CNBC Tackles Reverse Mortgages in Post-October 2 World

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.”

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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

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  • I strongly believe that the delay strategy has never been adequately explored by seniors during the period before the date Social Security for the initial date of benefits is selected. More seniors should be electing the deferral especially when a reverse mortgage is not necessary to adopting the deferral.

    I am also against the use of the strategy where the risks of loss and the low likelihood of sufficient reward have not been adequately considered. This is especially true where the deferral is dependent upon obtaining a HECM or other reverse mortgage.

    Many of the arguments for using a reverse mortgage to defer the initial date for the payment of benefits are similar to those for acquiring a deferred annuity with HECM proceeds. Yet through riders several of the most risky features of a deferred annuity can be mitigated. The same is not true for the deferral of Social Security benefits.

    There are times when the strategy should be employed even if a reverse mortgage is required especially when the amount needed from the reverse mortgage is substantially less than increased benefit the senior will obtain as a result of the deferral. Yet training on this subject is rare in our industry despite the high level of advertising about its use. Normally, the strategy should only be employed after consulting a competent financial advisor who has a legal or contractual requirement to provide such advice using a fiduciary standard of care.

  • Rather just accepting Tom’s word on the matter, let us look at what the actuarial life table prepared by the Social Security Administration says about life expectancy. While there are better sources breaking down life expectancy into a wide variety of demographic characteristics and even with better projections, I believe the basic gender difference is sufficient to demonstrate why the decision needs to be carefully scrutinized by someone who is experienced and competent in performing such analysis using the specific facts and circumstances of the prospect. The use of the tables in this comment are to present the harsh realities of life. After all there is NO physical evidence that anyone born before 1800 is still living today.

    If we look at the latest posted table (2014), we will see that a male born in 1952 will find about 84.1% of males born in the US in 1952 are still living in 2014 while a female born in 1952 will find that 90.2% of all females born in the US in 1952 are still living in 2014.

    Now let us look at those age 84 in 2014. While these individuals were born in 1930, the percentage of the cohort still living at age 84 should not be terribly less than those born in 1952 when they are 84 unless there are substantial medical breakthroughs by then extending the lives of seniors. So let us assume the percentages will be 5% higher for men and 7% for women.

    Increasing the percentages accordingly for those born in 1952, we find that only 43.1% of men are still living and 58.9% of women. That would mean that in 22 years (62 to 84 and 2014 to 2036), only 51.2% of the men aged 62 in 2014 would still be with us in 2036 while 65% of women aged 62 in 2014 would still be with us in 2036. Please keep in mind that I have added a shaky assumption into the percentage living in 2036 of those born in 1952.

    While Tom talks about half living by age 84, what we find is something very different. What we should not care about is what percentage of those born in 1952 are living in 2014 except as a variable in determining the percentage of those born in 1952 who were still living in 2014 who survived until 2036. That gives an idea of the percentage who will live to see the benefit of taking the deferral by using HECM proceeds to completely replace the monthly Social Security benefit during the deferral period.

    What this simply shows (assuming the adjustments I made can be relied upon) is that with NO other information other than the basic gender of the prospect, there is a 50/50 chance a male can live long enough to see one increased Social Security benefit distribution from using HECM proceeds to completely replace Social Security benefits with the goal of obtaining maximum Social Security benefits through deferring the start date of the initial Social Security benefit distribution. The odds appear to favor women since two-thirds of women who were born in 1952 and are alive at 2014 are expected to live to 2036 using my shaky assumptions.

    The table can be found at:

    https://www.ssa.gov/oact/STATS/table4c6.html#ss

  • Well, this subject has been more than beat senseless.

    The “S.S. delay for higher benefits later” concept is a simple one. The vast majority of those planning retirement, already know a good deal about Social Security and are capable of making their own decision to suit their own, particular circumstances.

    Sure, read the write-ups, too, there are already plenty out there. But actuary tables (lol), really!?

    • Ed,

      I am not so sure about any of your conclusions. The risks are so great that few seniors even consider using the strategy without a HECM. Those who do with a HECM are simply increasing their risks.

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