While reverse mortgage products have always had reputational hurdles to overcome, one of the oft-repeated ways that product educators and industry professionals have cited in an attempt to appeal to financial planners is by using a reverse mortgage – Home Equity Conversion Mortgage (HECM) or otherwise – to avoid sequence of returns risk. That way, when the stock market is exhibiting volatility, a senior can draw from the reverse mortgage until their investment portfolio stabilizes.
That turn of events has become far more tangible recently due to the outbreak of the COVID-19 coronavirus. This past Monday, the market endured its steepest decline since 1987, its worst decline since the beginning of the coronavirus’ economic impact according to the New York Times.
This could have the effect of making reverse mortgage loans an even more viable option from the perspectives of financial planners and advisors, particularly for those whose primary concern is the mitigation of loss in their clients’ portfolios, according to experts who spoke with RMD.
Reducing expenses, ‘buffer assets’
Since the stock market is in “bear market” territory, financial advisors will likely be looking at solutions for lowering the outgoing cash that their clients are obligated to pay, and a reverse mortgage may be a flexible solution towards that goal. This is according to Jamie Hopkins, head of retirement research at Carson Group.
“If we see a prolonged bear market, expect advisors to start looking at ways to decrease client expenses,” Hopkins tells RMD. “If you are working with retirees, one way to do this might be to pay off a forward mortgage with a reverse mortgage. This could substantially reduce the client’s monthly outflow of cash, which can be a huge help during a trying time like now in a bear market with lots of uncertainty in the global market also.”
Another advantage that a reverse mortgage can provide particularly while the bear market persists is as a “buffer asset,” which Dr. Wade Pfau, professor of retirement income at the American College of Financial Services and principal at McLean Asset Management has advocated for recently. As time has gone on, this concept has only been reinforced in Pfau’s mind.
“I’m personally finding the idea of a buffer asset even more compelling in terms of not having to plan for such a low withdrawal rate because of the ability it provides to skip taking portfolio distributions at particularly dangerous times in retirement,” Pfau tells RMD. “I would guess that others would become more open to the idea.”
Pessimism vs. reputation, necessity for cash flow solutions
One of the symptoms of the ongoing coronavirus occurrence, however, can be a predilection toward pessimistic thinking. If that kind of thinking prevails in someone, then the reputational concerns surrounding the reverse mortgage industry could present an issue, Pfau says.
“One countervailing point could be the psychology of the doom and gloom around people becoming worried that a reverse mortgage could also cause them to lose their home as everything else plummets,” he says. “A more natural response is probably to cut spending instead of trying to spend the same amount by using the reverse mortgage. But certainly the reverse mortgage is becoming a more attractive option for those who can get over the behavioral hurdles.”
While market volatility is in place, finding viable and sustainable solutions to cash flow problems that have been created by the pandemic is going to be an essential piece of the financial puzzle for many clients of financial planners, Hopkins says. If that’s a key problem that they are seeking to overcome on behalf of their clients, then a reverse mortgage may be a viable solution.
“I did a presentation to a group of advisors in Texas this week and I’d say anything that can help with cash flow will be of importance in the coming months,” he tells RMD. “If advisors can reduce drawdowns on retirement accounts and investable assets by turning off monthly mortgage payments or by freeing up equity in one’s home for spending needs through a reverse mortgage, I think they will be more willing to look at the product than they were during that last few years with the market doing so well.”
Financial planners may already be coming around to reverse mortgages
While the current crisis may accentuate a renewed interest in and viability for reverse mortgages to solve financial clients’ problems, something of an awakening has been in place for some time in terms of how planners are seeing reverse mortgages. This is according to Stephen Resch, VP of retirement strategies at Finance of America Reverse (FAR).
“Even before this market meltdown, [financial advisors and CFPs] have been changing their tune,” Resch tells RMD. “In my presentations and meetings over the past year, many have been acknowledging their need to look at home equity as part of their fiduciary responsibility and as I have noted in the past, this is being driven by demographics and the need to provide effective later-life funding strategies for longer life spans.”
However, in terms of current conversations related specifically to this outbreak, Resch says that this is simply not the time to “evangelize” reverse mortgages since advisors are dealing with conditions that are unprecedented. Still, once the current crisis passes, there will be more opportunities to discuss the incorporation of home equity into a financial plan.
“This is an incredibly stressful time for advisors, dealing with unprecedented market conditions and client concerns,” he says. “As an advisor myself, the last thing I want is someone calling to sell me on a new concept or idea. We can’t make the current situation better, but when this is over, and it will be, we will have an ideal opportunity to speak with advisors about the many benefits of including home equity in their financial planning process.”
Because of that, there is potential for the reverse mortgage industry to materially benefit from the environment once we get to the other side of the current concerns, he says.
“Conversations were already improving long before this meltdown, and once this is over, I expect it will be a boom for the reverse industry,” Resch says. “We have access to alternative, non-correlated income, can eliminate mortgage payments, and provide lines of credit or cash all of which can help with the recovery from this rout, and better prepare advisors and clients for the next market event.”