Financial Planners Express Home Equity Skepticism in Calif.

Despite impressive levels of home equity among homeowners in California’s Bay Area, one local independent news outlet featured a series of financial planners who advise their clients against tapping into their properties.

“I hope people don’t have short-term memory loss and get in the habit of spending like the federal government and having a deficit,” financial planner Sean Kenmore told Berkeleyside, a publication that covers Berkeley, Calif. and its surrounding cities.

Kenmore expressed concerns that homeowners didn’t learn from the boom years of 2003 to 2007, when many consumers took out risky mortgages or home equity lines of credit only to find their homes underwater. That’s of particular importance in the Bay Area and California as a whole, where home values have exploded in recent years: The median price of homes in Berkeley, known for the University of California’s flagship campus and its proximity to San Francisco and Oakland, sits at $1 million, according to Berkeleyside.

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“Prices are now greater than they were in 2007 before the real estate markets collapsed,” Oakland-based mortgage lender Vic Joshi told Berkeleyside, calling the current market in the area “completely unreasonable.”

The piece goes on to list the multiple pitfalls inherent in home equity loans, including annual fees and increasing variable rates. It also offers a quick dismissal of reverse mortgages, though Berkeleyside allows that the prevalence of Home Equity Conversion Mortgages is “expected to increase.”

“They tend to be expensive,” Jill Hollander, a financial planner in Corte Madera, Calif., told the publication. “The heirs don’t tend to like it because the bank gets their money out. When you die, the house gets sold.”

The piece does not mention the other options that heirs have for settling a reverse mortgage loan upon the death of the last surviving borrower.

To Berkeleyside’s credit, the planners quoted in the piece emphasize that their blanket advice shouldn’t apply to all potential borrowers, and that each homeowner’s situation is unique. 

Read the full take, an interesting look into the perceptions of home equity among average prospective borrowers and their advisors, at Berkeleyside.

Written by Alex Spanko

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  • This article and the comments associated with it are a great example of poor research on the part of the author and a lack of recent education by the financial adviser. These types of articles are unfortunate and the comments at the end of it are just sad.

    • Eric,

      We agree but more importantly these are the statements of practitioners, not academicians. While the FPA magazine is every good, its influence on that industry is very limited. Financial advisers are not the same as CFPs. Most are concerned about outperforming their peers in their retirement income investment advice.

      Most financial advisers are driven by sales (i.e. commissions). Most have little education in the proper and prudent use of debt and have no interest in understanding residential real estate. They are usually Johnny one notes.

      While schools like the American College are interested in what we have to say, most such schools are small and offer a wide choice of areas of specialization. Only a small percentage of the students at these schools will ever be exposed to an adequate education on reverse mortgages sufficient to change their lifetime perception.

      Despite the very wrong message they express, we need articles such as this to show what the industry is facing even in a state like California where homes are viewed more as investment property than castle than almost any other state.

  • It is sad to read something like this and to hear how uninformed financial planner Sean Kenmore is!

    Sure, a HECM is not for everyone but todays HECM is a different tool than it used to be. Todays HECM is not used like it was, which was looked at as a last resort method of getting money to bail a senior out to avoid foreclosure or bankruptcy!

    Today’s HECM is being used more than ever as a true retirement planning tool and financial planners and advisers who are informed are realizing that.

    The affluent are using the HECM and their home equity for many reasons. They use it as a hedging vehicle, to leverage investments, to supplement their income, pay off existing mortgages to increase their spendable income, a cushion fund for future use and much more!

    Financial planners are realizing this and they are finding out that when they are restructuring the assets of their client, the reverse mortgage is a tool that can fit into their overall planning strategy!

    In closing, I agree with what EricSD said, “The comments at the end of the article were sad”!!!

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

    • John,

      You state: “…pay off existing mortgages to increase their spendable income….” Yet a paying off a mortgage does NOT increase spendable income. Here is the Google (and a good) definition of spendable income: ” When you talk about and compare annual salaries among friends, you might throw around numbers based on your gross income, or income before taxes. But not all of that money is yours to spend — Uncle Sam gets a piece of it. The portion left over after accounting for taxes is your spendable, or disposable, income.” Spendable income is income after Social Security, Medicare, federal income, and state and local income taxes. In other words we cannot spend the portion of our income that belongs to government.

      So how does paying your mortgages increase spendable income? It increases cash flow, not income! Writing in this way exposes our fundamental lack of financial knowledge. Our industry seems to pride itself in stating the wrong thing and then defending it. While I have not seen you personally do that, too many in our industry do just that.

      While I agree with you when you say the following, I do not think you mean to mean to say it that way: “They use it as a hedging vehicle, to leverage investments,….” Leveraging investments is so risky that the securities regulators had to step in and reduce its practice when it comes to margin accounts.

      While the emphasis may be a little strong you are right when you say: “Sure, a HECM is not for everyone but todays HECM is a different tool than it used to be. Todays HECM is not used like it was, which was looked at as a last resort method of getting money to bail a senior out to avoid foreclosure or bankruptcy!” Yet as a tool, it has not changed except to get worse since there are NOW fewer proceeds available on HECM mortgages and restrictive rules on when proceeds can be used.

      Here again I have difficulty agreeing with you: “Today’s HECM is being used more than ever as a true retirement planning tool and financial planners and advisers who are informed are realizing that.” Yet where are the endorsements justifying that statement. Yes, many say that but verifying that is very difficult if not impossible.

      Here we do NOT agree at all: “The affluent are using the HECM and their home equity for many reasons.” There is no reason to believe that “the affluent” are using HECMs at all. It is the Mass Affluent whom we are targeting today, not the affluent. The mass affluent are defined by Google as: “In marketing and financial services, mass affluent and emerging affluent are the high end of the mass market, or individuals with US $100,000 to US$1,000,000 of liquid financial assets plus an annual household income over US $75,000.” The affluent are in a much higher liquid asset and household income level. The affluent include the one percenters and generally in comparison make the mass affluent seem very poor.

      The level of financial knowledge and understanding is far lower than it should be in our industry. Our peers as well as ourselves need to have a better handle on what we say.

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