Financial Planners More Receptive to Reverse Mortgages During Crisis

A survey of approximately 230 financial planners during a Mutual of Omaha Mortgage and International Retirement Resource Center webinar hosted by Dr. Wade Pfau late last week revealed that 77% of financial planner respondents are more receptive to offering reverse mortgages to their clients in light of the stock market volatility introduced by the ongoing issues of the COVID-19 coronavirus pandemic. This is according to Dr. Pfau, who shared the results of the survey with RMD.

Additionally, reverse mortgage borrowers have increased the levels of their draws from their reverse mortgage lines of credit recently, according to data shared by Celink chairman and CEO Robert Sivori during a “town hall” webinar conducted by the National Reverse Mortgage Lenders Association (NRMLA).

Reverse mortgages have often been cited by those receptive to their use in the financial planning community as viable products that can be used to avoid sequence of returns risk, where a hypothetical borrower instead chooses to draw on the reverse mortgage while their investment portfolio endures volatility due to the conditions of the stock market.

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Market concerns driving receptivity

In the webinar hosted by Mutual of Omaha Mortgage with the International Retirement Resource Center, “Best Practices for Retirement Income,” many different elements related to retirement financing were discussed including the difference between the accumulation and distribution phases of retirement planning and understanding retirement risks in the current climate. The webinar was planned prior to the outbreak of the coronavirus, but had added relevance to the retirement conversation in light of the pandemic.

In regards to the response to reverse mortgages, Pfau discussed what reverse mortgages could bring to a retirement portfolio but polled his audience of financial planners about their receptivity to them well before he actually began the reverse mortgage segment of his presentation.

“The webinar covered many different topics, and we asked the question before I discussed reverse mortgages,” Pfau tells RMD. “I was a bit surprised that the number [of receptive financial planners] was so high.”

Much of this reverse mortgage receptivity is likely fueled by the anxieties currently inherent in financial markets. The market has continued to exhibit volatility even in spite of additional unprecedented action on the part of the Federal Reserve, which said it would buy as much federal government-backed debt as it needs to in order to ensure that financial markets continue to function, according to the New York Times.

The current market volatility likely creates even more concerns on the part of people who are at or near retirement in the current climate, so those who manage the assets of people in this situation are likely looking at more options to protect portfolios, Pfau says.

“I think there is a lot of concern about the impact of these market declines and the low interest rates on near retirees,” Pfau says. “And so, we are seeing more advisors being willing to consider ‘outside the box’ thinking to address these challenges.”

Additionally, Pfau’s work on reverse mortgages was also recently cited by Jeffrey Levine, CFP and director of advisor education for Kitces.com, when discussing that a reliable source of capital for a senior in times of financial stress can often be the home.

“Notably, there are a variety of ways in which homeowners may be able to unlock some of the equity in their homes,” Levine writes. “For instance, spurred on by research, including that conducted by Wade Pfau, some planners have encouraged eligible clients to secure line-of-credit style reverse mortgages on their home to help mitigate sequence-of-return risk and to avoid selling assets during significant market drops (like this one!).”

Reverse mortgage, LOC draws increase

When briefing industry professionals on patterns observed in reverse mortgage draw activity, Celink chairman and CEO Robert Sivori asked for a quick report on borrowers’ activity in drawing from their reverse mortgages, and related that there was an increase in activity of over 50%.

“Week over week, if you look at the week ending [March] 13 versus the week ending March 20, we saw a 55% increase in the number of draws, it went to 1,055 draws,” Sivori said. “From the previous week, it was 720. And then the increase in the size of the draws […] we had a 14% increase. It was 8.7 million as of last Friday. The previous week and before that, it was 4.9 million. So, [the size of the draws has almost doubled].”

Draws on reverse mortgage lines of credit have also seen notable increases, Sivori said.

“And then we also are seeing […] some line of credit draws, the standby lines of credit, where some borrowers who had no balance or very little balance, maybe just the closing costs were on there — $3,000 — that did a full draw of $615,000 on that and they’re using it the way it was intended to be used,” Sivori said. “And by the way, these numbers fit January over February, as well. So, it’s been an increasing slope here on the draws being pulled down.”

Reputational issues remain powerful

In terms of the data shared by Pfau, while the 77% figure of those more receptive to reverse mortgages is a clear majority, the remaining advisers who did not answer in the affirmative to Pfau’s question are likely still influenced by their previous perceptions of reverse mortgages, Pfau says.

“For the other 23% [who did not express reverse mortgage receptivity], I do not know why they answered that way,” Pfau says. “But I suppose that it is still the impact of the built-in bias against reverse mortgages that has been part of the conventional wisdom for years.”

Reputational and educational concerns about reverse mortgage products have been a key issue that many in the industry have contended with for some time. In December 2019, RMD conducted a survey of its readers that garnered responses from more than 330 reverse mortgage industry participants, and a combined 62% of respondents expressed that the biggest challenges in the industry remain negative product perception and lack of product awareness among consumers.

To combat that, nearly half of respondents said that their own growth efforts in 2020 will revolve around refined marketing and consumer education practices.

Negative product perceptions among consumers still account for the biggest industry challenge, according to over a third of RMD survey respondents. A general lack of product awareness, which correlates with a low participation rate for reverse mortgages among seniors, is the next top challenge according to the same respondents.

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  • One of the best Webinars I’ve attended in a long time. Dr. Pfau really has his fingers on the pulse of retirement planning, and his insight during this webinar was very informative. Hopefully the advisor community that heretofore did not have any interest in learning of the power of a HECM will now take a second look.

  • While the information above is interesting and marginally helpful, statistically it has a very low level of confidence. The survey data is less reliable than political polls. The industry is so hungry for data, even unreliable information is accepted as useful.

    For example, what percentage of the financial advisers subscribed to Wade’s positions on reverse mortgages before the survey was taken? It seems improbable that 77% of all financial advisers in this country are willing to talk to their clients who are 59 years old and older about reverse mortgages. (Wade should be considered one of the best friends from that community that this industry has.) If 77% of financial advisers in the US support the use of reverse mortgages in the financial, economic, and securities market conditions we find ourselves today, imagine the number of closings we would be seeing right now. So if there is a flaw in the survey, it is in its most important feature, its reliability.

    “Reverse mortgages have often been cited … as viable products that can be used to avoid sequence of returns risk….” “‘…some planners have encouraged eligible clients to secure line-of-credit style reverse mortgages on their home to help mitigate sequence-of-return risk and to avoid selling assets during significant market drops (like this one!).’”

    These two quotations are promoting two different concepts. The first is generic like the idea promoted by Barry Sacks back in 2012 in his article “Reversing the Conventional Wisdom.” In that article, Barry argues that reverse mortgage proceeds (specifically from HECM Adjustable Rate Savers) should be used in periods following drops in the performance of the investments in a HECM borrower’s (HB’s) investment portfolio. Barry shows (based on some very questionable) assumptions that it makes little difference if a retiree takes the HECM proceeds upfront to delay further decumulation of the HB’s investment portfolio (until the HECM line of credit runs dry) or takes the HECM proceeds under a much more disciplined approach that he names the “coordinated strategy.”

    To a limited degree, the second quotation seems to support the use of the Barry Sacks’s coordinated strategy but in a modified manner to “‘…avoid selling assets during significant market drops (like this one!).’”

    Neither of these strategies are all that holistic. While I have little enthusiasm for the first quotation, the second needs to be modified by first culling through the assets in the investment portfolio to rid it of investments that are unlikely to recover, grow, and provide income and cash flow like the best of available assets and use the proceeds from selling the less productive investments and replace them with investments that are expected to do much better than those just sold. The second quotation should have also addressed restoring the available HECM line of credit (HLOC) by selectively selling some of the investments whose values are restored or nearly full restored to be able to paydown the HECM unpaid principal balance

    Some reverse mortgage advocates call the HLOC a buffer asset and then define buffer assets as assets…. The amount of the available HLOC is NOT an asset; it is a notation of how much MORE the lender is willing to loan the HB, if subsequent requests qualify. Also the HLOC does not function like an asset.

    For example, if a HB has a saving account with $100,000 in it and draws $20,000 out of the account, the new balance will be $80,000. Most of us agree that the savings account is an asset of the HB.

    Let us say that the HB’s line of credit is $100,000 and the HB takes $20,ooo out of it. Not only will the available line of credit drop by $20,000 to $80,000 but the unpaid HECM principal balance increases by $20,000.

    So if you take $20,000 out of the amount in the savings account the only thing that happens is the savings account balance (the amount available) goes down by $20,000. If the HLOC is an asset (which it is NOT), not only does the amount available drop by a draw of $20,000 BUT a debt amount also increases by $20,000 as well.

    If the HLOC is an asset (which it is NOT) as claimed by some, it is the only asset I know that for every dollar taken out of the amount available, not only does the amount available drop by the amount taken but the HB incurs increased debt of an equal amount. That means that for every dollar taken out of the HLOC, economically the HB loses $2. I know of no asset that acts like that.

    Two things are required for something to be an asset. It must be owned and it must have value. Since a servicer cannot generally honor a draw request 1) while a HECM is in default or 2) when the draw request is added to the unpaid HECM principal balance and the resulting total exceeds the Maximum Mortgage (or Principal) Amount, the HLOC draw request cannot be honored. These stipulation show that the HLOC is not owned by its HB. As to value, that is measured through the willing buyer and willing seller concept where the transaction is arm’s length and neither is under duress to complete the transaction. Normally a market that facilitates such transactions are involved with defining value as well. That is why the term market value is so commonly used today. It is from many such transactions that market value is derived.

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