Forbes: ‘Wise’ Reverse Mortgages Are Saving Grace for Retirees

Reverse mortgages have often been touted by members of the financial planning community as a “saving grace” for retirees unprepared to face the realities of retirement. But as a recent Forbes article indicates, the old reputation of Home Equity Conversion Mortgages continues to hamper the acceptance of this emerging concept of financial salvation.

Historically, reverse mortgages have carried the widespread belief as loans of last resort, to be used only once senior homeowners have exhausted all other means of financial wealth. As a result, any acceptance of reverse mortgages in financial and retirement planning was limited to this last resort notion after all other possibilities had failed, writes Wade Pfau, professor of retirement income at The American College and principal at McLean Asset Management in McLean, Va.

Both a frequent Forbes contributor and researcher on the topic of reverse mortgages, Pfau notes that any discussion of reverse mortgages as a retirement income tool has also been hindered by “real or perceived negatives” related to traditionally high costs and inappropriate uses for HECM loan proceeds.

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“These conversations often include misguided ideas about the homeowner losing the title to their home and hyperbole about the American Dream becoming the American Nightmare,” Pfau writes in the Forbes article published last week.

He acknowledges, however, developments in recent years have made reverse mortgages safer products for responsible borrowers. These changes, Pfau says, have made reverse mortgages harder to dismiss outright in the context of retirement planning.

“In short, well-handled reverse mortgages have been suffering from the bad press surrounding irresponsible reverse mortgages for too long,” Pfau writes. “Reverse mortgages give responsible retirees the option to create liquidity for an otherwise illiquid asset, which in turn can potentially support a more efficient retirement income strategy (more spending and/or more legacy).”

Read the rest of the Forbes article.

Written by Jason Oliva

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  • It is odd to see a reverse mortgage called “wise.” Since they are debt, the adjective seems very strange.

    It is amazing that so many financial advisers refer to HECMs in terms of income which it is not. Like Dr. Pfau they have so little background in our field that they talk of proprietary reverse mortgages as if they are designed to offer proceeds above what HUD permits or as Dr. Pfau states: “Other options outside of the federal program pop up occasionally, like jumbo reverse mortgages that exceed federal limits.” It seems Dr. Pfau as well as other recent arrivals are totally unfamiliar with the prevalent Ginnie Mae product called Home Keepers which could no longer be originated after 12/31/2008.

    Dr. Pfau also seems unaware as to exactly how fixed rate HECMs work. Their life time proceeds are limited to the maximum available under the first year disbursements limitation rule and must all be taken at origination.

    It seems so many of these educators are so caught up in teaching retirement income courses that they have lost sight of the difference between what is earned and what creates liquidity. Not once in the article was cash flow even mentioned. In fact it is income which is going to pay expenses, not cash. Trying to speak down to the alleged audience normally engenders confusion.

    The author states: ” As Tom Davison described the matter, a reverse mortgage allows a retiree to gift the value of the house, rather than the house itself.” How in the world is that true? No reverse mortgage provides sufficient proceeds at origination to accomplish that purpose nor is it guaranteed that it ever will even with the growth in the line of credit. (Gifts take place during the donor’s life; pecuniary bequests are gifts of money following death. A reverse mortgage cannot provide a gift after death.)

    “Reverse mortgages provide a buffer asset to sidestep this sequence risk by providing an alternative source of spending after market declines.” But is that true? Absolutely not in the case of fixed rate reverse mortgages or lines of credit with insufficient funds to become this so called buffer asset, which is never specifically defined.

    While academia searches for the right language to describe reverse mortgages, let us speak in clear, common, and accurate terms so that we limit confusion and misunderstanding.

  • What my friend Jim Veale stated in his comment has a great deal of validity to it, which all of his comments usually do.

    Jim is right in one sense, a reverse mortgage does not provide actual income but yet it does, depending how it is viewed in the eye’s of the beholder. Technically Jim is right on the button!

    Take borrowers who are strapped with large mortgage payments monthly, coupled with another monthly debt or two. If those borrowers take out a reverse mortgage, pay off their existing mortgage along with having enough left over to pay off another couple of debts that burden them monthly, what happens, BANG!, To these borrowers, they now have additional income in their pockets to improve their quality of life.

    Sure, they incurred a debt to achieve their goal but to them, they have no more mortgage payment, two other loans paid off and those payments have been eliminated. What this means to those seniors is they now have dollars in their pockets each month that they did not have before they took out the reverse mortgage.

    Let us take the fixed rate loan Jim talks about, he is exactly right! With a fixed rate reverse mortgage, all the proceeds are limited to the maximum available under the first year disbursements limitation rule and must all be taken at origination.

    However, in my scenario above, it would not matter to those borrowers, their goal of may still be able to be accomplished and because of this, our seniors now, in their eyes, have a life time income because of the elimination of the monthly debt they once had! Those monthly payments will never burden them again, will they?

    Take the gift Jim refers to, once again, Jim is exactly right on target with what he stated!

    Jim states, “How in the world can a reverse mortgage provide sufficient proceeds at origination to accomplish the purpose of granting a gift of equity at time of origination”.

    Jim is right again, there is no guarantee that there will ever be a gift of equity, even with the growth in the line of credit. Jim is also right when he says with a reverse mortgage,
    “Gifts take place during the donor’s life, not after the death of the borrowers”

    Hear again, Jim is technically right but let us say the intent of the borrowers were to leave their home as a gift to their children and a large amount of funds were left in a line of credit because the product was an ARM at time of origination. Let us also say the subject property was valued more at death than when the original loan was taken out. Let us also assume the balance of the loan was way below the then current value at death.

    In this scenario, we now have a gift for the children, even though it could never have been guaranteed!

    Here again, as I said in the beginning, it all comes down to what is in the eye’s of the beholder. As long as the loan originator was honest up front and went over with the borrowers what Jim points out and the borrowers decide to go the rout they feel best, then let us give the borrowers and their heirs dreams that may and can come true!!

    Life is not a guarantee, we make of it what we can. I have believed now for over 19 years that the reverse mortgage is a tool to improve the quality of life for our seniors, as long as we are truthful with them and point out all the pro’s and con’s. I still believe in that today, more than I ever have!

    John A. Smaldone
    http://www.hanover-financial.com

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