Can You Use Your HECM for a Standby Letter of Credit? With John Thompson

0:02 So often I see customers who are worth a lot of money cuz they have tremendous equity in their homes and need some cash short-term maybe for some emergency or important issue or opportunity they can buy something with some quick cash. You can use your reverse mortgage or HECM as a standby line of credit. Today we're really lucky to have a professional who's used this and other advanced reverse mortgage strategies, John Thompson of Simple Mortgage. John, thanks for joining us again on the podcast.

0:30 You're very welcome, Bill. Happy to be here. One of the experts and you're certified reverse mortgage professional, how does somebody use a reverse mortgage and use it for either for the opportunity of a standby line of credit or to avoid any problems with not having one?

0:46 Sure. So thanks much. So let's talk about what are buffer assets for people. So when you talk to financial advisors, professionals, and even in our own worlds, right? We have this idea that we want to have some liquidity a reserve as it were, right? So when you buy your first home, you know, you don't typically want to close on your last dime. You want to have some money left over for other stuff in life's little emergencies. You have car problems, kids, family, all that kind of good stuff. So the same idea exists as you build wealth over time and you maybe move to your pre-retirement or retirement years. Right, so a buffer asset is just that. It's a pile of money somewhere that you can get to if there are as you said opportunities or if there's some kind of risky kind of thing that comes along that creates a challenge you need to get to immediate liquidity. And a buffer asset could be simply, you know, a bunch of money sitting in a short-term money market account, right? That would be considered a buffer asset. You could you know, have buffer asset that might be it could be comic books, right? That you could liquidate on the open market right quickly. It could really be anything that can be converted to cash in a relatively short amount of time. Now home equity tends to be the largest asset for a lot of people, especially you know, in our local markets here in Southern California, but it's not liquid, right? You can't get to that money unless you sell the home, which could take 30, 60, 90 days. You got to pay commissions. You could do a refinance. You could set up, you know, lines of credit or other things like that. So, the reverse mortgage can also act as a buffer, right? So, once this is established, you know, it becomes a buffer asset you can draw from. It's just a line of credit. It has some unique features which we can talk about as well. But, I want to kind of just kind of lay out who might think about creating this standby line of credit as kind of a vola- I'm going to call it a volatility buffer for lack of a better word, right? Cuz I do think that you know, you want to have access to liquidity when there's a lot of volatility in the markets, and I'm talking about equity markets, the stock market, crypto, anything, right? There's been a

2:48 Lot of volatility in a lot of different things, including real estate lately. So, who are these folks that might be thinking about this? You know, they're in their 60s, maybe mid-60s. You know, they're still they're still investing. They're right, they're they have money. They're mass affluent. They have money in the stock market, and they're doing things. Maybe their portfolio's somewhere balanced 60/40, 60% stocks, 40% bonds, right? Maybe they've got, you know, 800 to maybe $2 million in IRAs or other assets. So, I mean, their net worth is pretty significant. So, you kind of plan it out. They have home equity, right? So, maybe their home is worth $2 million bucks, and they owe a mortgage of Maybe they don't owe a mortgage, or they only owe a small amount of money on it, right? So, that kind of stuff. But, they're planners. They're kind of warriors. They tend to have an advisor, that kind of stuff. And they're concerned that if the stock market is down, they don't want to pull money out of that when the stock market is down. That is the worst time to pull money out of any kind of marketplaces when the market is down, right? So, now you're locking in losses. You don't have time for the market to kind of recover. So, they can establish this reverse mortgage standby line of credit, and set it up and that money's just sitting there. And it grows over time. You do not pay interest on it other than the fees to set it up initially which you can pay in cash or you can pay it down over time. And so it gives a line of credit, right? And so you have access and let's just call it half a million dollars. You have a half a million dollar line of credit and maybe you'll have a balance of $30,000 from some from some initial fees.

4:17 And that's it. It's just sitting there. That $470,000 is sitting there available for you to pull for opportunity or in case there's, you know, a challenge or something else that comes along. You need that liquidity for the for the time being. So that's essentially what it is, creating a buffer asset out of your home equity with a reverse mortgage for any purpose you can think of.

4:36 What kind of opportunities have you seen customers use cuz it comes to mind for me personally, you know, a real estate deal came across my desk last year and you know, I needed some cash and you know, I just, you know, paid taxes. I just put in my retirement fund money that got locked up there. I didn't want to sell stocks, but I happen to have some cash available and I basically tripled my money in a reasonable period of time. It was a fantastic deal. I happen to have, in this case, about $100,000 that was liquid. Had I not, I'm not sure what I would have done. What examples that you see are people who use this or prepared to use this? What are they what are they preparing for?

5:11 Yeah, you know, so it's all over the place. It tends to be this will maybe drift in some other strategies. It can be for investment. I've seen people buy second homes with it, right? So they'll buy a second home. I've had clients that have bought you know, maybe these are considered frivolous things, but they want to have a boat. They have a home maybe in the mountains, right? And they want to have a boat near a lake and those kind of things. And so, you know, and they don't necessarily want to attach a payment to it, but they want to have their grandkids come or their family come and have that. So, we've seen clients do those kind of things. We've seen the other side of it where it's paying for in-home care. Now, in-home care and long-term care is a whole different kind of strategy, but that buffer asset sitting there can act as that hedge against the risk and in significant costs of in-home care and long-term care. So, those are the primary uses we see of it. And some of them are beneficial and some are protection.

6:09 And I've seen it used where people can write a check and for cash or something and then later set the financing later, like we talked about a second home. If you can buy a second home for cash in this market,

6:19 Yep. There's some really good deals. You may want to get a loan, but you can always refinance it 6 months down the road when you have more time, when the market's recovered, maybe it's out of season, you can refinance it when it's in season. So, it just seems to me like these are opportunities. You know, I think I literally wrote a book. I know you did. I got it and read it. Borrow smart and repay smart. Yeah. And you talk about I think more sophisticated uses. Reverse mortgage has traditionally been thought of it as like a loan of last resort. This standby line of credit is one example of an advanced strategy. Give me another example of an advanced strategy that people might think of a reverse mortgage that is beneficial or some reason why you see some of your customers getting the loans.

7:01 Well, you kind of mentioned, you know, let's talk about using it for a purchase now, right? So, and by just a kind of put a button hole in that last thing that you mentioned where if someone could use it to buy the second home and then refinance it into a traditional mortgage, now you get back your let's just call it three or four hundred thousand dollars, which you put back into your standby line of credit. So, you still have the money, right? This is a really unique feature of Well, any line of credit, right? You could do it with a traditional home equity line of credit as well. But now the money's back in there and it's available to you again. So, just wanted to kind of put a button on that. So, here's another situation that we see pretty often, right? So, someone is in their you know, their mid-60s, you know, maybe early 70s. They're empty nesters. They have a home worth a couple million bucks. You know, and they want to move to a retirement community or someplace close to their kids or grandkids. And so, they're going to be considered as a downsize. Now, it may not always be a downsize in price, but maybe it's a downsize from the large, you know, four-bedroom home in the valley. Now, they want to go someplace closer to the beach and, you know, it's the same price, but it's smaller or those kind of just in size. And they would they're tempted to pay cash, right? And how often have you heard this before, right? We sell the house and pay cash. Good. This feels like the way to do it. And quite frankly,

8:16 You know, I hate to say it, but it's encouraged in many ways by the larger real estate community because that is easier. And they say, "Hey, you're selling a house, you're going to take all that home equity and just pay cash for the next house." Happens all the time, very common. But, you know, the next step might be, well, what if we didn't? What if we used the reverse for purchase program to actually, you know, not pay all the cash into the home? And maybe we set aside three or $400,000, finance that with the reverse for purchase mortgage. I've no payment going forward, no required payment going forward. You could make a payment, but no required payment. And you get to add that three or $400,000 into your other assets. So, now you've created another buffer. You've created the opportunity for more asset growth over time, you know, with your advisor, and so forth. And so on and so on. So, I mean, it's a really interesting approach. We could also combine that with the idea that if you put a little bit more money down, you qualify for you now are creating that line of credit as well. Again, a little bit more advanced, but let's say you qualify for $400,000 and you end up only borrowing $300,000, that $100,000 becomes the line of credit, which now allows a volatility buffer at the same time. So, I think that's a fun strategy that people really should look at. It needs coordination with other advisors. You need a good real estate professional, you need your potential CPA because you know about capital gains as well. You know, and of course an advisor to help you manage the money over time.

9:48 I think one of the issues, you know, it's interesting that investors don't have a compunction from using a margin to buy an investment, right? If you have a $100,000 investment and companies will lend you money at very low rates against your securities, they're secured by your securities unless it goes down, there's a margin call. That's like considered almost like a sophisticated trading technique. Versus if you tell wealth manager that you're going to borrow money against your house you're thought of as some sort of a loser because your house isn't free and clear, but in reality it does create more assets for you to consider investing in other things. The problem is now you have a it's a higher cost of funds. But over time if you can arbitrage and get better return for your money than you're paying, you come out ahead.

10:38 Yeah. For sure. And this is where you need, you know, the professional to help you analyze it over time. Right? As to what makes sense cuz if you are going to consider the arbitrage, which simply said is earning more on your money than you're paying for the offset debt, right? If you're borrowing at 5% you can earn 6 then that's arbitrage and that's what every financial institution in the entire world over the history time has always done is arbitrage. That's how they make money. And 1 or 2 or 3% spreads over, you know, lots and lots of money is how the wealthy become wealthier. So yeah, I think you're spot-on.

11:19 I'm working on that. You know, I was offered during COVID, SBA offered me, you know, it was like a loan you could apply for. I applied for it. Not the not the PPL loans, but like a regular SBA loan. And you know, I thought I got like 25 or 50,000. And they offered me 200,000 dollars at 3%. I said, "Sure, I'll take it all." And you know, and I invested it in things that yield me more than that return. And then I have other money where you know, unique to my business, I have a chance to get a really good return about 30% on certain types of high-risk loans, but I know the business, I know the people making the loans, it helps my business. And so another case where maybe I might borrow money against my house. I didn't have to in this case. Invest there because they arbitrage and so I would say any business person should look at are there ways places where you could deploy capital and get a better return? Then why would you want to keep the equity in your house when you can get your money to work for you and take a little bit more time off?

12:14 Yeah. And we kind of teach this strategy. We call it the tale of two tellers. Right? So people literally will walk in. This is when you actually walked in a bank. No one walks in a bank anymore. But you literally could walk in a bank, you deposit your, you know, your money on one side of the of the teller, right? And they're going to pay you, let's call it 2% on your CD or whatever it might be. And then literally the next day you come back and you walk the other side of the bank and you borrow money on a credit card or a line of credit or a mortgage or whatever it is. And that's 6%. And so that 4% spread is what's making the bank money. You can literally do it yourself. Right? You can become both sides of that equation, right? So how do how do you become the bank by using your home asset as the as the source of funding for banks. Now that being said, you know, I these are advanced strategies. We're not telling people to go to this. There's risk involved, you need to understand it. And I actually personally believe that there are times when you the arbitrage is not important, right? So I know in my own case, I'm upside down on borrowing. I've borrowed and earned less. But you know, I'm self-employed like you are, Bill, and to me liquidity is important. I'm willing to give up a little bit of return in order to know that I have liquidity Yeah. You know, literally sitting in the bank. So, that's me personally. That's not for everyone, but I'm just pointing out that it's not always about the arbitrage.

13:38 And again, I know I know people who have businesses where they're borrowing money to buy property, buy equipment, financing it. And they might want to finance it in the short run. Why would you pay the bank, you know, 8 9 10% or more on some of these things that you know, that you might say, "Well, we're going to pay it off over 2 3 years." Well, pay yourself that money.

13:55 Yeah. Not why not And you can do that. There's a way you can structure loans for market value. You get a quote from another party. They say, you know, they're an institution. They would do it at that rate. Book yourself the same rate. And put that money in your pocket. So, I definitely think that's kind of a important thing. What are the You know, all these sophisticated strategies, I think, you know, behind all of them is the importance of planning. We Meaning, nobody's saying watch a YouTube video, take a loan against your house, and deploy the capital.

14:23 Of course. I'm not saying I enjoy people watching my videos. I don't think they're going to take that to heart. But, more it's really sit down with a professional. And so, talk a little bit about how you work with wealth planners or other financial professionals so that you can help the customer get an integrated holistic plan rather than just a one-off, you know, product search.

14:42 Thank you. So, yeah, we The our primary market is working with financial professionals. We also work with some great, you know, real estate professionals as well. And estate planners. But, you know, the financial space is kind of where we feel most comfortable. We have we talk a lot of the same language. And it goes both ways. So, sometimes the clients are calling us after being suggested by, you know, a financial advisor and said, you know, "Go talk to us to them about liability management." It could be anything from buying a home to second home to reverse mortgage anywhere kind of in there. More often, quite frankly, it's consumers who we're talking to that we've been referred by our own clients or other professionals. And you know, they need help. So, I'll get and they may be having an advisor, but they may not talk to their advisor about this stuff. I'll tell you So, a dreams and gold call I had with a client last week, you know, lost a job, has some assets, has a financial planner, is looking for some short-term, you know, cash to get through a period of maybe 6 to 12 months in for before she gets back on her feet and gets a job and so forth and there's a reverse mortgage second that's going to fit in her case. And I laid out sort of the plan. I said, "I need to talk to your advisor." Right? We got to come alongside that advisor to make sure we don't mess up whatever his plans are. Is it there's annuities in place and 401K and other kind of things that are also sources of potential funding for her.

16:04 But the house could be the potential source of funding as well. So, we want to make sure these things are aligned together. And that applies to almost every situation. We're trying to either have a client, you know, get with an advisor. We would we'd much rather coordinate these strategies with other professionals so we're on the same page moving forward. You can do things so quickly now with AI. I mean, I can put a plan together in you know, 5 minutes and my experience tells me what the right outcome potentially is. But then we need the human element to talk to other humans to say, "Is this the best solution for the human being we're working with, the client?"

16:43 It seems like so much of business, you know, you and I previously spoken about AI and how what tremendous tools it has. Absolutely.

16:52 And yet it still requires a human being to review the out the output and make sure it's appropriate. Yeah. So, I find myself more of more of an editor and a overseer than I do using it to replace myself. And the second part is you need humans to integrate different disciplines. In your case, with wealth management people, real estate agents, bankers, whoever else is involved in the transaction. And so, our roles become more about those higher level managing the task rather than rolling up the sleeve. And so, talk a bit about how you see AI helping you both help your customers, but at the same time requiring you to be involved in the process to be more effective.

17:33 Yeah. Thanks. You know, so in the in the mortgage space, you know, AI is getting integrated into process all the way from the front end through closing and so forth. You know, underwriting at a certain level is now happening. Fannie Mae's actually already buying the first AI underwritten mortgages in a in a very it's a fairly narrow window of what they're going to do, but that's already started. And I think it's fascinating. And all it really is going to do is I think free up more time for professionals to spend more time with their clients. With their humans. So the mortgage process I think will become more AI driven, you know, over the next quite pretty short amount of time if you if I'm being honest. It could be a few months, it could be, you know, less than a year, but it's not three or four years, it's now. On the other side of that is the work that we do with AI. So, you know, we have built you know, you mentioned the book, the Bar Smart Be Pay Smart book. We built our own AI engine our own that has been fed all the experience of what we've learned in the Certified Liability Advisor designation, the CRMP designation, the Bar Smart stuff, education over 20 years of lots of loan officers and financial professionals going through the this curriculum. And it's all been fed into that engine. And so, we put our case studies in there. And we, you know, and if there's no personally identifiable information, right? We're talking about, you know, Bob and Suzy, we're not talking about, you know, the specific people or home address or anything.

19:07 And it can generate things you may or may not have thought about. It's fascinating to see it happen, Bill. I mean, it's I think it's changed so much that even in the last 90 days, if the output's gone from us prompting to AI suggesting, you know, and finding things that and again, we have to validate the output, right? The best part of it is to get an idea, come back and go, "Okay, that's pretty cool." You know, but what did we miss? And what is being missed? And what's the potential risk? Because AI is just that, it doesn't understand the human element and what keeps people up at night. I will tell you this, that more and more consumers are putting their own plans into AI engines and asking for suggestions, and then validating those suggestions. It's starting to happen to us, you know, on a you know, pretty regular basis. Or they're taking a plan we might give them and putting into an AI engine and asking for feedback. Now, there's some interesting things about that, but I we love it. We've rebuilt some of our front-end systems, it's got a lot more efficient. Again, the entire purpose is not like you said, we're not replacing ourselves, we are enhancing our ability to help more people and maybe help them at a deeper level.

20:21 Yeah, I think that's the key is how can I how can I be a better real estate agent? How can you be a better reverse mortgage professional and use these tools to reach out more and touch more? And certainly the AI can do a lot of what I can do, but it can't do the last 10, 20% and that's the part that's most valuable. And so, we'll make sure we won't get lazy, but we want to be empowered by this rather than turning over to us.

20:42 Yeah. So, okay, so let's talk last day, I'm a real estate professional, you're a real estate professional, we've done some business back and forth. Talk a little bit about specifically how you interact with real estate professionals and help them in their business and how they can help you with your business. What can we do together to help our customers be more successful?

21:02 You know, good question. You know, I think one of the ways and this might not seem super obvious, but one of the ways I'm helping, you know, our real estate partners is I feel understand a little bit more about the AI information. I think that in many cases, a lot of real estate professionals have been a little slow to embrace some of the AI tools out there. And the realization that consumers are already using these tools. Like I've taught a handful of classes around AI and I hate to say it. I went in with the assumption that you know, the Realtors® that were at least in that room were kind of already using AI at some level and the reality was not that. It was it was a little surprising. So that's just one of the ways we're trying to give them more education and more outreach specifically around the reverse mortgage. You know, we've had some of the some of the best Realtors® I've worked with know that sometimes selling the home may or may not be the right solution. But maybe someone's having a cash flow issue. They're having a buffer, right? The volatility issue. They just don't quite know and I think one of the biggest fears that people have is that they don't talk about often enough is am I going to run out of money? Is there enough? If I live to 87 or 92 or whatever number it is can I make it, right? With all the unknowns we have in front of us.

22:21 And again, the real estate is the largest asset for almost all of them. And so I encourage real estate professionals to just pause for a moment. Would a reverse solve this issue here? And again, you're talking yourself out of a sale. But if it does result in that being the right solution, you know, that's a client that's you've done an amazing thing for them and I believe the universe will bring it back to you in other ways. And sometimes it isn't. Sometimes they talk to me and then I go, "You know what? You should sell." Right? And downsize and now you have, you know, validation from what you're already suggesting, which is another good thing as well. So that's just a couple of the ways that we work with the Realtors®.

23:00 You know, what? My first coach in business was Zig Ziglar and he used to say, you can have anything you want in life if you help enough other people get what they want. And it's really worked out. You know, I did this podcast. I never really had any plan for how it worked out for business for me and I've had mortgage professionals and homeowners reach out to me as a result of it and it's been great and I enjoy it, but I do think this is a product that's widely utilized. I think too often people see the 800 number and call center and then there's are you know, disappointed to find out they're not going to really get any real help. And that's why I'm really glad to talk to you, John. I you've been a real inspiration and resource for me building this podcast reaching out to great professionals like you and people in your team and your colleagues because I think that the core of this is that the homeowner and the wealth manager need a great professional to make this tool work properly. And so I just can't thank you enough for the time you spent. For those who want to get more John Thompson in their life, you want to talk about mortgages, you can go online smpomortgage.com. It's simple, but we're missing there and I So it's simple is how you remember how to spell properly.

24:07 Simple Yeah, it's missing me. Yeah, that's right. And like one of the things we always say, it's simple but not easy, right? So I mean, you know, Exactly. Simple mortgage 66583163 John Thompson or if you are watching this and can't write down, feel free to reach out to me. I'd be more glad to make a connection. John, thank you as always for raising the standards of the business as well as your friendship and support for our podcast. I really appreciate your time today.

24:28 Thank you, Bill. Okay, well, that is Reverse Mortgage Podcast. We get together every week with a new episode usually with professionals though not always as strong and accomplished as John is. But look for new episode every week. Please like or subscribe if you like this. Reach out if I can help in any way, especially if I have a product Reverse Mortgage SOS which is where the mortgage being paid off at the end and the family is not clear what the path is. They didn't work with a professional up front. And so now they need some help. And that's where I can help them if they need a probate or make the proper introduction. So if I can help anyway, please reach out at Bill Gross Probate on social media. As always, make today your best day ever.