Reverse Mortgages: Product of Last Resort? Not for Financial Advisers

NewImage.jpgInvestment News is reporting that financial advisers are not using reverse mortgages as the viable retirement income vehicles they can be.

Often referred to as a product of last resort, financial advisers usually write off the loans as too expensive and confusing for their clients.

“But because they allow people 62 and older to stay in their homes and convert home equity into tax-free income, reverse mortgages probably should be an adviser’s first resort. In fact, there are many times when a reverse mortgage can be the best way to stretch a retirement portfolio.”

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Before everyone jumps all over the reporter for using the term income, there is some great info.  An analysis provided by Generation Mortgage was used in the article.

Consider, for example, a 75-year-old who is living in a mortgage-free home valued at $350,000 and has a $200,000 retirement portfolio.

Assuming a desired after-tax annual income of $27,500, a 6.5% annual retirement account investment return and a 2% annual home value appreciation, turning to a reverse mortgage first would generate total income of $590,000 and fund retirement for 19 years. Applying the same criteria to a last-resort strategy, which uses a reverse mortgage only after the retirement portfolio is spent, would fund retirement for 16 years with a total income of $500,000.

The $90,000 difference is created primarily by giving the higher-performing retirement portfolio more time to benefit from market appreciation. A third option, drawing down the retirement account, then selling the home but having to finance other living arrangements, would fund retirement for 16 years with a total income of $475,000.

The HECM Saver gets a nice mention, but the article states it has yet to gain much traction and is emblematic of the highly charged nature of reverse-mortgage decisions.

“This is a financial decision to be sure, but it’s also an emotional decision because a lot of people are emotionally tied to a home they’ve lived in for 40 or 50 years,” said Harry Gordon, a branch manager at iReverse Home Loans, a subsidiary of Hopkins Federal Savings Bank.

Check out the article at the link below.

Reverse mortgages should be first resort for advisers

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  • The point of the article is well taken.

    One of the problems with most individuals in the financial investment and insurance selling communities is their propensity to look at just one growth rate and not consider the impact of income taxes. The scenario provided is no different. It is far better to provide a range of likely outcomes with the most probable outcome as the comparative case.

    The example is nonsensical. It assumes an unrealistically high retirement income earnings rate and a very, very conservative home appreciation rate over 19 years. In 19 years the author is assuming that the home will only grow compounded annually to 146% (for a 46% increase) of its starting value. Over the last decade there is no publically traded securities index that earned at an annual rate of 6.5%. Yet my own home value is still almost twice its late 1999 purchase price. Even if I had to discount my home by 25% to cash in on its value, the net growth rate would still be over 3.75%, net all income tax implications.

    Many in the industry still do not understand the difference between the legal issues related to a home and other assets. There are many favorable ownership rules such as homeowner exemptions in some states that will not permit the taking of a home even if the home or improvements are acquired by ill gotten gains. As a case in point look where most of the Enron executives invested the money they obtained in that scandal. Even the federal income tax rules are still very favorable to homeownership except when it comes to tax loss on sale.

    I appreciated much of what the author wrote (except erroneously calling loan proceeds “tax-free income”) until he writes about Savers (which he never capitalizes, not a swipe at him but rather those who educated him): “…except that it would save a few thousand on closing costs and allow the homeowner to keep more equity in his or her estate.” Like most alleged financial advisors, “home equity” (a greatly over valued net asset especially when a reverse mortgage is in place) is somehow equated to the equity of an entire estate. This once again displays a false understanding of what an estate consists of. Although not clear in this context, many talk about non-recourse but seem remarkably incapable of applying the concept to an estate.

    While the article was a positive step forward for the industry, the article itself gives pause about the financial analysis applied by the author to the product. The industry needs articles of this ilk but provided by those with overall stronger financial understanding and much better examples.

  • The point of the article is well taken.

    One of the problems with most individuals in the financial investment and insurance selling communities is their propensity to look at just one growth rate and not consider the impact of income taxes. The scenario provided is no different. It is far better to provide a range of likely outcomes with the most probable outcome as the comparative case.

    The example is nonsensical. It assumes an unrealistically high retirement income earnings rate and a very, very conservative home appreciation rate over 19 years. In 19 years the author is assuming that the home will only grow compounded annually to 146% (for a 46% increase) of its starting value. Over the last decade there is no publically traded securities index that earned at an annual rate of 6.5%. Yet my own home value is still almost twice its late 1999 purchase price. Even if I had to discount my home by 25% to cash in on its value, the net growth rate would still be over 3.75%, net all income tax implications.

    Many in the industry still do not understand the difference between the legal issues related to a home and other assets. There are many favorable ownership rules such as homeowner exemptions in some states that will not permit the taking of a home even if the home or improvements are acquired by ill gotten gains. As a case in point look where most of the Enron executives invested the money they obtained in that scandal. Even the federal income tax rules are still very favorable to homeownership except when it comes to tax loss on sale.

    I appreciated much of what the author wrote (except erroneously calling loan proceeds “tax-free income”) until he writes about Savers (which he never capitalizes, not a swipe at him but rather those who educated him): “…except that it would save a few thousand on closing costs and allow the homeowner to keep more equity in his or her estate.” Like most alleged financial advisors, “home equity” (a greatly over valued net asset especially when a reverse mortgage is in place) is somehow equated to the equity of an entire estate. This once again displays a false understanding of what an estate consists of. Although not clear in this context, many talk about non-recourse but seem remarkably incapable of applying the concept to an estate.

    While the article was a positive step forward for the industry, the article itself gives pause about the financial analysis applied by the author to the product. The industry needs articles of this ilk but provided by those with overall stronger financial understanding and much better examples.

  • I agree with James, there are few inconsistencies in this article but a huge thank you to Investment News for the message they are trying to deliver here…

    Until we as an industry stand up and start yelling from the roof tops that the reverse mortgage is not just a “product of last resort” or a “needs based product” we will continue to be treated as one.

    Now that being said, helping those in need is an incredible role to play and I enjoy it thoroughly. I have stated several times in my writings that I have thank you letters from clients that would bring tears to most…

    But the truth is a reverse mortgage can and should also be seriously considered as a component of an overall retirement plan by financial advisors. But most do not. The product is still surrounded by misinformation and false statements.

    NRMLA is taking huge steps to reach out to these other industries via their Strategic Relations Committee to deliver this message and it’s about time. I am very proud to be part of it.

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