Academic inquiries from researchers such as Barry and Stephen Sacks, Stephanie Moulton, and Wade Pfau have increasingly been used to promote reverse mortgages as retirement planning tools, and have contributed to shifting perceptions of the product among the general public.
But as the industry prepares for lower principal limit factors and increased insurance premiums, a lot of that research is suddenly outdated — and the exact effects on the Home Equity Conversion Mortgage on retirement strategies once the new rules take effect on October 2 is still unclear.
Pfau — a professor at the American College of Financial Services in Bryn Mawr, Pa. — weighed in on the coming shifts on a webinar hosted by Reverse Mortgage Funding last week, offering speculation but cautioning against making definitive statements about the future uses of a HECM.
The event was designed to educate financial planners about the product, but Pfau used the time to explore some of the post-October 2 possibilities, laying out a list of potential HECM strategies ordered by the speed at which the funds are used: For instance, the HECM for Purchase sat on top along with using a reverse mortgage to pay off an existing forward mortgage or to fund aging-in-place renovations, while opening a HECM line of credit to hedge against retirement spending “shocks” was listed at the bottom.
Because the new lending rules will result in slower growth for open-ended HECM lines of credit, Pfau said, consumers may find the more immediate uses for reverse mortgage proceeds more attractive, and the longer-term plays less so.
“It’s not going to be as attractive,” Pfau said of the line of credit. “I don’t know how much less attractive at this point.”
For instance, RMF advisor channel leader Tom Dickson presented data showing that under the new rules, a 62-year-old borrower with a home worth $636,150 would eventually reap $600,000 less in credit-line growth by the time she turned 92.
“It really benefits the consumer at the expense of the lender and the mortgage insurance fund,” Pfau said of the credit-line strategy. “I don’t think it’s been a very popular strategy, but I think the government’s just trying to close that door before it opens too widely and too many people start trying to do that.”
But Pfau also emphasized that the growing line of credit remains a “very powerful retirement income tool” despite the changes.
“That growth’s still going to happen, just a little less in terms of the percentage,” Pfau said.
Written by Alex Spanko