WSJ: Don’t Hate Reverse Mortgages, Hate Their Former Self

As reverse mortgages have changed over the years to become relatively safer and more effective retirement planning tools than they were once considered to be in the past, their criticism should not be directed at the product itself, but rather at their irresponsible use, says a recent article published by The Wall Street Journal.

A decade ago most financial advisers would scoff at the idea of suggesting reverse mortgages for their clients, writing-off these products as solutions only necessary for the financially ill-prepared. New safeguards in recent years, however, have begun to slowly change the perceptions of reverse mortgages in the financial planning community, says the WSJ article published this week and written by Robert Powell, the editor of Retirement Weekly, a service of MarketWatch.com.

“Indeed, many [advisers] now are exploring when and how to use them [reverse mortgages] in financial plans,” Powell writes.

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Powell cites several of the most recent program changes set forth by the Reverse Mortgage Stabilization Act of 2013, including initial upfront draw limitations, the Financial Assessment and new protections for non-borrowing spouses.

Such enhancements to the Home Equity Conversion Mortgage (HECM) program have encouraged various academics and advisers to delve deeper into reverse mortgages to learn how these new and improved loan products stand to benefit retirees today.

“Over time, these changes may encourage larger banks to re-enter the market, further increasing the credibility of the product and potentially lowering costs,” Powell credits Ohio State University researcher Stephanie Moulton with saying.

Moulton recently co-authored a paper published in the Journal of Urban Economics, which studied the willingness of older adults to obtain a reverse mortgage. The study also analyzed the impact of a reverse mortgage on borrowers’ well-being compared to others who went through mandatory HECM counseling and either later terminated or did not get the loan altogether.

New HECM program enhancements have also prompted a flurry of research and analysis among financial planners, who in the last year alone have published reports on the various strategies to effectively incorporate housing wealth into a retirement plan via the use of a reverse mortgage.

Such strategies have largely focused on leveraging the reverse mortgage line of credit option as a means to buffer against spending down retirement investment accounts during times of market volatility.

Using a reverse mortgage in such a way that helps diminish possible sequence of returns risks has been a focal point for groups the Funding Longevity Task Force, a Washington, D.C. outfit that promotes the use of home equity as a retirement income planning tool.

The Task Force, which is chaired by reverse mortgage industry veteran Shelley Giordano, also includes several prominent members of the adviser community who have published extensive research on the topic of reverse mortgages and the role of housing wealth in modern-day retirement planing, including Wade Pfau of The American College and John Salter of Texas Tech University, who has also co-written papers on reverse mortgages with Harold Evensky, chairman of Evensky & Katz/Foldes Financial, a wealth management firm in Lubbock, Texas.

“I believe most criticisms relate to a myopic view of the product that has not been reviewed for decades,” Evensky said. “Unquestionably there can be misuses of the product. But the problem is the use, not the product.”

Read more at The Wall Street Journal.

Written by Jason Oliva

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  • “Powell cites several of the most recent program changes set forth by the Reverse Mortgage Stabilization Act of 2013, including initial upfront draw limitations, the Financial Assessment and new protections for non-borrowing spouses.” That Act did no such thing. It is the Mortgagee Letters issued under the authority of that Act that both create and implement those changes.

    “New HECM program enhancements have also prompted a flurry of research and analysis among financial planners.” How sad. Most of us who know the differences between Savers and HECMs today, strongly believe the better product was the Saver. It was the Saver that caused not only the Sacks brothers to publish their research but Mr. Evensky and Dr. Salter as well. Michael Kitces has been generally less enthusiastic about the program since the loss of the Saver and the addition of the new “safeguards.”

    “Moulton recently co-authored a paper published in the Journal of Urban Economics, which studied the willingness of older adults to obtain a reverse mortgage.” That was not the case at all. She simply observed that despite much propaganda to the contrary borrowers were generally older in 2012 than was previously believed based on myth created by NCOA from its FIT database.

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