CBS MoneyWatch Calls Reverse Mortgages “Smart” for Seniors

Citing the growing cabal of pro-reverse mortgage academics and the story of one Mississippi homeowner, CBS News’ MoneyWatch called Home Equity Conversion Mortgages “a smart way for seniors to tap home equity” in an article published yesterday.

MoneyWatch writer Kathy Kristof tells the story of Richard Blackmon, a 70-year-old Magnolia State retiree who initially thought that a reverse mortgagee was a scam after seeing an advertisement for the product. But faced with growing debts and unwilling to leave the “three-acre compound” where he lives, he learned more about the program and took the leap.

“Honestly, about this time last year, I was contemplating having to file for bankruptcy,” Blackmon told CBS. “I can’t rave enough about this program.”

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Kristof’s piece nods to the HECM’s shadier past, but emphasizes that the reverse mortgage’s bad reputation stemmed from “some unscrupulous advisors” acting before the Great Recession. She also cites some familiar academic faces in the HECM world, Wade Pfau and Steven Sass, as well as American Advisors Group executive vice president of retail sales Paul Fiore, who told CBS about his father’s experience with a reverse mortgage loan.

Like many other popular sources, Kristof explains the growing use of reverse mortgages as pillars of a larger retirement plan, a fail-safe in case other investments experience a downturn at an inopportune time. But unlike mainstream news outlets, she frames reverse mortgages as a low-cost option in certain circumstances.

“The fees depend on your home’s value and the amount of equity you need to tap,” she writes. “However, they can be as little as 0.5 percent of the home’s value. Thus a reverse loan on a $250,000 home might cost $1,250.”

She touts the growing line of credit option, terming it a “smart” option and encouraging readers with considerable amounts of home equity to take out the loans as early as possible.

“So those who use the loans as a line of credit, borrowing sparingly — or not at all — in the early years pay virtually nothing,” Kristof writes. “Meanwhile, the amount available to borrow rises each year according to a formula. So the longer you have a reverse mortgage outstanding and unused, the more equity you’ll be able to tap.”

Naturally, Kristof counsels that the loans are not for everyone, specifically calling out borrowers under 62 — who, of course, can’t take out a government-backed HECM loan — as well as “rich” people who have no need to tap into home equity and people who intend to leave their homes within the coming few years.

Still, Kristof’s piece provides a simple, straightforward explanation of the HECM and its potential benefits from a trusted news source, along with a human success story to put a face on its positive uses.

“This was a win-win situation for me,” Blackmon told CBS. “I only wish I’d known about these loans sooner.”

Read the full piece here.

Written by Alex Spanko

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  • Kristof does not get it and shows as much when she shares: ”’The fees depend on your home’s value and the amount of equity you need to tap,’ she writes. ‘However, they can be as little as 0.5 percent of the home’s value. Thus a reverse loan on a $250,000 home might cost $1,250.'” And what about other upfront costs such as title or even the origination fee on a HECM when upfront MIP is only 0.5%?

    One of the most questionable claims about a good use of reverse mortgage proceeds is as: “a fail-safe in case other investments experience a downturn at an inopportune time.” This determination should only be made AFTER a thorough analysis of the recoverability of those investments. Investments that are crashing should be turned over into a different investment or used to meet near-term cash flow needs.

    Kristof shows her naivete when she writes: “‘So those who use the loans as a line of credit, borrowing sparingly — or not at all — in the early years pay virtually nothing,’ Kristof writes. ‘Meanwhile, the amount available to borrow rises each year according to a formula. So the longer you have a reverse mortgage outstanding and unused, the more equity you’ll be able to tap.’”

    Let us say that a borrower got a HECM and financed her upfront costs of $10,000 which was also her UPB at closing. Over a 25 year period, she only went into her line of credit to borrower a few hundred thousand a couple of times but each time within six months after distribution repaid the entire balance due except the original upfront costs and all accrued costs related to them. At the end of 25 years, the borrower sold her home and moved into an upscale senior community facility due to her deteriorating physical condition. If the average effective interest rate was 6% what was the balance due? $60,924.

    Would the borrower have been better off simply using a line of credit of $400,000 for no upfront costs due to her large cash reserves, her banker was continually offering her? There is simply insufficient information to reach a clear determination but with ongoing MIP it is hard to imagine how a HECM would have been the better answer.

    • Cynic –

      You seem pretty intent on painting the HECM as the poorer solution to your hypothetical case. Given your unlikely scenario – “she only went into her line of credit to borrower a few hundred thousand a couple of times but each time within six months after distribution repaid the entire balance due except the original upfront costs and all accrued costs related to them.” – she would surely have repaid her closing costs as a part of her first repayment and for the same reason, so there would be no $60K balance in 25 years…as if that’s the only consideration.

      Let’s not forget that she had access to her line for those hundred thousand dollar draws for the full 25 years – she was not cut short by a 10-year draw as is typical of most HELOCs.

      She also had to OPTION of not making monthly payments while her draws were outstanding – a potentially significant advantage depending upon her circumstances.

      She also had the benefit of the ever increasing borrowing capacity during the full term of the loan, while not having to stress over the possibility that that same borrowing capacity could be frozen, reduced or canceled by her lender.

      I’ll stop there. You are right in that the article provides insufficient info for a good determination of what her best option might be, but please at least give the HECM its due.

      • REVGUYJIM,

        So what you are saying is if the borrower had paid off the upfront costs at closing (minus a small amount needed to keep the loan active) she would have been done with it. That is interesting since that same $10,000 could have been invested for 25 years. So by paying off the $10,000, what is your estimate of lost earnings? Some would say over $75,000 if one uses the overused 8.43% earnings standard of the S&P 500. There would no taxes on this money as long as it was not cashed out from her portfolio.

        Besides if the borrower is wealthy as I have painted her to be why wouldn’t she just get a new line of credit every five years or so?

        By the way, my illustration of the use of the line of credit comes from people like Harold Evensky, the “Dean” of financial planning when a HECM is used in a three bucket approach to financial planning. It was his presentations at the start of this decade that woke up people like Dr. Salter and others to the value of HECMs in SOME situations.

        Does it bother you that in some cases, HECMs are not the best answer and that someone in your own industry would DARE to illustrate when the HECM may not be the best answer?

        Over the years, I have heard originator after originator sign off that they discuss alternatives to the HECM. Yet whenever someone actually writes about it, there is a barrage of naysaying, why?

        Many originators try examples but most do not understand limits or the difference between reasonable examples and luring. My example may be unreasonable to you but simply takes a senior who in not likely to need HECM proceeds for a long period of time and shows why there are times a HELOC or personal line of credit can be a better answer.

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