Stock Market Volatility Offers Reverse Mortgage Opportunity

The U.S. stock markets have been on a wild ride since the start of the new year. While this has stirred anxiety among retired investors who are compulsively monitoring the performance of their investments, such market volatility is inadvertently creating more opportunities for reverse mortgage conversations.

As the most common statistics portend, there are 10,000 Americans turning 65 every day and will continue to do so as the Baby Boomer generation enters retirement, during which many will likely lean on savings such as 401(k)s, IRAs, or assets in the form of stocks, bonds, among other investments. But with the market unpredictability stoking concerns for the future, some retirees may be finally convinced to take another look at how home equity can fit into their retirement plan.

“The volatile market right now presents a great conversation point for better understanding reverse mortgages and how they should be used in a retirement income plan,” said Jamie Hopkins, associate professor of taxation at The American College in Bryn Mawr, Pa.

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The markets rang in 2016 with some turbulent activity. The Dow Jones Industrial Average Index fell from a recent peak of 17,720.98 on December 29, 2015 and continued to decline steadily since then, albeit with a few hiccups along the way, to 16,067.18 (up 0.77% from the previous day’s close) at the market’s close Thursday, January 28.

During that timeframe, the S&P 500 Index dropped from 2,078.36 on Dec. 29 and continued a similar downward trajectory as the Dow Jones to close Jan. 28 at 1,893.36 (0.55%) as of this writing.

For older investors who need to begin making regular withdrawals from their portfolio to fund retirement, large drops in the stock market could have disastrous consequences.

The shock of negative returns risk, however, can be absorbed through the use of a reverse mortgage, as demonstrated by various financial planning commentary and research in the past year. Particularly, the reverse mortgage line of credit, when used as a standby strategy, can be used to buffer a retiree’s portfolio against potential market swings. By doing so, this strategy allows investors to draw from the available funds in their credit line when they would otherwise need to lock-in losses on their stock portfolio.

“Reverse mortgages really provide an income source that is not correlated to market returns,” Hopkins said. “For retirees, to have another source of income that is not related to the market, that is a great benefit.”

For some skittish retirees, today’s market turmoil is still recent enough to conjure bad memories of the 2008-2009 market crash, said Tom Davison, a certified financial planner and special projects coordinator with Summit Financial Strategies, Inc. in Columbus, Ohio.

“It’s certainly an echo of the that dramatic drop,” Davison said. “It’s bound to trigger anxiety, but any time the markets drop, some people start checking their portfolios every day and start worrying more.”

Here is where a reverse mortgage may become a valuable asset for retirees who want to bolster their savings and protect their market investments, without having to make any significant lifestyle changes like cutting back spending in the near-term.

“Reverse mortgages can ride out several years of spending,” Davison said. “That is typically plenty of time for markets to take a dive and pick back up again.”

Market volatility recently triggered one of Davison’s clients to call him about setting up a reverse mortgage, which both parties had initially discussed several months ago. The clients, a married couple, have an existing mortgage, which requires them to make monthly payments.

For anyone who has fixed payments they must make, like a traditional mortgage, Davison said, they do not have many options on making those payments. So, if the markets drop and they were withdrawing a fixed percentage from their portfolio to cover those payments, that market drop directly impacts the spending they can do on other things, like buying groceries, for example.

“If you have certain fixed expenses and variable income, the cuts in variable spending get bigger faster,” he said.

While a reverse mortgage may help some particular clients, they are not for everybody. Just because the market is a bit hectic now doesn’t mean investors will be flocking towards reverse mortgages in droves. Some might not even do anything at all.

Although Baby Boomers expect market volatility in the next decade, 69% are long-term investors who understand market fluctuations are normal, according to a recent survey from American Funds. The survey interviewed more than 1,000 U.S. adults age 50 and older who have at least $100,000 in investable assets.

“People have been trained to not mess around with their portfolio when the market dips, because in the long run that can typically be harmful,” said Davison. “Unless there is a sense of urgency, an easy decision is to put off thinking it through and taking action.”

Only three in 10 survey respondents (29%) are bracing for a “bumpier ride” over the next 10 years, with market corrections and a potential crash resulting in lower returns relative to historical averages. But for a sizable majority (78%), protecting savings and investment gains from market downturns is a key priority.

“That’s where a reverse mortgage as an option comes in,” Davison said. “For the people who are naturally nervous and uncomfortable with staying put, a reverse mortgage directly gives them another path to go down.”

Written by Jason Oliva

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  • Here is but another example of an academician using confusing terminology. Everyone involved in a reverse mortgage makes income except the borrower. Usually income does not have to be repaid but generally cash payouts from a non-recourse mortgage must be.

    To borrowers, a non-recourse mortgage is not an asset; however, they are an asset to lenders and subsequent note owners. When someone liquidates an asset, normally the balance due on a debt does not grow. HECMs are a valuable source of cash inflow, not a valuable asset.

    Finally, the professor and the practitioner are fundamentally on point but the terminology they use could improve.

    • Cynic –
      I agree with your point about the use of the term, “income”, when referring to HECM loan proceeds. “Cash flow” is the more appropriate word to use.

      I also agree that a HECM is not an “asset”, but am not sure the professor and practitioner refer to it as such. The author of the article does, but I think in a more general as opposed to strictly financial sense in this article. The financial “asset” is housing wealth and the HECM is simply one tool to access it…and one with some pretty compelling advantages in many circumstances.

      • REVGUYJIM,

        This should be no point of contention between us but in the paragraph where the author calls the debt of a borrower a valuable asset, he goes on to give several “reasons” as to why. In reading the story as a whole, this may have been a summary of what was said to the author by both interviewees so I attributed the statement to no one in particular but technically you are correct.

  • In the late 80’s and throughout the 90’s our CPA firm did a lot of retirement planning for business owners and executive type employees. Most were in the financial situation of needing about $25K to $35K per month. Back then, the proceeds from a HECM would not have lasted them for more than half a year at the most.

    We had some clients bringing in income of $5,000,000. They did not need additional cash flow from a reverse mortgage.

    Yes, we also had some retirees bringing in income of over $200,000 per year who would have found an adjustable rate Standard HECM quite valuable. It is all based on facts and circumstances.

    Most of our middle income retirees would have found a HECM useful. Again it all depended on their individual facts and circumstances.

    Yet my partners would and will not recommend a reverse mortgage to a single one of their clients. The reason being that if the client went into default and lost their home for any reason, they would lose too much trust from their other clients. We just had too many clients who had too many connections to our other clients to risk the chance.

    HECMs will not find their way into the practice of every retirement or financial planner but they have a lot of potential to find their way into the vast majority of them.

  • A lot of negative comments below. The reverse mortgage program has saved my parents retirement.

    Myths:
    Expensive
    The bank owns the home
    Heirs won’t inherit anything

    We found comparison website, click quote save dot com, that found us a lender who charged $0 upfront fees (savings of $6k).
    There was no haggling involved just tell them you don’t want to pay any upfront fees.
    The title/ownership remains in my parents name and if home values increase I will inherit the remainder of the equity.

    My parents are saving $24k/yr by not having a mortgage payment, and I don’t have to worry about their financial situation. They don’t need my assistance, everyone wins.

    If home values decreases or they live for another 30 years I’m perfectly happy not inheriting any $ or the home. I just wanted them to have a comfortable retirement.

    Don’t believe all the negative comments without doing your research first. Like any other service and industry there are good lenders out there.

    Thank you all, and best of luck.

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