Inverted teachers adopt more HECM misconceptions
Reverse Mortgage Educators Dan Hultquist and Jim McMinn brought their “Rules of the Game” presentation back to the National Association of Reverse Mortgage Lenders (NRMLA) Annual Meeting and Expo this year in San Diego. After getting some of the preliminary questions out of the way about the importance of targeted information, they delved deeper into certain topics related to the features of reverse mortgage products.
The popular presentation is very interactive and the presenters wear referee shirts. In a change of pace from previous years, the ‘violations’ of certain incorrect sample statements were called out by members of the audience – who were equipped with their own whistles.
Line of credit
One of these misconceptions discussed during the event related to the Home Equity Conversion Mortgage (HECM) line of credit.
“Hello, Mrs. Smith,” McMinn began, playing the role of a reverse mortgage lender. ‘I understand that you are looking for clarification about the line of credit growth. It is similar to the interest you receive on a bank account. …”
The sentence was immediately interrupted by the whistle of a whistle, which surprised even the presenters themselves.
“That’s not a fair representation of the line of credit,” Hultquist said. ‘It’s about mortgage growth, not income. We’re actually going to put a piece of cake on some of the things we say in the industry: credit growth is not income.”
Hultquist recalled that he was walking through Chicago’s Midway Airport when he received a call from an industry contact asking for his help in explaining “how the line of credit earns interest.”
“Yes, that’s not quite right,” he replied. Income, he explained, is generally taxed and does not have to be repaid, unlike loan proceeds.
“I prefer to talk about cash flow rather than income in our space,” he said. ‘But the line of credit growth? It doesn’t ‘deserve’ anything.”
He gave the example of calling a credit card company prior to shopping and asking them to extend an existing line of credit by another $1,000. When that happens, someone doesn’t make $1,000.
“Keep that in mind. It is simply the greater capacity to borrow more money in the future, regardless of the value of your property,” he said.
The U.S. Department of Housing and Urban Development (HUD) also advises advisors — although this also applies to originators — that the line of credit growth is simply “greater access to lending power,” he said.
‘Tax-free’ money
McMinn moved on to another fake call as a mortgage lender.
“Hello, Mr. Moore,” he began. ”The last time we spoke, we discussed reverse mortgage financial planning strategies. One of the main benefits we discussed is that the reverse mortgage offers you tax-free…”
Once again the sound of a whistle rang through the conference room.
This misconception often goes to the root of the language found in some advertisements for the reverse mortgage industry. But there should be a visible asterisk next to any claim of “tax-free cash” or “tax-free money,” Hultquist said.
“It would be OK to say that from my perspective, payouts are not taxed as income – again, I am not a compliance officer or a lawyer – but payouts are not taxed as income in any state,” Hultquist said by way of clarification. “But it’s better to say ‘general’ or ‘typical’ or whatever warning you have, just in case.”
A reverse mortgage itself is not a tax-free financial instrument, he explained. He pointed to a recent move in Florida, which reduced state tax stamps after legislation was signed in May.
“And intangible taxes, depending on who you talk to or in which county in Florida, may be taxed at a higher level,” he added.
“So there are significant taxes that you’re going to pay to get a reverse mortgage, or any mortgage for that matter,” he explained. “Things like immaterial taxes, state taxes – interest on money withdrawn could be taxable. And in rare cases, capital gains taxes may apply. So there aren’t many taxes you pay to get a reverse mortgage, but the CFPB’s main concern is that there are taxes you have to pay after a reverse mortgage, such as property taxes.
The Consumer Financial Protection Bureau (CFPB) has taken action against players in the reverse mortgage industry for not making this more explicit. Advertising “tax-free” money without mentioning the HECM program’s requirement to continue paying property taxes, homeowners insurance and other potential liabilities (such as HOA fees) could be considered misleading, Hultquist explains.
