Forbes Blog Asks: Should You Retire on Your House?

In a recent post for Forbes, George Mason University senior fellow and reverse-mortgage researcher Mark Warshawsky explored the pros and cons of home equity conversion mortgages, and settled on a small sweet spot.

Warshawsky, who has performed research into various types of retirement products with the backing the Golub Center for Finance and Policy at MIT, uses the tenure option for this particular exercise. He claims that the origination and closing costs may negate any long-term benefits for borrowers with houses worth less than $100,000 and low net worth.

“The product is not appropriate for for those with little or no financial assets,” Warshawsky wrote in the post. “Mortgaging their house would leave them with no liquidity.”

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Warshawky then defines a home-equity and asset parameters for which HECMs make sense, setting the low boundary at $3,000 of assets and a home value of $60,000, and the upper end at $290,000 and $250,000, respectively. Based on these definitions, Warshawsky claims that HECM products are “suitable” for about 14 percent of the retirement-age population, giving them an income increase of about 19 percent.

The fellow’s other research also includes a comparison of HECMs and life annuities, which found that reverse mortgages resulted in higher incomes for couples — while annuities led to greater incomes for individuals of most genders and ages.

At the end of his Forbes post, Warshawsky suggests lowering HECM transaction fees by half in order to expand the marketplace for reverse mortgages, and also calls for a lower home-value threshold for potential borrowers.

Read the full Forbes post here.

Written by Alex Spanko

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  • The authors of the Forbes article and the linked Journal of Financial Planning article have little idea about what they write when it comes to HECMs. As a satirical note we learn from them that if an answer cannot be easily determined, why waste your time? Blame it on undisclosed costs that NRMLA has hidden away in its online calculator.

    Today’s financial experts have little idea what a HECM is and how it works. For example in the Forbes article, the author states: “The mechanism is a reverse mortgage (also known as a HECM, or a home equity conversion mortgage), which is a federally-guaranteed…. This mortgage is repaid with interest on the death of the borrower (or when he or she moves out).” The author does not seem to realize that not only must the HECM be repaid with interest but also ongoing FHA mortgage insurance which is charged monthly on the balance due and for all HECMs with case numbers assigned after October 3, 2010 at an annual fixed rate of 1.25%. That means if the note interest is 5% for a month, the FHA insurance charge for that month will be 25% of the cost of the interest for the month.

    The Forbes article is linked to an article from the Journal of Financial Planning. In that article from which the Forbes article is taken, the authors struggle with tenure payouts. For example, in one scenario a 62 year gets a principal limit of $162,600 and a net principal limit of $150,694 when the expected interest rate is 4.82% with a tenure payout of $843 but when the expected interest is just 4.06% in another scenario with the same basic facts the principal limit and net principal limit come out exactly the same as in the first scenario but the tenure payout drops to $766. The authors are puzzled but somehow conclude that “apparently because the National Reverse Mortgage Lenders Association, the creator of the tool, believed that some costs (unidentified) were higher.” They have no idea that in determining the principal limit, the allowable expected interest rate has a floor of 5.06% but in computing the tenure payout, there is no such expected interest rate floor.

    So from the quotation in the last paragraph, we know (satirically that is) that when principal limits and net principal limits are the same for people the same age but the tenure payouts are different, NRMLA is rigging the answer with unseen costs since they created the calculator for tenure payouts on their website. That may not be a very teachable moment but it is most certainly a humorous one.

    As soon as the word “income” comes up in a discussion on tenure payouts, it is clear that the presenter has almost no fundamental knowledge about HECMs or how they work. These two articles were in line with exactly that point of view. Those financial advisors who can not or do not differentiate between income and cash flow are generally not well informed.

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