A Stanford Researcher Offers Perspective on Reverse Mortgage Practices

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

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  • The sequence of returns argument is more smoke and mirrors than reality in today’s market.

    The first problem cited in the article above is taking reverse mortgage proceeds versus savings. Savings are not earning and are expected to earn at a rate equal to or greater than the rate of savings, net of income tax. If Barry Sacks had used a realistic earnings rate rather the rate of return for the S&P 500 for a selected but biased period of years, his article on conventional wisdom would have been concluded just the opposite of what it did, even in most cases, net of income taxes.

    Just today a firm that is well known for its relative accuracy in predicting rates of return for various indices came out and stated that the S&P 500 would likely return 32% in total over the next five years. On a monthly basis that is a rate of return of just 5.56%. That is a little better than the combined accrual rate on a HECM if the initial note interest rate does not increase over the same sixty month period. Considering income taxes, the answer favors the Sacks methodology but looking just at interest rate risk, the answer favors taking out the HECM but not using its proceeds until the portfolio is gone.

    As one person has pointed out income tax should not wag the dog. It is but one factor even though it is an important one in retirement planning. One must be very concerned if he or she must be in tow with a specific financial advisor for a financial retirement plan to be successfully executed.

    This whole marketing theme of obtaining a HECM to enjoy a better lifestyle (or quality of life) is every bit the danger this researcher makes it out to be.

    I am leery of waiting until one is in their 60’s to plan retirement; that is fundamentally flawed. One should be making definite plans for retirement as early as one’s 40’s and revising those plans with more frequency the closer one gets to actual retirement.

    A reverse mortgage is not always a loan of last resort although is a very good one in such cases. Reverse mortgages are far more functional when taken early in or even near retirement.

    In light of recent articles on the direction of the industry, there is a new wave (there have been others) of reacting to the current market place where the reverse mortgage industry is trying to replace financial planning with reverse mortgage planning. We see that with companies now referring to themselves as “retirement solution specialists.” Some of that is reaction to the slow process of converting financial advisors into referral sources. Reverse mortgage originators who take up this mantle are those practicing outside of their business expertise. They have “fools” as “clients.” This is not new but we are selling to a protected class and must resist the guaranteed “easy” sell.

  • Everything that Steve Vernon pointed out, reverse mortgage loan originators should be doing and should be knowledgeable about?

    If we have originators out there that are not doing what
    Steve Vernon suggested, as far as when sitting with a senior client, going through everything in detail, we have major problems.

    Steve Vernon mention the reverse mortgage as a last resort tool to use but he did not go into a complete explanation of what he meant by saying that?

    I felt the interview with Steve Vernon, and RMD was a good one. I can’t say I agree totally on his philosophy about a reverse mortgage but I may be prejudice in how I viewed the interview!

    I felt the advice he gave to originators in the reverse mortgage space was very good, as I indicated above. All in all, the interview was a good one and worth reading.

    John A. Smaldone

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