WSJ: Standby Reverse Mortgage ‘Less Appealing’ After October 2

Taking out a reverse mortgage line of credit for a rainy day may have gotten less attractive after the introduction of new principal limit factors and mortgage insurance premiums, according to a recent story in the Wall Street Journal.

“We anticipate more consumers waiting to get [a reverse mortgage] until they actually need it,” LendingTree chief sales officer Sam Mischner told the paper.

Mischner’s company crunched the numbers and found that on average, the typical borrower will be able to access 58% of his or her home’s value with a reverse mortgage under the new rules, as opposed to 64% before the October 2 change.

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Jack Guttentag, a retired University of Pennsylvania professor and blogger who frequently writes about the Home Equity Conversion Mortgage industry, told the Journal that the new PLFs will have the most damaging effects on younger borrowers, giving the example of a 62-year-old with $300,000 in home equity. 

Before October 2, Guttentag said, that hypothetical borrower could have gotten $730 per month for life from a HECM, a figure that dipped to $613 under the new structure. That’s a drop of 16%, according to the Journal, while an 82-year-old with the same amount of home equity would see a decline of a little under 14%: While he could have netted $1,370 per month for life from an old HECM, he can now only take home $1,180.

The WSJ’s analysis mirrors what several experts have told RMD in the last few weeks — including American College of Financial Services professor Jamie Hopkins, who was quoted in the Journal’s piece as saying the HECM line of credit “is a much less appealing option moving forward.”

However, in conversations with RMD, Hopkins also postulated that a slower line of credit growth under the new PLFs could end up combatting one of the biggest stumbling blocks that reverse mortgage professionals face: The idea that a growing HECM line is too good to be true.

“That very robust line of credit growth, I actually think that might have been hard for people to really believe,” Hopkins told RMD. “I think a more reasonable-looking line of credit growth, with some limitations, actually feels more powerful from a marketing and consumer standpoint, where I’m more likely to believe it when I hear it.”

In the end, the Wall Street Journal asks: Is it still worth it to get a reverse mortgage?

“Most experts say yes, although the increasingly popular strategy of taking a reverse mortgage line of credit — known as a standby reverse mortgage — may become less useful because credit lines will now grow more slowly,” the paper concludes.

Written by Alex Spanko

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  • RMD states above: “Guttentag said, that hypothetical borrower could have gotten $730 per month for life from a HECM….” Yet is unclear from the WSJ article itself if that is what the Professor said at all or if it was an incorrect paraphrased statement.

    The WSJ reporter wrote the following (without quotation marks): “A 62-year-old with $300,000 in equity could have received a lifetime monthly income of $730 under the old rules….” So what is wrong with this short quotation? First reverse mortgage proceeds are not income whether received monthly or in a single lump sum. Second, without the proper caveat, it is logical to assume that the reporter is describing the lifetime of the borrower but tenure payouts last no longer (and sometimes not that long depending on subsequent payout elections of the borrower) than the lifetime of the HECM. So if the HECM terminates when the borrower is 82 due to a full payoff of the balance due, any tenure or other payouts will terminate as well on the date of the full payoff.

    Never is it said in the article that only adjustable rate HECMs offer monthly or tenure payouts. Also the reporter claims: “A reverse mortgage is a federally backed loan against a home’s equity that requires no monthly payments and is available to homeowners 62 and older.” I guess no one bothered to explain to the reporter that there are still some reverse mortgages being originated that are not “federally backed.”

    The reporter goes on to say: “…the increasingly popular strategy of taking a reverse mortgage line of credit—known as a standby reverse mortgage—may become less useful because credit lines will now grow more slowly.” Does having a line of credit mean one has a standby reverse mortgage? Hardly!

    But hold on, it gets worse as the reporter goes on to write: “That type of reverse mortgage ‘is a much less appealing option moving forward,’ says Jamie Hopkins. The Standby Reverse Mortgage has a word that follows it, Strategy. There is no type of reverse mortgage that is a standby reverse mortgage; it is a strategy.

    While Jamie Hopkins is right that the strategy may be less appealing, that is not true for everyone. The growth in the line of credit is a byproduct to the strategy, not one of its primary ingredients.

    To be clear, Harold Evensky, CFP, commonly known as the Dean of Financial Planning was the first to name the strategy, Standby Reverse Mortgage Strategy, as part of his Three Bucket Retirement Strategy which was merely an expansion and modification of his earlier Two Bucket Retirement Strategy. The Standby Reverse Mortgage was a very pragmatic approach to combining the use of a HECM adjustable rate Saver with financial planning. Some may point to the date of an article published by Barry Sacks but Evensky was providing information on the strategy for a long-time before his article was published. Even at that the Sacks approach to unconventional wisdom is complicated and poorly analyzed. For most retirees it is just too complicated.

    Since the growth in the line of credit is nonessential to the Standby Reverse Mortgage Strategy on its own and that growth has not been eliminated but reduced, it would seem that use of the strategy will only be partially hampered. As to the primary loser in popularity, that distinction will, no doubt, belong to the so called Ruthless Strategy since its value is wholly dependent on the size of the available line of credit at origination and the velocity by which it grows.

    • The fact that the amount of money a person will receive from a HECM is not usually the issue. It’s my personal experience, that most of my clients are having a hard time making ends meet. They’re making a decision each month to eat, or buy their medicine, literally. The fact they receive less money is of no consequence to them. Anything they get will enhance their lives immensely! With the HECM, they can now do both, eat and have medicine.
      The mere fact that the HECM is painted as a negative in this article is a complete disservice to the reader and potential client of the HECM. Perhaps responsible journalism has gone the way of the honest journalist. And you wonder why your readership is slipping.

      • >>the amount of money a person will receive from a HECM is not usually the issue

        I disagree, Ed, but we may be working with a different Client base. Most folks I talk to have a mortgage, and reducing the Priciple Limit inhibits them from qualifying.

      • Ed,

        You state: “And you wonder why your readership is slipping.”

        I never wonder about that.

        On a AAG site it shows you are in Pleasant Hill, Ca and on LinkedIn you originate in the Sacramento area. Which is it? Are you actually working with people in south Oakland, Lodi, or Stockton?

        With the customer wealth base you describe, how do you get them past financial assessment? I know in my area, around Seal Beach, CA, we have trouble enough with those who can easily afford their medications plus eat occasionally at Olive Garden and Outback.

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