NY Times: Seniors Turn to Reverse Mortgages After Seeing Investment Income Decline

nytimes_logo_story Millions of Americans are paying a high price for a safe place to put their money as banks offer extremely low interest rates on savings accounts and CDs according to the New York Times

The elderly and others on fixed incomes have been especially hard hit and many have seen returns on savings, C.D.’s and government bonds drop so much that it’s often costing them money once inflation, fees and taxes are considered.

“The unemployment situation and the general downturn in the economy had an impact, but what’s going to happen now as C.D.’s mature is that retirees and the elderly are going to take anywhere from a half to three-quarters of a percent cut in their incomes,” said Joe Parks, a retired accountant in Houston on the advisory board of Better Investing, an organization that works to help people become savvier investors.

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People who rely on income from such investments for support, however, are being forced to consider new options.

For example, Eileen Lurie decided to take out a reverse mortgage to help offset the decline in returns on her investments tied to interest rates.  Lurie told the NY Times the bank was going out of its way to explain the product to her.  “These banks don’t want to be held responsible for thousands of seniors standing in bread lines,” she said.

“If your assets aren’t appreciating and aren’t producing any income, you’re getting eaten up in this interest rate environment,” said Peter Strauss, a lawyer who advises the elderly. “A reverse mortgage is one way of making a very large asset produce income.”

At Tiny Rates, Saving Money Costs Investors (NY Times)

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  • Lawyer Peter Strauss shows he does not appreciate the economic value of a reverse mortgage when he says: “A reverse mortgage is one way of making a very large asset produce income.” No income is ever earned by a borrower when a reverse mortgage is obtained but to the extent proceeds are used, interest will be accruing at rates higher than can be earned on those CDs and savings accounts (whether income taxes are considered or not).

    There is little question that seniors in the financial situation described in the article would be better off by obtaining an adjustable rate HECM and then using up their savings and CD funds before accessing their much costlier HECM proceeds; of course, this assumes that the senior does not need a significant portion of the HECM proceeds to pay off existing debts and does not anticipate using the vast majority of their proceeds for some time to come.

    I hope Mr. Strauss is not advising seniors that their reverse mortgage is producing income. If he is, I hope when it comes time to pay off these reverse mortgages, he has had and is keeping a whole lot of malpractice insurance in force because his clients will find out the hard way that their estates have shrunk, not increased, due to this “income.”

    There is much to correct and simply condemn in this article. However, the principal points Mr. Gross makes are clear. Financial institutions are getting healthier off of the interest rates CD and savings account holders are earning. Whether or not this situation results from Fed policy, conditions in world markets, the crafty and collusive avarice of bankers, some combination thereof, or some other factors is another matter.

    It is clear that seniors who cannot afford risk are losing value in CDs and savings account everyday due to negligible earnings after income taxes, especially when compared to general inflation. It is tragic. Although reverse mortgages can alleviate the loss in cash flow, there is no way that a reverse mortgage can “reverse” a real loss in earnings, no matter how hard the bank explains.

    • I believe Mr. Strauss is referring to the income from the retirement plan.
      He is a preeminent elder care lawyer, and perhaps is weaving a more complex strategy than a simple RM. You can't reverse losses, but you can allow some assets to perhaps regain ground. The RM allows you to do this.
      His bio is very impressive:
      http://www.ebglaw.com/showbio.aspx?Show=2714
      and I would not hesitate to follow his planning advice.
      The fact that an elder lawyer of his stature endorses RMs is worth a lot, or would you prefer a McCaskill opinion.

      • dduck12,

        I would like to see how the “regain” philosophy works within the framework of accepted norms of risk. Attorneys who advise elderly clients may provide great legal advice (and most do) but when they begin giving financial advice, I might just take (LOL) Senator McCaskill's.

      • Hey dduck12,

        OK, you made even me read up on Mr. Strauss and take a deeper look at his statement on reverse mortgages. I have alot of respect for the law school at NYU. He is no doubt a great elder law attorney.

        But (dare I say it) like The Cynic, I think Mr. Strauss got it wrong. But you have great mind on your shoulders, so giving you the full benefit of the doubt, how does a retirement plan fit into his statement: “A reverse mortgage is one way of making a very large asset produce income.” Are you saying that a reverse mortgage makes a retirement plan produce income?

        I have had no eggnog today and my caffeine intake was very limited tso can you please elaborate on what you mean? Maybe I just need “some spike” in a little eggnog and I will clearly see it. Without it, I am having a hard time. Thanks.

      • Cynic/Critic:
        This may not be fair since you two may be unencumbered by caffeine or eggnog, but here goes.
        When I first came to this forum, I was actually looking for an RM. Why, because my IRA value had dropped, say 40%, I felt I might need extra money for basic needs, and I did not want to take “income” from my IRA which would mean I would have had to liquidate shrunken stocks. I felt the market would recover, you see, and once removed (stocks sold) I would be removing from a shrinking asset. With money from an RM I could have paid off my mortgage and taken tenure. Since then the my IRA has gone up over 50%. Still behind my 2007 end of year (I only calculate on 12.31) value but luckily untouched. Next year, when I must do minimum req. dist., I will hopefully have a larger base to provide me with “income”. This is my strategy, but believe me PS is a lot smarter than any one in this room. If he speaks favorably about RMs to accountants, lawyers and planners, believe me they will sit up and listen. Your industry needs more like him to give it a positive image.

      • dduck12,

        We agree; however, I do not want him put off because he is put down by some narrow minded acccountant.

    • I read the article and it's pretty well written in my opinion. For example, banks are taking advantage of the spreads they are currently able to earn.

      It seems that the mistake Mr. Strauss made was using the word “income” instead of “cash flow”, which is a common one as we know. Those of us in the RM industry should never make such a mistake, nor should financial planners. Otherwise his points are well made.

    • Wow!! Do all of your standards slip when adversity comes?

      False expectations can have far more reaching impact than false accusations. Senator McCaskill did not take on this industry as a result of false accusations; what caught her attention was rotten marketing by those in our own industry. Sometimes we and our “friends” can do far more damage by producing false claims than the false claims of our adversaries.

      I have fought for improved information being provided seniors; that is my standard. If you find it acceptable to say that reverse mortgages are not due until a senior dies, that reverse mortgage proceeds are tax-free, and that reverse mortgages force large assets to produce income, then be satisfied. I, for one, think it should be pointed out for the folly it is.

  • For what it's worth, Mr. Strauss may have been referring to the investment of the proceeds of a RM in a vehicle which provides a return higher than the cost of the RM. I certainly don't advocate this, but I met with a financial planner the other day who is doing just that, our caveats against such investing of RM proceeds notwithstanding.

    • I doubt that PS would do that, and i don't think most legitimate planners would advocate that either. My rule is never use borrowed money in a speculative way. Of course, people taking out mortgages and buying homes (not speculators) could now in retrospect, be considered to have speculated.

      • dduck12,

        Sometimes it is better to accept that an authority used an improper word than to try to justify its use. I believe that Lance Jackson (either a current or former CPA) is right in his comment above. Why so many people readily use the word “income” to describe reverse mortgage proceeds is because they have never analyzed why it should not be used.

      • Let me clarify, the cash flow (we agreed way back that this is a more agreeable term) is NOT from the the RM, it is from the IRA at a later time when hopefully the assets have appreciated. The RM cash flow IS used for paying off the mortgage and for other expenses. Careful reading is very helpful.

      • dduck12,

        I have had a few spiked eggnogs with 4 or 5 caffeine spiked expressos and other than being a wide awake drunk, I still don't see even this point in what Mr. Strauss wrote. I think he either misspoke or was misquoted. If you want to believe it was the latter, I am fine with that.

      • Ok. I just hope after I tell him all the nasty things you RMers said about him, that he will still say favorable things about RMs. Having my catnip tea now.
        BTW: Enjoying the spell checker today. It caught me on 7 words already.

      • dduck12,

        Although I watch my liquids, I agree with The Critic; however, I greatly appreciate your advice to the REVGUYJIM. It is wise and warranted.

        Critic, go easy on that eggnog.

    • REVGUYJIM,

      What is surprising is that more so called “financial planners” have not caught onto this extraordinarily risky idea to earn commissions. One result of the closed end HECM is the beginnings of a cottage industry of “financial planners/advisors who have found the perfect investments” for seniors to invest excess funds so that accruing interest will be more than offset by the alleged growth and income of these investments. Madoff made similar claims.

      Some might argue that these financial advisors could pitch even more products to those with proceeds available through their adjustable rate HECMs. While that is true, these borrowers are not under the same pressure to avoid shrinking equity caused by accruing interest and MIP that fixed rate HECM borrowers with excess funds find themselves fighting.

      A few seniors have the skills necessary to choose less risky investments that can offset most of the accruing mortgage costs but most do not. I expect we will all be hearing more and more about these self proclaimed financial advisers and their “high earning/safe” investments. While these advisors may help increase originations, eventual losses could result in civil suits against not only the investment advisor but also against the originator.

      Of course one of the things many of these advisors forget to discuss is that their investments are taxable. So besides bearing excessive risk, the borrowers payout income taxes based on “their earnings.” What a mess!!!

      Originators should steer clear of these “advisors.”

      • “I certainly don't advocate this, but I met with a financial planner the other day who is doing just that, our caveats against such investing of RM proceeds notwithstanding.”

        No need to take me to task on this; I thought I made my position clear in my original post.

      • Just out of curiosity, if you don't mind, and I realize you are against the ploy this guy is advising, does he have any recognized credentials and do you know if he has a broker dealer? Is he a Series 6 or &?
        I ask, because my BD strictly prohibits the sale of variable products using any “borrowed funds”.

      • I only met with the fellow once, but am sure he is Series 6 & 7 licensed as he used to be with a national brokerage and now is with a large regional firm. His income-producing “investments of choice” are closed-end bond funds whereby he purports to match the risk tolerance of his clients with the risk profiles of the individual funds. Higher risk = higher yields, and depending on risk tolerance and age he is able to generate greater income than the RM tenure option.

        I've come across several BD's with the prohibition you mention, some citing FINRA rules which I've been unable to confirm but others simply stating it as “company policy.”

        If you happen to know of a FINRA rule 'on point, I'd love to know about it so I can share it with this guy.

      • I don't know of a FINRA rule on this. I will try to check.
        This guy have any CFP, CLU, ChFC, CPA or other real designations?
        I still don't like using borrowed money for “investments” no matter what even Nobel prize winners say.

      • REVGUYJIM,

        While I have realized from your first comment this is not an idea you are promoting, this has been the excuse for annuity sales, i.e., earning more than the interest that is accruing. Of course the promoters did not address the general inability of matching income and deductions for income tax purposes.

        I could not agree with dduck12 more. Leveraged investing is a questionable practice to advocate especially for a securities licensee.

  • There is that old bug-a-boo word INCOME again. The Cynic is correct: It's a loan, not income– Even if the funds are used to purchase income producing
    vechicles. I don't care how smart the Legal Beagle is: His Profession has as its foundation the proper use of words. In this particular sentence, he failed. Unfortunately, most of my clients have only one asset and one source of financial help other than Social Security: Their home and and a FHA HECM. CDs and Stocks either never existed or are long gone.

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