The academic perspective on the reverse mortgage market is not always one that gets widely circulated among originators, but it is likely beneficial to those who work in the reverse mortgage industry to see what scholars are saying as an alternative point-of-view.
To that end, RMD spoke with Steve Vernon, FSA who is a consulting research scholar in the financial security division at Stanford University’s Center on Longevity. In November of 2017, Vernon published a research paper called “How to ‘Pensionize Any IRA or 401(k) Plan,” which sought to provide substantiated data to assist in workers’ retirement through properly leveraging the financial tools and assets available to them, including reverse mortgages.
We asked him to go deeper into his findings on the reverse mortgage product offering, and though he doesn’t believe it’s something that should be used frivolously, he offers perspective that illustrates scenarios for best use if a particular consumer’s situation calls for it.
“My belief, really, is that reverse mortgages ought to be a tool of last resort for retirees,” Vernon told RMD. “But, when I say ‘last resort,’ there are a lot of people who might be faced with this last resort.”
Still, Vernon was quick to acknowledge that there are a lot of misconceptions about the realities inherent in reverse mortgage borrowing from seniors who are interested in leaving their homes to their children or charities.
“A lot of people think that the lender owns your home, which is not the case,” he explained of those misconceptions. “A reverse mortgage is like any other mortgage: when you sell it, whatever you got for the sale of the house minus the mortgage belongs to the owners. So, you could still take out a reverse mortgage and still have some kind of a legacy to pass on, it’s just reduced compared to not having a mortgage on it.”
When RMD asked if he would offer any advice to reverse mortgage originators, he related his hopes that they would disclose all of the associated fees upfront in initial conversations with prospective borrowers, but to also brief them about the fact that there are multiple ways to use the reverse mortgage product that borrowers may not have thought of when thinking of ways to implement it into their specific situation.
“You can have a line of credit versus tenure payment,” he said. “Tenure payment acts like an annuity where it’s a monthly payment. And so, a retiree might have a different use for a line of credit versus a tenure payment. I’m guessing the originators would explain those different uses of reverse mortgages.”
He has also seen in both his research and with personal acquaintances, though, that some borrowers simply don’t exercise the right discipline when all of a sudden finding themselves with an influx of cash, and that originators can be a big influence on the longevity of their clients’ financial decisions.
“I’ve seen neighbors take out reverse mortgages, and then they take cruises, and the money’s gone,” he explained. “So, I just think there’s a lot of dangers in the reverse mortgage market for people who don’t have the discipline or the knowledge on how to use them, and I would hope that originators would explain those dangers.”
Still, Vernon was adamant about countering the judgments that some borrowers may be making about their own decision to utilize their home equity, instead of pragmatically looking at all the tools available to them that might help grant them freedom in retirement.
“I’m not saying ‘don’t use them,’” he said about the reverse mortgage. “I would disagree that it’s a sign of failure if you get a reverse mortgage on retirement.” He concludes that thought by saying that looking at all of the available tools to prospective borrowers before they make a decision constitutes “smart use of all your assets,” including the potential employment of the reverse mortgage product.
“When you’re in your 60s [and] you’re planning retirement, it’s just smart to look at all your assets, and how you can best deploy them, and that should include your home equity,” he said.
While still emphasizing his belief that it should only be employed as a last resort, Vernon was still pragmatic in offering his perspective for the final reality that will hopefully result from a borrower’s decision to get a reverse mortgage.
“For people in that situation, so what if it’s a high cost for a reverse mortgage? It’s still funding your retirement!” he said. “So, in that instance, it’s a price worth paying, in my opinion. So, I’m really about getting people to make conscious choices.”
Vernon concluded his discussion with RMD by offering different use scenarios he researched, and found one of the best ways to leverage the product would be in taking out a line of credit and using it to protect against sequence of returns risk. In this situation, if a retiree is drawing from their savings to cover their expenses and the market goes down, they then stop drawing from their savings and tap a reverse mortgage until the market comes back.
“[That] can be a good strategy,” he explained. “It probably takes someone working with a financial adviser to put it all together.”
At the end of the day, Vernon says that the primary source of his advocacy simply rests in helping consumers make good financial decisions, which he believes can include a reverse mortgage for those in specific circumstances.
“We just want consumers to be aware of what those circumstances are so they can go in with their eyes wide open. And then, if they fit, then good! Use that tool, use that equity,” he explained.
To read Mr. Vernon’s November 2017 paper on the subject, click here. He is also the author of a recently-published book, “Retirement Game-Changers: Strategies for a Healthy, Financially Secure, and Fulfilling Long Life.”
Written by Chris Clow