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HOME EQUITY: A RESOURCE FOR LTC & LTCI

Session 31: February 28, 2006

Session Producer:

Barbara R. Stucki, Ph.D.

Project Manager, Use Your Home to Stay At Home Initiative

National Council on the Aging (NCOA)

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PANEL• Peter Bell, President, National Reverse

Mortgage Lenders Association

• Claude Thau, FSA, MAAA, President, Thau Inc.

• Valerie VanBooven, RN, BSN, PGCM, National Director of Marketing and PR, Next Generation Financial Services

• Jim Mahoney, CEO, Financial Freedom Senior Funding Corporation

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De-MystifyingReverse Mortgages

Peter Bell, President National Reverse Mortgage Lenders

Association

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What is a Reverse Mortgage?

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Reverse Mortgages – The Basics• A loan that allows homeowners age 62+ to convert

home equity into cash while living at home for as long as they want.

• Can receive payments as a lump sum, line of credit, monthly payments (for up to life in the home).

• Funds can be used for any purpose, and are tax-free. • Loan comes due when the (last) borrower moves out,

dies, sells the home, or stays in a nursing home over 12 months.

• Borrowers continue to own the home. They are responsible for repairs, insurance, and taxes.

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Types of Reverse Mortgages• Home Equity Conversion Mortgage

(HECM).– HUD program, insured by FHA.– Represents 90% of the market.

• Cash Account loans offered by Financial Freedom Senior Funding Corporation.– Designed for high worth homes.– Offer loans with no closing costs.

• Fannie Mae Home Keeper loan.

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Consumer Protections• Borrowers can live in the home as long as

they want without making a monthly payment.

• Never owe more than the value of the house at the time of sale or repayment of the loan.

• Must receive counseling from a HUD-approved agency before they can take out a loan.

• Borrowers can cancel the loan for any reason within three business days after closing.

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Using Reverse Mortgages to Pay for

Help at Home

Barbara R. StuckiNational Council on the Aging

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Reverse Mortgage – Fills a Gap

50 60 70 80 90

Age

LTC Insurance Medicaid

Plan Ahead Crisis

Reverse mortgage

Aging in Place

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Reverse mortgage can pay for home care for many years

3.1

6.5

19.8

3.7

8

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Home care

Adult day care

Family care

75 85

Likely duration of funds based on monthly withdrawals from a HECM creditline (years)*

*Estimates based on HECM amount for a $122,790 home and an annual creditline growth rate of 5.36%. Source: NCOA analysis using the AARP reverse mortgage calculator.

$500/month

$1,120/month

$2,160/month

Years

Age of borrower

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NCOA Use Your Home to Stay at Home Initiative

• 2006 Use Your Home to Stay at Home report (www.ncoa.org).

• Consumer booklets on using home equity to age in place (www.ncoa.org and www.nrmla.org).

• Research study funded by ASPE and AoA – Working with MN, WA and the City of LA to find ways to promote the use of reverse mortgages for aging in place.

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Home Equity: A Resource for LTC & LTCi

Claude Thau

President, Thau Inc.

cthau@targetins.com

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RMs and LTCi Have a Lot in Common

• Both are part of LTC Planning.

• Both are funding sources for LTC.

• Both help people to stay in their own home.– Rather than going into NH or ALF.– Rather than moving in with kids.

• But, both are discouraged by Medicaid treatment of the home.

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RMs and LTCi have differences

• RMs are more suitable for the less affluent.

• RMs cost less when interest rates are low; LTCi is less expensive in high interest environments (ignoring opportunity cost).

• RMs structured to be variable in price; LTCi intends level predictable cost.

• RMs are same cost whether treated like cash benefit or reimbursement.

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Can RMs Help Less Affluent People Purchase LTCi?

• Expensive: loan cost + premium cost.

• Risk of inability to pay for LTCi, especially if there is a premium increase.

• Risk needing low level services but cash-poor and, due to LTCi, RM unavailable.

• Could lose house whether or not LTC is eventually needed.

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Can RMs Help the More Affluent Purchase LTCi?

• 60% of those who could qualify for RMs are not candidates for Medicaid.

• Generally don’t need RM to afford LTCi.

• In the past, could take RM and use proceeds to buy LTCi and life insurance that would replace loan.– Now LTCi is more expensive, esp. for singles.– UL less attractive with lower interest rates.

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RM Annuitant Life Expectancy

• Less affluent RM users likely to have shorter average life expectancy; lenders and insurers do very well.

• More affluent RM users likely to have longer average life expectancy and more able to anti-select; lenders and insurers do less well.

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Use of Home Equity as “Safety Valve” for LTCi

• RM: method of dealing with rate increase.

• RM or home sale as way to cover LTC needs exceeding a limited BP.

• Buy LTCi w/lower daily benefit assuming home sale or RM will fund institutional cost.

• Buy longer EP, relying on potential RM or home sale to fund EP.

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CONCLUSIONLTCi and RMs are Complementary• Serve different economic strata.

• Greatest overlap: RM as safety valve or extender of LTCi, not as $ source for LTCi.

• Ability to do both LTCi & RMs can be great positioning; may become more common.

• Deficit Reduction Act of 2005 (DRA05) will help BOTH markets.

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DRA05 Restrictions on Medicaid Planning

• People with >$500K in home equity.– Few people affected.– Most home equity is still exempt.

• Non-trust look-back extended to 5 years.

• Partial months of ineligibility could no longer be waived.

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DRA05 Restrictions on Medicaid Planning

• Penalty period starts at later of transfer or when would otherwise have qualified.

• Income first, requiring assets to be liquidated.

• Balloon annuities are countable.

• State = annuity beneficiary to recover.

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DRA05 Restrictions on Medicaid Planning

• Life estates (transfer house; PV of future rent currently deducted from size of transfer).

• CCRC assets countable if refundable.

• Limit loans, promissory notes, etc., to actuarially sound, no balloon payments and not cancelable by death.

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Medicaid is a Great Program

for Long-Term Care

1. Provides LTC for destitute people.

2. Loans $ so other people don’t have to sell their home to pay for care.

– People can return to their home. – Spouses can stay in the home.

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Medicaid Loans

• Interest-free loans.

• Long-term loans: not repaid on death if spouse, disabled child, child care-giver lives in house.

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Paying back Medicaid*

...

• Federal law requires estate recovery. NOT a permanent exemption.

• Estate recovery intended to provide funds to other needy people

• Recovery from “destitute”

is roundly criticized.* As required by Public Law 104-191

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Positive Medicaid Reform

• Take Medicaid out of the loan business.

• Instead create government-backed private industry loans.

• So people with illiquid assets get a private loan instead of going on Medicaid.

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Advantages of the Private Loan Approach for the Care Recipient

• Dignity: not told that they are on welfare.

• Freedom: use their money as they please.

• Better care: more revenue for providers.

• More competition in the LTC market.– More choice.– Lower private pay fees.

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Advantages of the Private Loan Approach

for Medicaid-Certified Providers• Non-destitute Medicaid recipients

reclassified as “private pay” patients

• Increased income enables:– Higher salaries, hence staff retention.– Better care.

• More attractive to traditional private pay patients

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Advantages of the Private Loan Approach

for non-Certified Providers• Bias toward nursing homes and certified

providers removed.

• Increased consumer control in selecting provider translates into more clients for them.

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Revenue Advantages of the Private Loan Approach for the State• Fewer people on Medicaid.

• Huge savings in:– Medicaid expenditures.– Processing both Medicaid eligibility and

Medicaid expenditures.– Processing estate recovery.

• Increased taxes from providers & staff, insurers, ins. brokers and lenders.

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Other Advantages of the Private Loan Approach for the State

• More consumer choice.

• Financially stronger providers.

• Increased investment in LTC services.

• Improved State income AND reduced expenses.

• = BETTER CARE and MENTALITY

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The New Paradigm Shift In Marketing Senior Services:

Innovation in Reverse Mortgage and LTCi Marketing!

Valerie VanBooven RN, BSN, PGCMNational Director of Marketing and PR for

Next Generation Financial Services a division of 1st Mariner Bank

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The Way Things Were…

• Only certain people were able to write reverse mortgages.

• Referring business away.

• Potential downside risk/benefits.

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The Way Things Are…

• Financial planners and insurance producers can write reverse mortgages.

• They must become a W2 employee of a HUD-approved lender.

• 1st Mariner Bank program.

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Requirements• Complete a 3 day basic training class, pass a

background check and drug screen.

• Meet minimum production requirements.

• Meet annual compliance testing requirements.

• Abide by the rules for marketing and advertising set forth by the bank’s compliance department.

• Follow HUD regulations, including RESPA (Real Estate Settlement Practices Act).

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Case Design Strategies

• Selling more traditional LTCi – Example– Do the right thing for MORE clients.

– Earn commissions on the product and the reverse mortgage.

• Selling more asset based LTCi – Example– Do the right thing for MORE clients.

– Earn commissions on the product and the reverse mortgage.

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Marketing Strategies That Put You in the Spotlight

• Providing a needed community service– Property tax issues and local municipalities.– Home care costs and the reverse mortgage.– The Church Program- What pastors learn in seminary.– Education through radio and audio CD.

• Establishing credibility and trust

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Conclusions• It is possible to write reverse mortgages without

referring the business away. • Using the reverse mortgage as a planning tool is a

new and innovative way to market your services. • Long-term care planning AND crisis management can

be addressed- you can help almost anyone. • Presenting the reverse mortgage concept as a

community service is a valuable marketing strategy. • Programs that include educating church leaders and

marketing strategies like the radio show program build trust and credibility.

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Comments and Perspectives

Jim Mahoney, CEO

Financial Freedom Senior Funding Corporation

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Panel Discussion

with

Q&A