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Here’s How One Finance Professor Came Around to Reverse Mortgages

In the financial planning world, there are a few products that come with a tarnished reputation. A reverse mortgage is one of them.

But in recent years, professionals in the space have started to change their tune, recognizing the benefits the home equity loan may offer to a retirement income strategy.

For Wade Pfau, this view on reverse mortgages started in October, when he attended a meeting hosted by the Funding Longevity Task Force, a group that was formed by Security One Lending and Reverse Mortgage Solutions last year to eliminate reverse mortgage misconceptions among financial planners and regulators.

Pfau — now a professor of retirement income at the American College in Bryn Mawr, Penn. — had been active in the financial planning world, having written for industry journals and spoken at leading conferences, but, he says, he didn’t know much about reverse mortgages.

Previous research in the Journal of Financial Planning by John Salter and Harold Evensky (both of whom Pfau knows), among others, have pointed him in the right direction.

Their work has influenced Pfau’s own research on the topic, as he uses it as a springboard to make the case for reverse mortgages in a recent Wall Street Journal column and in another article that quantifies the reverse mortgage standby line of credit.

Reverse Mortgage Daily caught up with Pfau to learn what the reverse mortgage newcomer thinks of the industry, of the product and of its misconceptions. Here’s what he had to say:

Reverse Mortgage Daily: In your short time in this industry, what have you learned about reverse mortgages? 

Wade Pfau: This is really something people don’t know a lot about. There’s a big misconception that you sign the reverse mortgage and the bank now has the deed to your home. But if you just use your home as a “last resort,” that’s constraining yourself. You could find a more efficient way to use your home equity and that’s what that standby line of credit can do.

At that [Funding Longevity Task Force] meeting, everyone was talking about how great a line of credit is, and now I understand it better. It’s because that line of credit just keeps growing no matter what the home price is. It’s a really good opportunity to protect the price of your home, because the line of credit can pretty easily grow to be higher than the value of the home as long as you live past your life expectancy.

RMD: What were your thoughts about reverse mortgages before the Task Force meeting? 

WP: I hadn’t given reverse mortgages proper attention yet. [My view was] really just more of an “I just don’t know a lot about them so I better remain skeptical” approach. You see all those commercials touting the benefits of a reverse mortgage — that’s kind of a red flag in my mind of “well I better remain skeptical about these until I learn more.”

There are a lot of financial products aimed at retirees that aren’t always trustworthy, so it’s good to be skeptical about anything before you dig into it.

RMD: What’s your take on the bad reputation of reverse mortgages?

WP: There are a lot of financial predators out there. The conventional wisdom of reverse mortgages was a sleazy advisor would get [seniors] to tap their home equity and put it all into a shady investment. But the new HECM rules prevent all that from happening.

RMD: How can lenders better market that to the general population? 

WP: Reverse mortgages may be really good, but the way they’re promoted [isn’t]. There are a lot of financial products that seem like they’re being oversold.

Sometimes salespeople overdo it and cross the line. Even if their sales pitch is correct, they make [reverse mortgages] sound too good to be true. There has to be a fine line there of explaining the benefits, but making sure to address any potential disadvantages or clearly explain why these benefits exist and that the government is regulating the industry.

RMD: From a consumer’s standpoint, how can a reverse mortgage fit into a retirement income strategy?

WP: I’m basically coming to the opinion that for a lot of people, it’s a pretty good idea to just open a standby line of credit as soon as the older spouse turns 62. Of course, people who are too poor may want to open a line of credit anyway, and for people who are very rich, it’s not going to make much of a difference.

But for the large middle-class, open it and it will grow throughout your retirement. Then you can use that line of credit as a part of your retirement income strategy. Even if you don’t end up needing it for retirement income, there’s this good potential that if you leave the line of credit alone, it can eventually grow to be worth more than the home.

If your home value decreases, your line of credit is going to continue to grow by at least 4.4% and could be higher if interest rates go up. So even if the home price goes down, that makes it easier [for the line of credit] to outpace the value of your home.

RMD: What are the pitfalls of using a reverse mortgage standby line of credit?

WP: It’s not going to be sustainable from the government’s perspective. The strategy could become too popular for its own good and then the government might stop letting the line of credit grow at the rate that it is.

Whoever signs up today [for a reverse mortgage] is going to get this great benefit that may disappear in the future.

Written by Emily Study