CNBC: Reverse Mortgages Can Buffer Coronavirus’s Economic Shock

COVID-19, the so-called coronavirus which has sparked concerns of a global epidemic after spreading into multiple countries, has introduced additional volatility to the U.S. stock market as investors raise concerns over the effects the spread of the virus might have on the American economy.

For retirees, there are steps that can be taken to try and protect finances from the new market volatility, and one such tool seniors can employ is a reverse mortgage. This is according to Wade Pfau, professor of retirement income at the American College of Financial Services, as quoted in a new story published by CNBC.

“At some point it becomes too late to do anything after the fact,” Pfau tells CNBC.


Using stocks as a method to fund retirement is inadvisable in the current environment, Pfau says. Selling out declining-value stocks can lead to smaller stock footprints for investors, meaning they will make less money on that portion of their portfolio when the stock market does eventually bounce back, writes CNBC reporter Greg Iacurci based on Pfau’s input.

“Anything you can do to avoid selling assets for a loss will go a long way toward preserving your portfolio sustainability,” Pfau tells CNBC.

Turning to other assets less prone to volatility like cash or bonds is one such tactic that seniors can employ. One other tool that falls into that category is a reverse mortgage, Pfau says.

“They may also consider ‘buffer assets,’ which provide a steady stream of monthly income that don’t fluctuate with the stock market, such as a reverse mortgage,” Iacurci writes based on his interview with Pfau. “There are certain risks associated with reverse mortgages that retirees should gauge beforehand.”

Other interviewed specialists do believe that the shock to the market caused by the fear surrounding the coronavirus is temporary, but it’s difficult to tell how long market volatility will last.

“I think markets will go back up, but there’s no telling how long they will go down,” said David Blanchett, head of retirement research for Morningstar Investment Management to CNBC. “They could down for the next 10 years. No one knows.”

Delaying retirement and accumulating income for longer is a surefire way to avoid investment volatility, Blanchett says, describing that tactic as a “silver bullet.” However, those who are near retirement right now while this new strain of volatility has been introduced may also have to increase their current levels of saving if their portfolio has taken a hit recently, he adds.

Read the story at CNBC.

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  • The article is problematic and confused. When debt proceeds are incorrectly equated to income in an article that provides advice about how to restructure investments in a downturn is odd at best. Too many undisclosed assumptions underlie the conclusions presented in the article to make it suitable for all.

    So called corrections in publicly traded asset markets should give investors pause as to the vulnerability of their holdings, public or private and give thought to a different mix of assets. Some investments will have value changes that match market value adjustments almost identically. Others will go up and down almost independently of overall market moves (such as earnings and cash flow potential, accounting changes, and management fraud). Others will move in an almost exaggerated manner when compared to market indices. One rule as how to deploy or redeploy assets does not apply to all investment asset holdings.

    Having been employed at publicly traded companies, we had employees who had more value in their employer provided retirement plans than their home equity. A Fortune 250 company had high concentrations of employees at locations in north central Utah, along the border between Colorado and New Mexico, and in two desert communities in California (in the Inland Empire). In all three cases, growth in home values were low. At a Forbes 100 company, employees were located throughout not only the United States but throughout the world; the places where engineering operations were concentrated were Orange County, California (now moved to Dallas County, Texas) and Greenville County, South Carolina. At one employer, company contributions were held in employer stock but it also provided a self directed 401(k) plan. The other employer had a defined benefit pension plan that had diversified plan assets. Those employees who did best in timely choices in retirement plan available election option throughout their period of plan participation and distribution, generally were the most efficient and effective in employing their plan distributions throughout retirement.

    Then there was the unsophisticated notion in the article that those eligible for retirement should consider extending their time of working to accumulate income. First, the reason most employees extend their working lives is not primarily to accumulate income but to use those funds to live on rather than taking Social Security or invading 1) their employer provided retirement plan benefits or 2) their investment portfolios. Further workers do not normally accumulate income but rather a PORTION of the cash and other assets provided through such employment. Normally workers who invest convert some portion of the cash they receive into some type of investment asset.

    Normally, the biggest problem with the presentations on employing reverse mortgage proceeds in an overall retirement strategy is that they are normally tied to an investment strategy rather than to a cash flow strategy that is used in conjunction to an overall estate asset base strategy. Remember, reverse mortgages do NOT provide cash flow without increasing debt and debt to a senior is just the opposite of an investment.

    One of the silliest notions, I have recently been exposed to in this industry is that home equity is an asset. It is not. Home equity is the netting of an asset against all debt where the home is direct collateral on the debt. Some have stated that since a reverse mortgage is a nonrecourse debt, home equity cannot be negative where a reverse mortgage is involved. However, such thinking shows the lack of financial acumen of these proponents since recourse debt can also be placed on the home following the close of a reverse mortgage. In one case, reverse mortgages can be a second mortgage; if the first mortgage is recourse and the value of the home falls below the amount due on the first, how is home equity, not negative. Further if the borrower must pay off the reverse mortgage in full (as is the case with HECMs) at HECM termination in order to retain title in the home, and if the home is underwater, how is home equity not pragmatically negative where the unpaid principal balance is greater than the value of the home despite the current intentions of the borrower? So as to a BORROWER retaining title in the home, a HECM is pragmatically a recourse debt whenever the value of the home is less than the unpaid principal balance on the HECM. As is the case with all other reverse mortgages that require borrowers to pay the debt in full in order to retain ownership in the home at loan termination even when the value of the home is less than the unpaid principal balance.

  • The following statement needs clarification: “Using stocks as a method to fund retirement is inadvisable in the current environment, Pfau says.” The sentence is in the context of retirees. Yet there is NO caveat to that effect.

    Even in this era, when ACCUMULATING assets to fund retirement, stocks should be INCLUDED in the investment or (self directed) retirement plan portfolios. It is in the DECUMULATING stage (generally retirement), where asset type becomes crucial when investment asset markets are falling or have severely fallen and have yet to recover.

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