CNBC: Reverse Mortgages Gaining Mainstream Respect

Strengthened consumer protections and an aging population facing a slew of retirement challenges are giving reverse mortgages some mainstream appeal, says CNBC in a recent article.

Viewed as loans of last resort in the past, reverse mortgages are now looking more attractive to retirees who may be unprepared to face the reality of retirement expenses, as well as among financial advisors who are seeing the viability of these products when used as part of a retirement planning strategy.

For advisors, a reverse mortgage line of credit strategy is especially attractive for their clients given the growth feature on the credit line where the unused portion balance grows over time.

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CNBC poses a scenario concerning a 62-year-old borrower who secures a reverse mortgage worth $100,000 even though they don’t need the cash immediately.

“For a lot of people…they could be looking at a 30-year retirement,” said Tom Davison, a certified financial planner and special projects coordinator at Summit Financial Strategies, in the CNBC article. “So 20 years from now that $100,000 could be $400,000. The balance can grow to quite large amounts, and at any point along the way, you can use it.”

Davison is also a member of the Funding Longevity Task Force, a group of financial planners and other experts, several of which whose research has explored how reverse mortgages fit into a coordinated retirement planning strategy.

Reverse mortgages can help a person’s investment portfolio work better, Davison said to CNBC, by providing an additional funding stream to reduce drawing from one’s portfolio and also helping lower the chance of being forced to sell investments when the market is down.

“Your investment portfolio will work better if you can cut down how much you have to rely on it monthly to live,” Davison said. “So a reverse mortgage can really help another asset.”

Read the CNBC article.

Written by Jason Oliva

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  • “’Your investment portfolio will work better if you can cut down how much you have to rely on it monthly to live,’ Davison said. ‘So a reverse mortgage can really help another asset.’” That may or may not be the case. It all depends on how the portfolio is invested. A lot of Enron employees and retirees had a significant amount of their portfolio invested in Enron stock. How is it that HECM draws would have helped them?

    Not every reverse mortgage will help another asset. Some reverse mortgages today have interest rates that exceed all accrued cost rates of the government guaranteed reverse mortgage (HECM). Also they are generally fixed rate requiring that all available proceeds be taken at closing. This leaves the borrower at enormous risk of negative arbitrage on the proceeds they do not currently need.

    Rather than acting like reverse mortgage originators, it would help if financial advisors would act as such and spark new ideas on how to use reverse mortgages in retirement planning along with making reasonable caveats about risks. We need financial advisors acting competently, not marketing for us unless that is what they are doing and they are disclosing that fact.

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