Reuters: New Angles on Reverse Mortgages

Upon a study released last week indicating that reverse mortgage borrowers are getting younger, a Reuters article presents many different takes on reverse mortgages and the different angles that can be taken on them.

It’s a strategy, but is it a smart one? the article asks.

It can fill gaps, the article notes, in providing the example of a couple delaying the husband’s Social Security draw, or a couple who expects to downsize and sell the home eventually, and can pay the reverse mortgage off while selling the home.

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The article cautions that there are still fees involved, even though there is now the lower-cost Saver option. The no-recourse aspect, however, is appealing and could make it a strategic opportunity for some younger borrowers, Reuters points out.

Another downside, the article points out, is not leaving the house to the family or heirs. An alternative could be doing a reverse mortgage within the family, rather than through an outside lender, Reuters says.

View the original article.

Written by Elizabeth Ecker

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  • Note that the article does not state that the clients asked to increase Social Security but rather the “financial adviser … had one couple in their mid-60s take out a reverse mortgage so the 67-year-old husband could defer his Social Security benefit for three more years.”  The advisor “expects the couple, who had little savings, to pull no more than $60,000 out of their reverse mortgage.” 
    While the 24% increase in Social Security benefits (there is no compounding of the 8% per year increase) sounds significant, what is the ultimate cost?  It is not $60,000;.it is $60,000 plus the upfront costs of the HECM, ongoing MIP, and interest.  How soon will the cash flow from the increased benefits of 24% equal the balance due on the HECM?  Even if the upfront costs are just $2,000 and the average actual interest rate is just 3.75% (rather optimistic) over the period of a simple payback, the payback period could be 25 years.What happens if the seniors are deceased before then?  What if note interest rates are higher?  This is not an argument against a Saver at 62 but rather a strong condemnation against the industry PROMOTING this particular strategy.While some financial advisers (my four year old grandson meets that qualification) may be making this advice, does that mean our industry should be ADVOCATING such a financially risky strategy?  It was not that long ago that reverse mortgage originators were selling and promoting the sale of annuities with reverse mortgages.  The headline ramifications from those activities still the haunt the industry to this day.

    While condemning the promotion of any strategy “that gets the phone ringing” may seem counterproductive in the short run, it is the right position for the sake of seniors and the long-term growth of the industry.

    • dduck12,

      If I remember correctly Bernie Madoff and Allen Stanford were so called financial advisors and they managed more assets than the total combined assets of The Forbes 50 and Fortune 250 companies I used to work for.

      But those who hold the credentials you list, hold those credentials because they do not want to be known simply as financial advisors or bookkeepers alone, except for CPAs who provide services which no other individuals can legally provide even those with more education and experience.

  • michael w,

    I was there in the dot com debacle.  People make very stupid financial decisions as well.

    The Social Security strategy may be a valid option for the very few but for the majority it is full of risk and no successful investor I know would make such a ridiculous investment.

    The pay back period is incredibly bad under all reasonable scenarios.  Please present one example where it works and you would advise your mother to do it.

    • Mr Veale, your second paragraph in both your posts above answers your own question.  We (you included) advocate a borrower doing their complete homework when investigating a reverse mortgage and a good financial planner that understands the cash flow benefits has the ability to run different scenarios to best work for his or her client.  It might not have to work on paper for some, it just may be what they want to do, its their prerogative.

  • I happen to be a Series 7, registered representative, and have dispensed tons of prospectuses and documents relating to investment and insurance products.  On the bottom of most is the admonition to consult with your financial and legal advisers.  FA is a loosely used term.

    Your point that BM and AS, were called financial advisers is well taken, but so what.  Who is best equipped to give advice on whether to delay SS or not?  The main factor is actually, medical or potential longevity, so hence a “medical adviser”, which your grandson can also qualify as.

    • dduck12,

      If I remember correctly the head of the enforcement group overseeing securities licensees was Mr. Madoff.  He was a President of the NASD before it became FINRA.  As to Mr. Madoff it seems even registered representatives were fooled.

      Medical advisors have no idea how long a particular senior will live.  All they can say is based on the theory of large numbers here is the likely outlook.  But I would not trust a medical advisor to say what the appropriate reward for the risk is.  I just remember some of the interesting tax shelters my clients got into.

      Perhaps you would like to clarify what the right reward for this risk should be.  Unlike deferred annuities there are no riders to minimize risk.  The penalties in this case at any point in time are all or nothing, not 10% or 20% of the whole.  This is leveraging with no loss mitigation available and no safety net whatsoever.  I like the odds on USC winning the National Football Championship next year a lot better.  At least my life is not part of the bet and I have a wide range of bets I can make including a gentleman’s wager of dinner or a cup of coffee.

      Unlike life insurance or securities, a senior has no choice on how much to wager or selection of products or riders.  This is an all or nothing wager.  Give me USC football and water polo and UCLA basketball and volleyball (I went to both schools).  I have been losing a lot lately but the losses are not nearly of the magnitude that the Social Security deferral scheme can be and they are a lot more fun.

  • I have no idea what BM and sports have to do with whether a person should take early or late SS.
    However, if the quarterback has a broken leg, the backup a bad throwing arm, I don’t bet too heavily on that team (P.S., I am a Giants fan), much like a product that produces a stream of money that ends when I die, like a heart condition with high blood pressure, means I don’t bet on longevity, and hence don’t delay SS or enter into an annuity lightly.
    Given good health and a family history of longevity, in consultation with my “medical adviser” as they DO have some general idea on your expected mortality, much better than the dreaded “financial adviser”, I might gamble and delay SS.

    • dduck12,

      For example, to defer at $1,500 per month for 8 years using an average rate of a 4% interest rate (very conservative for an adjustable rate HECM) and a 1.25% MIP, the balance due at 70 would be about $182,300.  Without COLA the benefit would be $2,640 per month or for the $182,300 the borrower has an additional payout of $1,140.  After 22 years the amount recevied will be $300,960 but the balance due on the HECM will be $577,167 and that is as if no monies were taken from the HECM for the period other than the eight years of $1,500 per month.

      What happens if the average interest rate is 5%?  The balance due after 8 years is about $190,500 but the balance due 22 years later is about $750,750.

      Keep raising the average interest rate to just 6% for the next 30 years and the balances due are about $199,100 and $976,638 respectively.

      I love the idea of deferring Social Security but only if it is due to work paying enough to make deferral a good result.  I just do not believe that an adjustable rate HECM is the right way to do that.

  • Some people think the idea of deferring SS is so great that if they started SS when they were younger, they can pay back the amounts received and start again at a later date and receive the higher payments.  A sort of second “bet” on USC, if you will.

     

    • dduck12,

      While that used to be the case, the start and payback dates can no longer be greater than 12 months apart now.  We have talked about the fact that if the old rule was in place, it potentially had much better financial results.  Wait 8 years, take out a reverse and pay the amount taken in prior years with the reverse mortgage proceeds in full.  That can be a sounder risk/reward decision due to the fact that the health issues are eight years further down the road and the risk starts at 70, not 62.

      My remarks are not about the 2005 BCS Championship game but the September 8th, 2012 Syracuse game.  I will even use real money if anyone wants to bet on Oklahoma winning the 2005 BCS Championship and I will even give up 3 touchdowns.  You get the idea. 

  • You are correct about the new one-year rule, it may be  that someone at the SS administration  thought delaying SS was not beneficial to the system, hence better for some SS recipients.

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