And now, joining my colleague, Roger Crombie, by jumping into the fray with both feet! As a qualified wealth manager, I have seen longevity and insufficient retirement funding problems more frequently than anyone realises except for those agencies working directly with senior citizens.When providing comprehensive financial solutions for clients, all things that can impact a client’s financial profile, including estate planning (and reverse mortgages surely impact estate planning) must analysed and weighted relative to the cost benefit, both on a current and projected lifestyle basis.

Joe Homeowner is 78 years young, his wife Rochelle is 75. While they used to be able to get by on their Social Insurance benefits and interest on savings, now inflation, and health costs are whittling their principal down at an alarming rate.

Joe is adamant that they will not, ever, be a financial burden to their children, but is increasingly anxious about their future. Their home, estimated worth about $700,000 is debt-free, but they are not eligible for a bank loan because neither they, nor their children, have the extra income to cover loan payments.

They could sell the home, but where would they live then? A reverse mortgage may be a good way to get the funds they need to balance their budget. See their total cost chart:

Reverse mortgages were created in 1987 by HUD (Department of Housing and Urban Development) in the United States. In 1990, 157 home equity conversion loans (the formal name) were made — by 2005 the number skyrocketed to 43,000!

My biggest critic and supporter often takes me to task for citing US sources — feeling that readers want to hear about Bermudian issues. Truth is the United States is still the most aggressive and innovative investment product generator. Australia, who implemented reverse mortgages in 2003, calls them Equity UnLock Loans for Seniors.

A reverse mortgage provides funds to seniors, either in a lump sum or over time, using the equity in their homes as collateral. Unlike traditional mortgages or equity loans, which borrowers are required to repay, reverse mortgages require no monthly repayments. The total loan balance, including accumulated interest, is repaid when the home is sold or the last surviving borrower dies.

What are the positives?

[bul] A dignified way to continue to live by leveraging a client’s most valuable asset.

[bul] The client can continue to reside in his or her own home.

[bul] A lump sum advance can pay off an existing mortgage, reducing monthly cash requirements.

[bul] Older clients can receive larger advances (due to shorter remaining life expectancy calculations).

[bul] Under HUD mandatory guidelines, all loan applicants must receive third-party financial counseling by a HUD-approved financial advisor. Note that the lending institution cannot provide this service due to conflict of interest.

[bul] The client remains in control of his/her financial life.

Here are some of the negatives:

Lump sum payment — Oprah Winfrey had it right — 70 percent of individuals who receive sudden wealth spend it all in less than three years. You can bet (and win) that everyone even remotely connected to Joe and Rochelle knows they have decided on the lump sum option.

They will be under heavy emotional pressure from their family, investment brokers, start-up community business friends and travelling salesmen to invest (or loan) this money for a greater return than the reverse mortgage interest rate.

Achieving a greater than 8 percent rate of return automatically means assuming significant investment risk: you may lose significant capital when markets crash (as they are prone to do from time to time); family members default on their loans (because they don’t consider them loans, but prepayments on their entitled inheritance); small businesses have high bankruptcy statistics; friends withdraw their friendship and support. In short order, the couple is bereft, no money now for survival, and no home in the future.

Property values depreciate — the market value of their home drops considerably below the accumulated debt (and the original loan to value equation.) whether through sheer neglect of maintaining the property, or a local recessionary economic environment reducing the overall local market property values, the lending institution considers making a capital call on the couple (asking for some of the money back), or drastically reducing the future monthly payments to them.

Granny in the garage, or on the street? The clients run out of money long before passing. The reader audience is not privy to the demographic information that I have learned from clients over the years, both while practising in the United States and in Bermuda.

Here are some startling facts: We are and our parents are living longer than ever before — children in the their late sixties and seventies still have one or two parents alive in their late nineties, and over 100 years old.

At passing, the remaining family members cannot afford to buy back the family home. In the words of my partner and friend, Julie Hendrickson, why do you think there are so many abandoned properties in Bermuda? Because families cannot even agree on how to pay for a parents’ burial service, let alone the biggest purchase in a life. One thing is absolutely certain. The ramifications of this innovative real estate concept need to be absolutely clearly understood — by all parties.

And having said all that, the entire debate may be moot as it is interesting to note that all lending institutions on the island have remained silent as to whether they intend to enter this line of business. Stay tuned in a couple of weeks for more on this highly controversial topic.

Sources: American Institute of Certified Public Accountants “Journal of Accountancy” July 2006. The author is a member of the AICPA Tax and Financial Planning Division.

Martha Harris Myron CPA/PFS CFP|0xae| is a dual citizen (Bermudian/US). She is a Senior Relationship Manager at Argus Financial Limited specialising in wealth management and comprehensive financial solutions for clients considering lifestyle transitions and rewarding retirements. Confidential email can be directed to marthamyronnorthrock.bm or 294-5709

The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific investment or financial planning advice, nor as a recommendation to buy/ sell any investment product. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.