Why This Financial Advisor Isn’t Sold on Reverse Mortgages

Certified Financial Planner, Dan Moisand has been working with retirees for over 25 years and has seen many ups and downs in the reverse mortgage product, but still isn’t jumping on board, he explains in a recent article published in Financial Advisor Magazine.

Moisand compares the reverse mortgage product with the variable universal life product (VUL) that was popular in the early days of his career. He explains that it was presented as the ‘swiss army knife of financial products’ and just couldn’t get behind that kind of blanket statement, because everything depends on a client’s individual situation.

This is how he feels about reverse mortgages as well. Though he does point out that since the Federal Housing Administration (FHA) has made changes to the rules and regulations of the product, it does have more of a chance than in previous years of being useful for the right homeowner.

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But the overarching theme of why he is skeptical of the reverse mortgage product revolves around lack of knowledge. Whether that be the lack of knowledge of potential borrowers or financial advisors themselves.

“Too many people treat reverse mortgages as something for nothing,” he writes in the article. “That’s dead wrong. Reverse mortgage must be paid back. Because servicing payments are not required and the maximum payback is capped, they can look friendly compared to more conventional mortgage products.”

Another issue Moisand sees with reverse mortgages is that clients can sometimes see financial advisors who discuss the smart strategic use of a reverse mortgage product as a creative and innovative thinker, which he says he’s skeptical of, because ethics then come into play.

Investing borrowed money in not, in and of itself, an ethics violation, Moisand admits. Rather, the facts and circumstances determine whether a reasonable strategic choice has been made or if predatory sales are taking place.

“Using a reverse mortgage to preserve an investment portfolio may make good sense, but if the reverse mortgage is not presented as a higher cost debt or the lack of required servicing payments are used to present a reverse mortgage as free or cheaper than other debt, a line may be crossed,” he writes.

Even though Moisand is not extremely fond of the reverse mortgage product, he does explain that in some situations, advisors owe it to their clients to explain the reverse mortgage options, but should be prepared to receive native feedback from some.

Read the full article on Financial Advisor.

Written by Alana Stramowski

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  • Alana claims: “Another issue Moisand sees with reverse mortgages is that clients can sometimes see financial advisors who discuss the smart strategic use of a reverse mortgage product as a creative and innovative thinker, which he says he’s skeptical of, because ethics then come into play.”

    Yet here is what the writer actually stated: “Some of the members of the Swiss army seem to think that clients will take the discussion of smart strategic uses of reverse mortgage products as creative, even fun and will view the advisor as an innovative thinker. I’m skeptical about that assertion.” Here is what said earlier in the article: “Unfortunately, the more and more I hear about the versatile uses of reverse mortgages, the more I have flashbacks to the Swiss army knife and more uncomfortable I become because I see too many advisors moving too quickly to use reverse mortgages with clients.”

    The writer does not specify what group of advisors he is addressing. He seems to be addressing all of us. Yet his anger and frustration are targeted toward those who promote the strategic use of reverse mortgages as a cure all. It is those who live in a world of broad answers to specific questions, issues, and needs. They do not see the individual or fully appreciate the unique problems of that individual and how the financial product being promoted do not necessarily fit the need.

    He questions the use of borrowed money to buy investments. He just comes short of questioning the use of loan proceeds in a way to preserve a portfolio. He questioning centers around borrowers not having an adequate understanding of the debt they have incurred. He skirts around the negative amortization of reverse mortgages but does address non-recourse in a roundabout manner.

  • I have been originating RM’s for 10 years. I have never had anyone as a prospect or a closed loan indicate to me that they believed the RM is some kind of grant. I don’t know who this guy has been talking to, but everyone knows it is a loan that must be paid back and is not free money. I wonder if he knows about the required HUD counseling? Taking out a RM while one is 62 or so as a line of credit is a no-brainer.
    The unused line of credit will grow at around 6%. If a 62 year old single person with no mortgage qualifies for a $400,000 line of credit option, when the borrower is 82, the line of credit is whopping $1,282,854. This can be drawn “tax-free”. Will anyone posting here please tell me how this does not make good financial sense or where the negatives are? What a great way to generate a tax-free pool of cash to give to heirs, travel, long-term health care, etc.

    • I don’t think a 62 year old will qualify for a $400k LOC. I see it closer to 315k assuming 12k of costs. Please correct me if the calculator I used is wrong. Also, how many 62 years old folks can honestly say they will not want to downsize at some point since they will be in a house worth more than 625K in order to access that much. Tough decision to make at 62. If they do move, 10k+ in potential costs is a lot to spend for a credit line you may not need or never use. Especially with the compounding interest. Also, I have found most people who have access to a LOC use it. So this scenario is a very unrealistic one to think the LOC will sit there and grow untouched. Most people lack financial discipline. Otherwise everyone would be much better off in retirement.

  • After reading this article, I don’t feel that Dan Moisand really said why he is not fond of reverse mortgages. What I read tells me that Dan needs to read into what reverse mortgages really are?

    The article did not do our industry any good but I also don’t feel that this article helps Dan Moisand at all either!

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

    • John,

      Like you, the RMD title does not fit the Moisand article. Mr. Moisand is disparaging the enthusiasm our originators display in promoting various strategies on the use of HECM proceeds. Some of them are too much “cure all” and “sales job” than solving the problems of real clients. I also think Mr. Moisand is open to using HECMs when the facts and circumstances demand it. While he may not be fond of HECMs he does not despise them just our over enthusiastic sales jobs.

      We would do better listening to CFPs and then working with them on an unnamed client to show the practical aspects of some of these strategies. One of the most worthless strategies involves using HECM proceeds to bridge cash needs in order to defer claiming Social Security benefits. On the other hand the strategy can create a huge benefit but it is all about the facts and circumstances of the client. Selling this strategy as a cure all is a dangerous habit too many originators lean on.

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