PBS Program Takes Deep Dive into Reverse Mortgages

A nationally syndicated PBS personal finance program dedicated a solid chunk of a recent episode to the new academic thinking around reverse mortgages and retirement.

Jamie Hopkins, an associate professor of taxation at the American College of Financial Services in Bryn Mawr, Pa. and a noted proponent of Home Equity Conversion Mortgages, sat down with host Consuelo Mack for a wide-ranging interview on an episode of “WealthTrack.”

Hopkins and fellow guest Steven Earhart of Devon Financial Partners in Wayne, Pa. discussed a variety of retirement options, with a focus on viewing assets as a way to convert income, not a finite amount of money or property to accrue over the course of a lifetime and then spend gradually over retirement.

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“We’ve been programmed to think accumulation, accumulation, accumulation,” Earhart said of asset-building. “Now we have to think about it as an income stream. An income stream is going to replace your salary when you step off in retirement. And it’s going to replace it, hopefully, for the rest of your life.”

Earhart and Hopkins notably differed when Mack brought up the potential use of reverse mortgages in retirement planning, with the host offering skepticism of her own.

“Twenty years ago, reverse mortgages — that was the last thing you wanted to do,” Mack said.

Earhart generally agreed, calling them a “last resort” before softening his position.

“Tapping into a reverse mortgage when maybe you don’t have to? I just think that starts a chain of events,” he said, before adding: “If someone’s never going to move, and they absolutely need income, then I think it makes total sense.”

In his counterpoint, Hopkins presents a hypothetical scenario based on the financial crisis of 2008 and 2009: If a recent retiree faced a situation in which an investment portfolio lost 30 to 40 percent of its value, would he or she be better off drawing money from the portfolio, or borrowing against his or her house at a rate of 4% to 5%?

“Actually, that’s a very easy decision,” Hopkins said, advocating for the reverse mortgage line of credit, a point to which Earhart agreed.

He went on to expound on the benefits of setting up a reverse mortgage line of credit early in retirement and tapping into it only when the market goes down, particularly if this occurs during the first three years of retirement — a period that Hopkins identified as particularly dangerous for retirees. He also noted that some seniors use bonds or cash reserves to tide themselves over during dark days early in retirement.

“But this can be another option for that cash-buffer strategy for the first couple years of retirement,” Hopkins said.

Hopkins and Earhart cover other ground during the nearly half-hour episode, including Social Security, annuities, and long-term care insurance. Mack concludes the show with a quick summary that comes out in favor of potentially taking out a HECM line of credit to supplement a diversified retirement porfolio.

“As our guests pointed out, you may want to use other sources of income to avoid drawing down your investments during bear markets,” Mack said.

Watch the full segment here, or check WealthTrack’s website for a list of showtimes on a variety of local PBS affiliates.

Written by Alex Spanko

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  • As with almost all such discussions, there is almost a fear of describing loan proceeds for what they are, cash inflow. Instead those who have not been acquainted with accounting and classifications of balance sheet and income statement items mistakenly call cash, income. Yet income is but a small segment of cash inflow.

    Income describes a particular source of asset inflow. Sometimes it has nothing to do with cash. When a gardener provides services to a landlord and instead of obtaining cash, the gardener is provided a place to live at a reduced cost to the gardener, that reduced cost is income to the gardener. Each month as services are provided income is generated even though no cash has been paid to the gardener by the landlord and the landlord has incurred a cost for the gardening in lower rent received on a living unit. The IRS correctly requires taxpayers to report such “trade” as income. In sourcing and identifying income for lending purposes, banks readily recognize such trade as legitimate income even though the valuation given may differ. The asset in this case is the right to occupy a living space at a reduced cost to the gardener. This helps the landlord especially in months where cash might be tight.

    The practice is common in the radio industry. In exchange for air time, hotels will provide rooms, restaurants will provide meals, auto rental agencies will provide rental cars, clothiers will provide clothing, etc. When the ad has played, income is earned even though cash has not and will not be exchanged. Often building supply companies sell on credit. Even though the exchange of cash may be delayed for months, income was earned when the supplies were received by the contractor. The illustrations are all but endless. Neither the proximity of payment nor payment by means other than cash effect the recognition of income. In the early days of a company many times the most significant source of cash is equity and debt. The reason is income is tied up in sales on credit (which is waiting satisfaction), not in cash sales.

    When it comes to what reverse mortgage borrowers receive as proceeds, what all three in the segment are discussing is cash, not income. As the saying goes: “Everyone in the reverse mortgage transactions receives income but the borrower.” The borrower is expected to pay the lender back for the proceeds borrowed with interest. Income is rarely ever required to be paid back. Yes, the concept of borrowing scares senior consumers but to call proceeds, income to the borrower is anything but “education.” In fact it is just the opposite.

    HECMs (and reverse mortgages generally) become confusing when unexpected and imprecise language is used. Why bring up income in regard to HECM proceeds when seniors understand very well what cash is and what it can be used for? What other category of mortgage originators call loan proceeds income?

    While retirement income is an important topic in the discussion of retirement planning, it is also limited and excludes debt and capital. Cash flow on the other hand is much broader and even includes reductions in debt payments. If the American College is going to have a department dedicated to financial analyzing and planning for the retirement of the seniors in this country, the need is to understand not just retirement income but cash flow throughout retirement as well.

    • James could not be more correct, and as an industry participant the ubiquitous references to HECM proceeds as “income” never cease to amaze me.

      If the CFPB was going to focus on just one misleading advertising term, that should be it. Perhaps it will take some hefty fines to purge the industry of the miss-leading and erroneous use of the word “income”.

  • Thank you for a very useful and logical presentation of the changes financial professionals are looking. It has been as these two gentlemen said something that has needed to happen. Most FP’s were more geared towards accumulation. There were very few FP’s that understood how to create that income stream for the rest of the client’s life. With fewer and fewer company pensions offered it then falls to the retiree to figure out how to go from that paycheck stream to retirement. Where does that income stream come from? Even though they had some disagreements both agreed that it is important to have a plan. A plan for all aspects of retirement. They include; income stream, portfolio management, health insurance, taxes, and LTCi. As a recent retiree I had to go through all of that and more and explain it to my better half without a professional. Since my retirement last year my wife has come to appreciate my patient tutoring of her financial education.

    • Mr. Lanois,

      For my entire CPA career spanning almost 4 decades now, the CPA firms I have worked for have not only tried to help its older clients plan wealth accumulation but also their hold in the decumulation phase, and the decumulation phase itself. Our planning was individualized without many guiding rules other than minimizing gift, estate, and inheritance taxes. Only two of those firms tried to manage the assets of some of their clients.

      Beginning in 1994 with Mr. Bill Bergen we began to see the move from emphasizing asset accumulation planning to developing rules for decumulation of those assets. Before that almost all planning was highly individualized with limited guidelines.

      Where HECM/reverse mortgage planning deviates from most other strategies is that the borrower does not need a huge asset base. Instead a major focus is on a previously underutilized asset, the home. The home has never come into play because it is on its own illiquid. Under the trend in current planning the home itself remains illiquid but can be used as collateral in a nonrecourse mortgage specifically designed for retirees which have no required monthly payments of interest or principal as long as the loan does not become due and payable because of not meeting loan covenants which trigger the due and payable clause which include death of the last surviving borrower, no borrower residing in the home as that person’s principal residence, and a sale of the home. While these loans are currently fixed rate with no lines of credit, FHA offers through its reverse mortgages, called HECMs, adjustable rate HECMs with lines of credit where most of the new and growing aspect of financial planning is heading.

      So while reverse mortgage planning will rarely include either seniors with highly mortgaged homes or seniors who have more than sufficient cash flow to live well throughout retirement, it should be looked into by the mass affluent. Like all nonrecourse mortgages, there are upfront costs and with the most used reverse mortgage, HECMs, there is ongoing mortgage insurance that is charged monthly on the outstanding balance due at a 1.25% annual rate.

      Congress and HUD has made the HECM so flexible and biased toward cash flow planning throughout retirement that it allows the available line of credit to grow by exactly the same rate as the balance due. If you have not looked into a HECMs lately, it is time you should.

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