Reverse Mortgages and Roth IRAs, with Anthony Byrnes

0:01 Welcome to the Reverse Mortgage Podcast. You know, I often refer to the Reverse Mortgage as a Swiss Army knife of financial products. And I say that as a positive because it has so many different tools or features. And I was taken to task on a prior episode that I was denigrating the product because it's good at certain things. And our current guest, Anthony Burns, when he got ready for this call, mentioned that the Reverse Mortgage has a role to play in doing with your Roth IRA. And I thought, "Wow, I don't know enough about Roth IRAs to begin with." So, Anthony, how does Reverse Mortgage even enter the space of talking about a Roth IRA?

0:37 So, two different ways, actually. If you're familiar at all with Wade Pfau, he's a retirement planning guru from the American College of Financial Services. And he often recommends that one of the best applications for Reverse Mortgages is to use it to fund what he calls retirement efficiencies. So, what would a retirement efficiency be? The taxes associated with a Roth conversion. Or maybe premiums associated with an existing long-term care plan. In this case, of course, discussing Roth strategies, he suggests open up a reverse line of credit, a HECM maybe specifically, and use that to fund the taxes associated with a Roth conversion. And of course, the idea of a Roth is that the benefit lies in cutting the IRS out as a partner as early on as possible. It reduces required minimum distributions later on in life. And it also just allows you to grow your funds as your own funds without having the IRS partner up with you on the future growth. There are also plans or also benefits associated with having the Roth as a legacy. So, leaving it to heirs and having no tax burden be put on the heirs is another huge reason why people will switch to a Roth. But one way that he discusses using it, Wade Pfau that is to take this product and use it to fund those conversions.

2:01 There is, however, a far more interesting strategy in the offing with this product. And you'll have to indulge me a little bit because it get it can get a little bit complex, but I'll do my best to make it as simple as possible. Most people choose not to make payments associated with the reverse line of credit. A lot of people will take it simply because it offers them the flexibility of not having to make that payment. Well, what's interesting about the reverse mortgage is that interest on a reverse mortgage and the mortgage insurance is as deductible on a reverse loan as it is on a traditional loan. Here's the difference. On a traditional loan, every year we probably take a standard deduction and that standard deduction these days is hovering on either side of 30,000 depending on whether you're married or single. And so even though that mortgage interest is deductible, you don't really see the benefit of it. However, where the reverse really has a superpower is that you can choose when to make payments to your reverse mortgage. And so now imagine a scenario hypothetically where somebody takes a $300,000 reverse mortgage to pay off an existing an existing loan that was used to acquire the property because the one caveat here is in order for it to be deductible, it has to meet the IRS rules for deductibility, meaning that it was either used to purchase the property or to make significant improvements to the property. So assuming that condition or those conditions have been met, now you take this $300,000 balance and maybe over a 10-year or 12-year period of time it accrues to $600,000.

3:45 Well, if you have tax-deferred accounts, right? Your IRAs or your 401(k)s, you can take a distribution in that scenario amounting to $300,000. That distribution is going to trigger the custodian to send you a 1099, which of course is a massive tax burden for you. But by applying those funds to your reverse line of credit, you create a 1098 in an equal amount, and the two of them can wash. So now you've distributed $300,000 from a tax-deferred vehicle, and you've done it without any tax liability.

4:25 Tax deductible. Right. Wow. Wow. Okay. So that's Well, you're not

4:34 I've seen the distribution, which is might be the Roth IRA conversion as a distribution of sorts, right? That's what you're suggesting. Yes. Exact Well, now here's the thing. You could take it one step further. When you apply that $300,000 in funds to your reverse line of credit, because your line of credit is a living, breathing line of credit, you can take those funds right back out

4:57 And convert them into a Roth. So now you've taken pre-tax dollars that save that you saved pre-tax, it grew pre-tax, you've converted it without a tax liability in this scenario, and then you could pull it back out of the line of credit and put it into your Roth conversion, and now you've done a full Roth conversion with no tax liability, which of course provides tremendous just to you, but to your heirs.

5:24 Right. Now, these are Look, I'm not a whiz at finances. I'm pretty good at real estate, real estate investments, and the business, but most these concepts are beyond my ability to really understand without getting professional assistance personally, and I don't really discuss them with customers. You're verse You're a reverse mortgage specialist. Let's help out. How does this information get from you to your prospective borrower? Are you working with financial planners? Are you working with wealth managers? Are you working with accountants? What's the process look like? I don't imagine you're just getting a customer to walk in and go, "Oh, yeah, great. I'll go ahead and do my Roth conversion and stuff like that." Cuz there's a whole plan probably behind that person's finances.

6:09 No, you're 100% right. So, what we do is we reach out and one of the big things that we do as a company is we've taken on this initiative of having these discussions in a continuing education forum. So, we are providing continuing education to accountants in some areas, to real estate agents in some areas, nationally to certified financial planners, RICPs, et cetera. And we'll bring everybody into a room and have a discussion that really takes the product from a 30,000 foot view right down to very granular and specific case studies. We show them how it applies, how it's applied to people that we've actually worked with, and give them all the nitty-gritty on how it works. And the visuals that go along with the presentation are everything in helping people to digest what it is and how it works.

6:56 So, is this something that you do yourself? Or do you have resources within your company? I know you guys have a large reverse mortgage team. Is it something you have resources that you bring in? Or are you the person who's doing these presentations?

7:12 I do it myself. So, which isn't to say that I do it everywhere myself, but I'm personally licensed in 13 states. And so, where I can work directly with a consumer and their financial advisor or accountant, I will do that. However, we do, as you mentioned, have a whole team of people. And with those people, we're licensed in 50 states plus the plus the District of Columbia. So, we've got everything covered.

7:36 You know, it I launched this podcast about a year ago on the thesis that we as an industry should be doing 10 times the number of reverse mortgages that we are. Just based on as a real estate agent, understanding that cash buyers, if they're old enough to qualify, 62 to 65, should either do use a reverse mortgage instead of all their cash or a line of credit at a minimum to preserve the ability to get the cash back. As well as people owning houses free and clear should all have a reverse mortgage and or at a minimum line of credit or at least should look at the product. At least at a minimum. And yet, you know, this product was initially done for low-income, desperate situations. That was the old 1.0 version. Now the new version is so much more powerful, so much more sophisticated. But the problem is I believe the people you're talking to, wealth planners, estate planning attorneys, accountants, like they're so sophisticated that they know they know it was a bad product 20 years ago. What they don't know are these sophisticated strategies. So, what do you do to kind of break down that stigma? Because this is a very powerful tool that everybody should at least look at if you have the appropriate equity and you're of the right age. They should at least look at it and say, "No, it's not for me." Or it doesn't make sense economically. But at least that much. So, what do you do to break down that stigma?

9:00 So, it's a challenge. As you pointed out, it's something that we deal with on an ongoing basis. In fact, I probably no less than a dozen times a week I'll speak to somebody new and explain to them that the bank doesn't take your house. They think that you're trading your house in order for whatever in order to get whatever financial security the reverse offers. Not, you know, obviously not the case. And so, really our approach has been an education-forward approach. Let's go out, have conversations with people, keep them open to discussion forums, criticism, and just have the conversation with people. And the more conversations we have, I will tell you that when we do these continuing education seminars, it's really a refreshing thing to see the light bulbs going on over people's heads. And they see, "Hey, this isn't just a last resort." And listen, for what it's worth, it plays well as a last resort. There's no doubt about that. It would play better at maybe a couple of stops short of a last resort, but as a planning tool, it has some really fantastic implications.

10:03 Some unparalleled implications in the world of real estate finance. Yeah, and to your point, for the purchase scenario, if you are of age, right? If you're age eligible for a HECM, meaning 62 years or older, and you have the funds to create enough equity in a purchase transaction, I would I would say very boldly, you have to do a reverse mortgage in that scenario. There Prove me Prove to me that there's a better way to do it. I think you'd have a real challenge finding a way to prove me wrong on this one. It has so many benefits.

10:41 Well, you'd have to assume that your return for investments would be less than the rate of the interest for starters. Right? But no financial planner's ever going to say that cuz they all assume a higher rate when they put your plan together. So, to me, that's the starting point of it can't be. And I just share with you what launched this podcast was I was talking to a reverse mortgage originator on another forum. And I at the time was considering buying a home in Florida. I was considering moving my business there for tax reasons, not selling our house here in Los Angeles. My wife's here, our grandkids are here, so that so that was kind of complicated. And I was And I had cash, and I was going, "Well, I could buy about $500,000 cash. What can you get? Not much." And somebody And the And the reverse mortgage originator said, "Well, why don't you get a reverse mortgage, and you could get it maybe 800 850?" I said, "What?" He said, "Yeah, you know, if you have 500, you can get a reverse, and" And I said, "Well, I don't need another payment. No, you don't have to make the payment out if you don't want to. You can. And I'm like how does that work? I'm a real estate agent. I was in the business at that time 38 years. I've done a ton of business. I didn't know anything about the power of buying for cash and for sure either you can buy more at no payment or you can conserve some of your cash and not make it as painful to write the check.

11:59 That's exactly right. So, you know, you started earlier on talking about the economic implications of doing it, right? Like, well, okay, you're preserving liquid liquidity in some amount and if your advisor can generate the same return of interest as you're paying on the money, then it winds up being the same. But there are other implications that go beyond the economics of it, right? Which is maybe you're maybe you're living in a two-story home and that's becoming untenable for you at an advanced age. And you feel like you're trapped in that home. You feel like a 55 and older community might provide the single-story living you're looking for, all of the amenities, a sense of community with peers, but you can't get to it because it feels out of reach from a price perspective. Now you look at a reverse mortgage and how it enables you to leverage that purchase power and it's a game changer for that person in far more than economic ways. And maybe it's bringing you closer to grandkids. There are so many other implications associated with using this strategy. It just provides optionality in a way that other programs can't.

13:06 Right. And I think that's why I've tried to put evangelize this product to real estate agents and attorneys to say just look at your individual customer's case. Don't worry about is it a good product for the rest of the country or not. Really, who cares? If you can buy a property or a better property or have less expenses or have a better retirement by using this product, look at your situation and run through that. It seems to me then the key is to have a relationship with somebody like you who's going to be willing to sit down and ask me the question so I can, you know, provide the scenario by which you can make an informed decision. So, let's talk about what does that look like? Meaning, how does somebody come to you and then how do they go from this is an interesting concept to, oh, mathematically this works for me.

13:54 I and again, I'm going to have to harp on the education. Right? So, when somebody comes my way whether from a financial advisor, a real estate professional, or even just somewhere through my sphere of influence, it always starts with asking a lot of questions. You have to get to know the client and know what their specific scenario is because you can't custom tailor anything for them if you don't understand where they're coming from. Another part that we'll go through with them is we'll look at the alternatives. So, I don't I don't just say, hey, this reverse fits you so let's go with it. We're going to see how does selling your home and downsizing fit you. And maybe that's a better fit for you or maybe traditional financing is a better option for you. And I think that the reverse mortgage industry as a whole can benefit from that level of transparency and giving somebody a really holistic approach to what their best scenario is so that they can help them determine what makes the most sense long-term.

14:49 I think one of the other areas that's underserved with reverse mortgage potential is long-term care where oftentimes people say, I can't afford it. And they can't given the current, you know, portfolio and their current maybe social security income or whatever income they have. But the reverse mortgage can be a tool used to fund insurance and or long-term care. Now, that's a different segment of the marketplace. But it seems to me that having that feature available is a just another reason why somebody should have a reverse mortgage step in cash for a house.

15:23 Yeah, a long-term care has become a real hot-button issue for us in the reverse world. You know, people generally fit into three different categories. First of all, almost everybody should have some protection against long-term care expenses, right? And the saying is if you can't get a long-term care policy, you need to at least have a long-term care plan. And I believe that the reverse line of credit provides a long-term care plan in a way that few other products could. But when you look at if you start segmenting the market, you have people who can afford long-term care, can qualify for long-term care, and are willing to pay for it. Then you have people who can't qualify for it. And what do they do? Or you have people who can qualify for it, but they don't want to make those premium payments. And so, the reverse line of credit is a really solid alternative solution to a long-term care policy.

16:21 It definitely One of the areas that probably get into the space was kind of the negative publicity also comes from the foreclosures when the borrowers pass.

16:34 Now, I would say there's no reason for that to happen. Most the HECM loans in particular require an annual statement saying, you know, you're still have the loan, you still have the primary residence. And I think that too many originators, particularly ones that are on television and have no relationship with the customers,

16:55 Or the ones you find on Google Ads or Facebook Ads, don't have a relationship with the customer. And so, the customer just It's just a transaction. They're going to die, we'll foreclose, or we won't foreclose. Who the hell cares? You know, CrossCountry, you guys are a major retail originator in the country. I know I've known several originators in my market area over the years in different areas I've worked in. And your business is all based relationships.

17:18 So, it seems to me that part of the solution and where I'm really pushing reverse mortgage originators is to get the discussion with well, if the parents pass, who is in charge? And let them know what the process is. We don't want to be foreclosing your house. We want you to plan ahead. Either know the rules or get an estate plan with a trust. Talk a little bit about Do you get a chance to And I know it's hard to get those conversations. Nobody is going to open up their family, you know, Rolodex to you necessarily. Talk a bit about the challenge of that, developing those relationships or perhaps even the value if you've been able to.

17:51 Yeah, so I think again, it goes back to education and preparedness, right? So, having the conversation with the client up front. I will tell you for my own part, I always try to get the family involved to the extent that they're willing to be involved. So, if they're willing to hop on a counseling call and learn more about the program, get on calls with me and learn more about the different scenarios and alternatives, I always encourage them to do that. We'll often have conversations surrounding beneficiary type deeds. So, maybe enhanced life estates or ladybird deeds, having the house pass without going through probate where we're able to affect that for them. But, we have those conversations and we let them know that, you know, foreclosure in the reverse space, especially as it pertains to somebody passing, a homeowner passing, it's more of a procedural situation than some sort of negative credit event or you know, the way we've associated foreclosures in the past with somebody being evicted from their home. It's not like that at all. It's really just procedural. And again, if the clients and the family understands what that looks like, it takes all of the sting out of it. So, FHA in particular gives you 6 months to disposition the home following the passing of the last homeowner.

19:08 They give you two, three month extensions beyond that. As long as everybody's engaging with the servicer and passing along information so that everybody knows what's happening, everybody's okay.

19:20 I will say that I'm in California and I think it's a little different in that my experience, while the deed says they may give you an extension, in practice they don't. And the servicer is really racing to foreclose. Now that part of that's California, you know, part of that is if squatters get in there, they have a nightmare on their hands. California is a different state than most. So I would I don't mean to be argumentative, but I'm just saying my experience is customers say to me, "Oh, I you know, I'll get an extension or two." Well, the deed does say you may get an extension, but pigs may fly. I wouldn't bet on it and I wouldn't bet on getting those extensions. So I my best advice to the families in those cases is just assume you're not going to get the extension and deal with what you have to deal with quickly because but there's really no excuse for it. I mean, I think part of the process is their first mortgage has set you up, at least the HECM with the annual form that gets filled out. Seems to me like there's no other product in real estate where you have really the customer has to have some engagement with the product annually. And you know, every real estate agent knows they should call all my customers every year and mortgage originators know they should call the customer once a year. This one's kind of built in. It just seems to me that either you know they've passed or if they're still alive. Hey, by the way, you know, you didn't deed the property the way you should. You know, whatever the There's deeds in different states. In California, you really need to have a estate plan put together or at least a trust put together. But it seems like those There's an opportunity to have those conversations regularly as well.

20:51 Right. And again, the more you can handle up front, the better the experience is going to be for the clients and their heirs. So it's just really important that you go through all of those scenarios in the beginning.

21:01 Fantastic. Well, okay. Anthony, I really appreciate the chance to learn a little more of the details with the Roth IRA and how you use that. And I know that again you're a originator and a reverse mortgage specialist with CrossCountry Mortgage. I have your contact info. And the best way to get hold of you the phone number on the screen [phone number]?

21:23 That'll work. You can email me. You can visit my website as well. Yeah, any of those ways will get you to me. And again, I think it's really important for everybody to understand this is not a tool that's right for the country. The question is it the right tool for you or for your client? And if the answer is possibly, reach out to Anthony or somebody like him who's a specialist in this field, get a scenario on your situation so you can decide to move forward or not. Anthony, thank you so much for your time today. I really appreciate meeting with you and getting a chance to learn more about the product.

21:50 Yeah, it was a pleasure. Thank you so much, Bill. And for everybody else, this is the Reverse Mortgage Podcast. We get together every week with usually top originators in the field, specialists in reverse mortgages, sometimes vendors or management. If you're interested in being interviewed on that, let me know. Reach out. Reply, questions, love to hear feedback from you guys. Subscribe if you like the podcast. As always, make today your best day ever. Thank you so much.