into another 30 years of required payments.

Wait… WHAT?!?!

30 years of payments for a 60-something-year-old?!?!

So you’re telling me you are literally telling a perhaps 65-year-old, “Yep, chances are you’ll die before getting out of this monthly bill!

JK. We all know no one is saying that.

Out loud.

But seriously, does that payment still work at 75? At 85?

And better yet, how does it feel?!?

Does it feel like real help, or does it feel like a slightly lighter chain?!?

What happens as property taxes, insurance, medical expenses and the cost of living go up while retirement income doesn’t necessarily keep pace?

Qualifying for a payment today and sustaining it throughout retirement are not even close the same thing.

Sometimes when we actually ask that question, the answer is a huge NOPE.

Okay, Back to Bea...

When we left Bea, she was 65 and enjoying some much-needed breathing room from her cash-out refinance.

Except the cash didn’t fix her cash-flow problem… for long.

Fast forward four years. Bea was now 69, she’d had some “unexpected big bills during retirement” (shocker, I know), and she needed money again.

Except now taxes and insurance were higher. Her income wasn’t. Rates were higher. And she had the larger mortgage balance from the first cash-out.

She tried another cash-out refinance.

This time, she didn’t qualify.

Her loan officer called me to see if a reverse mortgage would work instead.

It didn’t.

Bea would have needed to bring roughly $100,000 to closing to get her existing mortgage balance low enough for the reverse mortgage to work.

Obviously, the woman looking for money did not have an extra $100,000 lying around.

Do you know how much it sucks to tell a sweet and vulnerable little old lady that the thing she thought was her last resort (more on this in part 3) isn’t going to work either? To hear the fear in her voice as she tries not to cry because she realizes she is going to have to sell her home?

I do.

So I went backward and asked:

What if someone had shown her a reverse mortgage before the first cash-out refinance?

It could have worked. In fact, it could have worked very well.

It could have worked way better than the way the cash-out refi was working out for her.

Bea still could have accessed the cash she needed. She still would have owned her home and lived in it as her primary residence.

But instead of taking cash out while adding another required monthly principal-and-interest payment to a budget that was already struggling, she could have used a reverse mortgage where those monthly payments were optional.

And if she had chosen a HECM line of credit, she could have made payments when things were good, increasing the funds available on her line of credit, and then had access to those funds again later if she needed them.

You know... like when those totally unexpected “unexpected big bills in retirement” showed up four years later.

Does that mean Bea absolutely should have gotten a reverse mortgage?

Maybe. Maybe not.

Maybe she still would have chosen the cash-out refinance.

Fine.

But Bea was never given that choice.

And I’ve never had someone in this situation tell me, “Yeah, we looked at a reverse mortgage a few years ago and chose the cash-out instead.”

What I hear, A LOT, is:

“I had no idea this was an option. No one has ever talked to me about it.”

These aren’t 30-year-olds who somehow bought a house, got a mortgage and refinanced twice entirely online without ever speaking to another human. These are people in their 60’s and better.

Someone (ahem, a forward mortgage loan officer) had opportunities to bring this up.

By the time someone finally thought about the reverse mortgage for Bea, we didn’t have both options anymore; she didn't even have one option anymore.

Bea ended up having to sell her home.

That’s a really crappy time to discover there was another option four years earlier.

Look Down the Line

I’m a surfer, and surfing teaches you pretty quickly that you can’t just look at where you are on the wave right now.

You have to look down the line at where you’re going next.

Sometimes a tiny adjustment in your angle is the difference between making the next section and getting completely clobbered.

Home equity planning, and therefore retirement home equity investment strategy, feels a lot like that to me.

We can’t just ask:

“Does this loan solve the homeowner’s problem today?”

Where does it put them five or ten years from now?

What options are we preserving, and which ones might we be closing off?

Forward mortgage lending taught me to solve the financing problem in front of me. Reverse lending taught me to ask what today’s financing decision does to the client’s options five, ten and twenty years down the road.

A Reverse Mortgage Doesn’t Have to Win

Reverse mortgages generally don’t allow the same loan-to-value ratios forward mortgage professionals are accustomed to seeing. So adding debt today can affect whether a reverse mortgage will even work later.

The mistake isn’t choosing a cash-out refinance.

The mistake is never evaluating the reverse mortgage in the first place.

I’m not saying everyone over 62 should get one, (but I bet a lot more would if they understood in advance what Bea learned only too late).

I am saying before putting someone in or approaching retirement into another 30 years of required mortgage payments, maybe stop and ask some questions:

Can she realistically keep making this payment 10, 20 or even 30 years from now?

What happens when taxes and insurance go up but her income doesn’t?

What happens if she gets cancer? Takes a bad fall? Needs a new roof? A new car? Needs in-home care?

Expensive stuff happens in retirement. I think it’s silly to build a home equity retirement strategy around the assumption that there won’t be financial curveballs.

So stop and ask:

“What would a reverse mortgage look like here?”

Maybe the cash-out still wins.

Fine.

And maybe the biggest question:

Could the loan we’re putting her into today take one of her future options away?

Don’t Wait Until Reverse Is the Last Resort

For decades, the larger mortgage industry has treated reverse mortgages as something to discuss when everything else has failed.

The homeowner can’t afford the payment. They’ve burned through the cash. They can’t qualify for another refinance.

Now we talk about reverse.

That's backward, and a total disservice to older homeowners (not to mention this incredible retirement tool that is today's reverse mortgage).

A reverse mortgage is worth evaluating while the homeowner still has choices.

Sometimes the traditional mortgage will still make the most sense.

Great.

But at least we made that decision after looking at the homeowner’s retirement picture, not simply because it was the loan product we knew how to originate.

After more than a decade in reverse lending, that’s what I wish every forward loan officer understood:

You don’t need to become a reverse mortgage expert.

You just need to recognize when you’re looking at a potential reverse mortgage client and bring someone into the conversation who does.

Because what we recommend today doesn’t just solve today’s problem.

It can determine which choices that homeowner still has tomorrow.

Please send this to your Forward Mortgage colleagues and invite them to have a discussion with you about Today’s reverse mortgages. Now, more than ever, American Homeowners need them in this conversation.