Exploring Home Equity Amid Stock Market Uncertainty

The recent volatility in the stock market has brought stress and uncertainly to many retirees and investors. So far, the roller coaster ride has yet to significantly impact the reverse mortgage industry, loan originators said, but that could change if stocks continue to lose value.

As companies were releasing first quarter earnings in late April, the leading stock market indicators have fluctuated from bullish to bearish and back again. The interest in reverse mortgages, though, has remained steady, and seniors have largely resisted any temptations to use those loans as essentially a safe financial harbor, originators report.

For one, the move may not work for everyone, Ed O’Connor, marketing manager with the Home Equity Conversion Mortgage division of New York-based FirstBank said.

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“And the 2% MIP [mortgage insurance premium] has made this expensive for an option,” he said.

The recent stock market uncertainty comes as a new marketing pitch emerges in the reverse mortgage industry: Use your home equity when your 401(k) takes a tumble so you can give it time to recover. O’Connor and other originators are casting a skeptical eye at that marketing message.

“While it sounds good, it’s just a pitch,” he said.  It’s “no different than using a celebrity spokesperson. It helps to get the word out, but at the end of the day the product either fits and makes sense, or it doesn’t. We are not selling used cars here.”

That reaction mirrors the industry mood from earlier this year, when the once-mighty stock market took its first significant tumble after steady impressive gains. Laurie MacNaughton, of Atlantic Coast Mortgage in Virginia, cautioned that plugging the reverse mortgage as a cure-all for stock headaches could backfire on the industry in the long term.

“It’s tempting to use something like this as a ‘make hay’ moment, but opportunistic pitches erode trust placed in us by professionals of other sectors — at least in my market,” MacNaughton told RMD in February.

She also emphasized that borrowers should look at the decision to take out a reverse mortgage in the context of their own personal situations.

“If a reverse mortgage was a good fit before a market plunge, it’s a good fit following a market plunge,” she said. “If it was a poor fit before a drop, it may well continue to be a poor fit.”

Originators are still urging their clients to remain calm and avoid panic as investors and retirees wonder what’s next.

“Using a reverse mortgage line of credit as a portfolio protection product is smart whether the portfolio is full of stocks, bonds, mutual funds, etc., or things such as real estate,” said Parker Turk of Sun American Mortgage Co.

“The bottom line is that you never know where the values of these assets will be when the time comes for a retiree to liquidate,” Turk said. “That is why the line of credit simply provides flexibility for someone to buy time and sell a specific asset on their timeline and not out of panic.”

Written by Thad Rueter

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  • A reverse mortgage is not a cure all.

    In fact if one listens closely to the overall problem of MBS justifications in 2006 and early 2007, they came from simulations. Simulations are based on assumptions. Sometimes those assumptions are wrong.

    It has been troubling that when inquiring about the assumptions being used in the simulations for the strategies to reduce the risk from the sequence of returns, the response at least from one such strategist has been “don’t worry; the math is right.” Fortunately math is not opinion but, unfortunately, the assumptions going into that math are opinion. Like the old I/O (input/output) computer adage goes: “Junk in, junk out.”

    So far there is no verifiable case that comes from historical data that shows that over a 30 year period those with HECM lines of credit using the latest rage in strategies to offset risks from the sequence of returns do any better than those without HECMs. If those strategies work as promoted, we are at least two decades off from obtaining sufficient evidence to prove the strategy works in the “real world.”

    Many seniors are savvy enough to realize simulations are just that. They provide no proof, just a justification for the particular strategy being promoted. The next question will be did the seniors who intended to employ the offset strategy for a thirty year period actually follow through without significant deviation.

    The examples that are out there can work, if the underlying assumptions prove true AND seniors are disciplined enough to stick to the strategy; however, there is a strong need to be skeptical. After all the problem with our amortization schedules for our adjustable rate HECMs is not the math but rather the assumptions we use in making those computations such as the average effective interest rate for each year will approximate the expected interest rate (or in some cases the initial interest rate) on the adjustable rate HECM.

  • We are not stock brokers or are we hedging experts for our seniors stock portfolios!

    We need to stick at what we are best at, uncover the need of the senior and where a HECM can make our seniors life a better quality one. The last thing we want to do is create a stressful environment for our seniors by being a hedging expert and having it blow up in our faces and theirs!

    The HECM is still a great retirement planning tool if it fits the need and accomplishes the goal of our seniors!

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

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