CNBC became the latest mass media outlet to tackle the reverse mortgage landscape in the wake of major program changes rolled out last month, warning that the new principal limits and insurance premiums could “put a crimp” in some traditional strategies.
In general, the financial news network still comes down on the side of using Home Equity Conversion Mortgages in retirement, providing a quick recap of some of the major uses that financial planners have advocated even before the advent of the changes.
“One intuitive method is coordinating draws from investment portfolios and reverse mortgages,” longtime HECM proponent Tom Davison told CNBC. “Particularly in the first seven to 10 years of living on a portfolio, avoiding drawing from it in down years can be a big boost to sustaining the portfolio through the rest of your life.”
The outlet also promoted the potential benefits of using a reverse mortgage in lieu of long-term care insurance. According to Sally Long, a principal and wealth manager at Modera Wealth Management, the HECM could end up being less complicated to set up than a long-term care policy, which involves an application, underwriting, and final approval.
“What I find compelling about the HECM for this need is the growth in the line availability, along with the feature that doesn’t require payments of advances but the ability to do so exists,” Long told CNBC.
As several sources have pointed out to RMD, the line-of-credit growth under the new rules will be slower, potentially freezing out people who were interested in setting one up as a standby product.
Tom Dickson of Reverse Mortgage Funding, for example, presented statistics on a recent webinar that showed a 62-year-old borrower with a $636,150 house. By the time that borrower turned 92, she would see $600,000 less in credit-line growth under the new rules than under the old principal limit factors.
“That growth’s still going to happen, just a little less in terms of the percentage,” American College of Financial Services professor Wade Pfau said at the time.
Social Security question lingers
CNBC also addressed the recent controversy over using HECMs to delay Social Security benefits, an emerging strategy that faced scrutiny from the Consumer Financial Protection Bureau over the summer — and again last week, when bureau director Richard Cordray asked the Consumer Advisory Board to help spread the word about the potential pitfalls behind it.
Like others who weighed in after the August report, Davison told CNBC that the CFPB didn’t consider the benefits of using the strategy over a retirement that lasts longer than expected; in its report, which postulates that the costs of opening a HECM outweigh the benefits of Social Security delay, the CFPB only used average life expectancy.
Davison recommended the strategy as a potential option for anyone worried about running out of money before hypothetically turning 95.
“Roughly speaking, if you live to life expectancy, Social Security deferral may be about a break-even,” Davison told CNBC. “But what if you are among the nearly half the people who live longer than expected?”
Read CNBC’s full look into reverse mortgages.
Written by Alex Spanko