Financial Planning Guru: Reverse Mortgages Can Be Insurance Policy

Reverse mortgages can be used as an insurance policy under the Home Equity Conversion Mortgage Saver program, financial planning expert Harold Evensky tells the Journal of Financial Planning in a Q&A

Citing a paper he published recently on the use of the Saver reverse mortgage as a financial planning tool, Evensky explains how his mind was changed on the use of reverse mortgages. 

“Up until very recently, pretty much like every other practitioner, I wouldn’t touch [reverse mortgages] with a 10-foot pole,” Evensky tells the Journal of Financial Planning. “What changed that was a year or so ago when a new product came out called the [HECM] Saver, which is very analogous to a home equity loan, a HELOC. The difference is, with HELOCs, as we learned the hard way, there’s nothing guaranteed.”

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Advocating the use of the Saver essentially as a standby home equity loan, Evensky explains the way borrowers can keep the reverse mortgage as an option for times when their retirement portfolios are underperforming. 

“When markets recover and get better you pay it off again, so it’s not designed to be a leverage investment strategy; it’s not designed as a credit strategy,” he says in his response. “We see it simply as risk management, “insurance” against a volatile market allowing investors to remain invested through those volatile times.”

The study, which ran hundreds of simulations of retirement portfolios led the researchers to conclude the use of reverse mortgages is effective in almost all cases. 

“…our conclusion was, anyone who qualified for it should consider doing it. And there’s a high probability, based on our simulations, that most investors would never have occasion to draw on it, but as I said, we see it as an insurance policy.”

View the original Q&A.

Written by Elizabeth Ecker

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  • Does anyone know if he advocates the borrower paying closing costs out of pocket? Always been my question and something I’m sure we’ve thought about.

    • wealthone,

      The danger with your comment is if the borrower attempts to pay the entire balance due and thereby terminates the HECM. The ideal should be to pay down the balance due to say $1,000 or so.

      • Totally agree about leaving a small balance, that is required. Some states have such a large recordation tax that it quickly runs up the opening costs, even on a Saver.

  • Wealthone, good point, apparently he has not thought of it or he did not want to touch that with his 10 ft pole?

    However, his strategy may be OK but is that a good reason to take out a reverse mortgage or should we in the industry push that philosophy? It is a question we all need to ask ourselves.

    The other thing that bothered me in his statements was that he would never think about touching a reverse mortgage with a 10 ft pole! That bother’s me, what he is saying is that either a reverse mortgage is a scam tool or it does no justice for a senior. I don’t know what he means, foe sure he would not give us the courtesy to explain himself.

    I have to give his proposal a lot of thought, I have to give his presentation a lot of thought.

    Have a great weekend everyone,

    John A. Smaldone

    • Re-read the first two sentences of Evensky’s response to the question on reverse mortgages, John. To wit:

      “Up until very recently…I wouldn’t touch [reverse mortgages] with a 10-foot pole. What changed that…”

      You owe it to yourself and your customers to read the Salter/Evensky article outlining the study in the August 2012 issue of The Journal of Financial Planning.

  • Like all analogies, comparing a HECM to “insurance” is shaky at best. It is somewhat worse than comparing tenure payouts to an annuity. They are not the same. When insurance pays claims, proceeds generally do not have to be repaid.

    How is using debt proceeds to avoid reducing investments, not anything other than leveraged investing even if it is only intended to be temporary? Debt is debt even if it is a HECM Saver. Promoting the concept that a Saver is “insurance” is all but a “bridge too far.”

    What would regulators do about the following HECM ad? : “HECM Savers ‘insure against volatile markets.’ They provide proceeds to help your investments recover (as a line of credit which when used must be repaid by you or your estate with interest plus insurance based on the balance due).” That message would hardly be received with open arms.

    While the concept Evensky is advocating may be very valid (even preferred) for higher net worth clients in a CFP environment, most seniors would not necessarily benefit overall in trying to utilize this strategy without continuous input from a competent advisor.

    • The “insurance” analogy is one of concept, not mechanics. The SRM strategy is not “insurance” against volatile markets; it’s “insurance” against running out of money as a result of volatile markets. The focus is on portfolio survival to fund retirement until death, NOT on what may/may not have to be repaid post mortem.

      • REVGUYJIM,

        That is all well and good except that is not what is stated in the quotation which is as follows: “We see it simply as risk management, “insurance” against a volatile market allowing investors to remain invested through those volatile times.”

        As to your idea that the Standby Reverse Mortgage as presented by Harold Evensky is to “insure” against running out of money in volatile markets, for most seniors for whom Harold recommends it, there is little to NO risk of “running out of money” in all but far more extreme depressions than even the Great Depression or at the end of their expect longevity. The risk is raising cash by selling portfolio assets or drawing down defined contribution plan assets and IRA assets in a short-term down market when such reductions would be most detrimental to those assets.

        Calling a HECM or any other form of debt “insurance” is falling off the edge of the envelope in the minds of most financial advisors. Debt is not insurance unless we are redefining that term to somehow in some distorted way of including HECMs (a nonsenical inclusion). It is for these kinds of comparisons that we are rightfully attacked by our detractors.

      • Wish I had seen you reply when posted, Cynic – better late than never!

        We will have to respectfully agree to disagree. I think you are interpreting the term “insurance” too literally and missing the point. Rather than argue semantics, I will continue to suggest this use of the HECM LOC with a clear conscience. If you can give me another name for the pro-active positioning of an asset to provide liquidity in a time of unexpected need, I’ll gladly consider it!

      • REVGUYJIM,

        The intentional misclassification of one financial product with another is false and misleading. It only adds confusion to an already confused public. HECMs are not insurance; to claim they are does not add integrity to the industry. While such allusions are perfectly fine in a literary setting where there is no expectation of reliance on the allusion in making a significant financial decision, in a financial setting they can be detrimental to the parties hearing them. Their use should be entirely discouraged.

        There is a reason why the Head of the Democratic Party in the state of Florida referred to Senator John McCain as “preying on seniors like a bogus reverse-mortgage peddler.”
        http://floridaspeaks.blogspot.com/2008/09/fdp-exposes-mccain-dirty-tricks.html

        This is more than mere semantics, we are dealing with the financial future of a protected member of society.

  • Personally, I think the best thing the Saver programs can be used for is when a senior needs to make repairs to sell the home within five years. The Saver (particularly the adjustable) can be obtained more cheaply than the Standard, and if paid off fairly quickly, provides a relatively low cost mortgage without payments. For most other cases I would be looking to a Standard program.

    The Cynic is right, though, you do have to be careful about paying it off. That is something I mention to everyone that I counsel, do not pay off an adjustable loan. Pay them down, but always keep them open, never pay them off. If the senior finds that they need them in the future, then they have to go through counseling and all of the fees all over again. If they do not pay them off, the money is always available if they need it and the heirs need only pay off a small amount to take back the home.

    Frank J. Kautz, II
    Staff Attorney
    Community Service Network, Inc.
    52 Broadway
    Stoneham, MA 02180
    (781) 438-1977
    (781) 438-6037 fax
    FrankKautz@csninc.org –work
    Frank@Kautzlaw.com –private

    • Frank,

      I agree with your assessment of Savers for our traditional customer base but in expanding our market to the larger senior community, the adjustable rate HECM Saver becomes a great low cost “emergency” standby source of cash. For those who have adequate income but want to invest cash otherwise set aside for “emergencies” beyond a six month minimum and be less subject to market whims as to,the adjustable rate Saver is one answer (as is the Standard).

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