Two of the most difficult things to watch retirees deal with are health crises and financial challenges. When there is no solution, it’s heartbreaking.
Our mission is helping people overcome the struggle of not having enough cash or income in retirement so they can make the most of the rest of their years. Reverse mortgages are not the problem, they're an attempt to address the real problem.
When I worked at Merrill Lynch, a mentor, Steve Bernardy, told me, "Our job as financial advisors is not to make our clients rich, our job is to keep them rich. It's their job to accumulate the wealth."
There's a parallel with reverse mortgages. Reverse mortgages are not financial alchemy; they help with cash flow but not net worth.
If you don't have enough wealth before you get a reverse mortgage, you won't have enough because you got one.
That's not meant to sound harsh, it's just a truism no one wants to talk about. Imagine, on a realistic budget (one that accommodates minor surprises but not major catastrophes) you're going to need $500,000, on top of your retirement income, to pay your bills through an average life expectancy. If your net worth or total wealth is $400,000, a reverse mortgage is not going to fill that $100,000 gap.
This, I think, is the back story why blame gets cast on this highly-regulated, government-insured financial product. It's easier to blame a home loan than address the real issues, what I call the six causes of retirement struggle.
People tend to get off track when they look for solutions to difficult situations and the conversation turns to a victim/villain narrative. People can become a victim by circumstance but they stay a victim by choice.
Last week, Bloomberg published an article in the Economics section titled, America’s Most Hated Home Loan Is Staging a Comeback. The gist of the article is that reverse mortgages aren't good and the industry is trying to pull a fast one by substituting Ph.D. academics for celebrity spokespeople.
In my opinion, the reverse mortgage ‘hate’ phenomenon is misdirected on two sides. One side tries to demonize reverse mortgages and those who offer them. The other has angst and anger that reverse mortgage loan amounts are too small.
This second group asks in frustration, “Why can’t I get more?” We’ll cover that in our next post where we’ll do a thought experiment called: Pretend You and I Own a Bank.
The goal of this post is clarity, not agreement. Anytime we talk about addressing the issue of insufficient cash or income, whether in retirement or not, it’s tough because humans want choice and control and our egos want to protect us from admitting we make mistakes.
Articles that demonize products or solutions confuse without enlightening and deflect us from action, to borrow a Jordan Peterson phrase.
In the interest of full disclosure, I am a Certified Reverse Mortgage Professional, which is a credential from the National Reverse Mortgage Lenders Association in D.C. My goal is not to come across as a reverse mortgage salesperson, rather to dial down the emotional rhetoric around what is essentially a math question.
That question is this: how do I maximize income in retirement while minimizing taxes and risk. The answer is always constrained by the choices available.
Last week, in response to a post about reverse mortgages and retirement planning, I wrote:
What percent of your friends and family have saved enough that they have no worries about outliving their money or healthcare expenses in retirement?
It was a rhetorical question. We all know the answer is very few people have that much money. If you have 200 friends, maybe one can say, “I have so much money I’m not worried about anything.”
For the other 199 friends, and/or those who give them financial advice, my post concluded with:
All sources of wealth will be needed – thus the importance of understanding home equity solutions.
Why home equity solutions? Because for most people, most of their wealth is in their home. Back to the Bloomberg article.
Reverse Mortgages Are Bad
This line of reasoning is mainly based on ignorance. The dictionary defines ignorance as a lack of knowledge or information. I’ve noticed, among my acquaintances, the smartest ones are the most at ease saying, “I don’t know.” And the opposite is also true.
Ignorance is not an insult, rather it’s a condition of not knowing. If something you thought you knew turned out not to be true, how soon would you like to know?
Reverse mortgages are more of a symptom than a cause. They are an imperfect financial product, like auto insurance. Having car insurance doesn’t prevent you from sliding on a wet road and running into something.
And a reverse mortgage won’t give you financial security or lifestyle beyond the wealth you’ve accumulated. You don’t get what you can’t pay for.
At the risk of over-simplifying, the funding retirement - home equity solution story goes like this:
- Food, shelter, clothing, medical, and entertainment cost money
- If you have wealth, you don’t have to go without, or ask for a handout
- For most people, most of their wealth is in their home
- There are two ways for those 62+ to access home-based wealth: reverse mortgage or sell the house
- If you sell and rent, you’re still paying a mortgage, you just don’t get the house appreciation
- Reverse mortgage opponents are usually heirs who want a larger inheritance
- A reverse mortgage default is usually a property tax default, wrongly blamed on the mortgage
- When the conversation gets emotional and off track, go back to #1
Instead of taking the tack: You’re Going to Outlive Your Retirement Savings, Now What? the Bloomberg article posits a new villain – the academic.
It starts by trying to discredit a quoted professor by noting he works for a mortgage company. If a mechanic says changing the oil in your care helps the engine last longer, his statement isn’t less true because he works for Jiffy Lube.
Chris Mayer, the academic in the article, didn’t get his Ph.D. from M.I.T. so he could take advantage of elderly people by way of a reverse mortgage. My bet is he is more aware of the coming financial crisis surrounding underfunded pensions and inadequate retirement savings than most of us and he wants to be part of the solution. That he earns money doing so doesn't invalidate his why.
Next, I took issue with the image in the article showing a picture of a 92-year old with the caption stating the woman was at risk of losing her home after taking out a reverse mortgage. Association is not causation. Whatever difficult circumstances the woman faces, they would be worse if she had a conventional mortgage with a monthly principal and interest payment.
More than likely, she would have had to leave her home many years ago if it weren't for the reverse mortgage. I’ll bet, more than anything, she just wants to stay in her home as long as possible. That's one of the most frequent planning requests we hear: I want to stay in my home.
How Do People Lose A Home?
Usually people lose a home because they’ve failed to pay their mortgage payment and/or property taxes. There is no mortgage payment with a reverse mortgage so we’re talking property taxes.
Imagine your cash or income is insufficient... would you say it’s easier to pay a (mortgage payment + property taxes + insurance + maintenance), or just taxes, insurance, and maintenance? If people lose a home with a reverse mortgage, it's because they are out of money. That's a difficult thing to admit but I encounter many retirees who have the courage to say that.
If there is one common trait I’ve witnessed among all the seniors I’ve talked to it’s the mature awareness that there is no free lunch. In fact, one of their big drivers is that they don’t want to be a burden on others.
Cognitive decline of course is a different issue and the government has implemented safeguards around that issue (mandatory counseling).
In their most rudimentary form, reverse mortgages boil down to four points:
- You can borrow significant money
- You don’t have to make payments on that borrowed money for years or decades if you promise two things:
- You must pay your property expenses in a timely manner*
- The loan has to be repaid when the last surviving borrower moves out; i.e., its not their primary residence anymore
*Property expenses include property taxes, hazard insurance, HOA dues if applicable, and general maintenance.*
I spoke to the Bloomberg author about two other points in his article: (1) costs and (2) selling and moving to less expensive quarters. Let’s start with costs.
Reverse Mortgage Costs Are Too High
The costs to get an FHA-insured reverse mortgage are nearly the same as getting a conventional purchase or refinance loan, except for the upfront mortgage insurance, which is calculated on the value of the home (or National Lending Limit), whichever is less.
Reverse mortgage insurance, however, is different than the typical mortgage insurance on conventional loans. Conventional mortgage insurance only protects the lender, which is why lenders are willing to lend to someone who has little skin in the game.
Reverse mortgage insurance includes several borrower protections, in addition to protecting the lender.
First, an FHA-insured reverse mortgage line of credit cannot be frozen, reduced, or cancelled – regardless of what happens with the home’s value. Ask anyone what happened to their traditional bank HELOC during the last recession. Many were frozen or cancelled when they were most needed.
Second, the reverse line of credit, or the FHA monthly payment option, is guaranteed by the government in the event their lender goes out of business. This guarantee came into play and protected seniors during the great recession when the likes of Financial Freedom and Countrywide ceased to exist.
Third, if the value of the house is less than the loan balance, the heirs are not liable for the shortfall. If there’s equity, the borrower(s) or heirs get it, if there isn’t, the borrower(s) or heirs are not responsible. It's sort of heads you win, tails you win.
How can that be? The mortgage insurance premium insures the shortfall in the unlikely event one occurs.
The government is constantly trying to strike a balance between keeping reverse mortgages affordable and protecting the tax payer. The challenge they have is whatever assumptions they make won’t be realized for years or decades. It would be like driving looking only at your rear view mirror.
Reverse Mortgages Are Expensive
At the risk of sounding like a salesperson, saying something is expensive begs the question: compared to what?
Consider a hypothetical example. A 70-year old homeowner is eligible for a reverse mortgage (they have enough income to cover property expenses and they have good recent credit). They have $300,00 in home equity and $30,000 in savings/retirement accounts.
They need $1,500 per month on top of their Social Security to pay their monthly bills. They do not have any children who are in a position to give them money each month. Their savings will be used up in 20 months. What are they going to do?
The author suggests they could be better off selling and moving to less expensive quarters. With a reverse mortgage, our hypothetical borrower only has to pay for taxes, insurance, and maintenance. If they become a renter they’ll be paying for those things plus a mortgage (somebody else’s mortgage). Renting has its own set of challenges - rising rents - as noted recently in the OC Register.
And selling a home involves significantly more costs than a reverse mortgage – think real estate commissions, closing costs, moving, annual rent increases, etc.
The whole rent versus own consideration is itself a big math problem. I wrote a lengthy article called Rent or Own In Retirement, which you can read here. In the hypothetical example, we talk about the $200,000 mistake.
The Six Causes of Retirement Struggle
Earlier I said home loan hate is misdirected. For most people, the necessity of a reverse mortgage or home equity conversion mortgage is a symptom. Here is why we struggle in retirement:
- Insufficient savings
- Unexpected longevity
- Central bank financial repression where savers are punished with near-zero interest rates
- Societal changes where elders no longer live with subsequent generations
- Medical and college cost inflation that dwarfs wage increases
- Sequence of returns risks for those who retired at the beginning of the Great Recession
The intellectually easy way out is to blame a product, a mortgage loan, or to vilify lenders or Ph.D.’s. I submit that is a red herring. You don't blame your car insurance when you slide off a wet road.
Home equity conversion mortgages are one of the most regulated financial instruments in America and no one was ever forced to get one. Also, anyone who has ever gotten a reverse knows how comprehensive the disclosures and counseling process are.
People know they’re borrowing money that has to be repaid and, by skipping monthly mortgage payments, their equity may go down - depending on house appreciation rates. Sometimes a home equity solution is the answer, other times it's not even an option. People don't like not having options.
Our goal is to help people find peace and happiness. The way we do that is by helping them lower distress around finances. The best way I know of to accommodate people’s desire to stay in their own home (and pay for food, clothing, medicine, etc.) is a home equity solution - if they're eligible.
The Bloomberg article concludes by saying the answer is deferring property taxes. Property taxes for many seniors are low because they bought the home long ago. Saving a couple hundred dollars a month is not the answer. And many people are surprised to learn that interest rates states charge on deferred property taxes can exceed that of a reverse mortgage.
The core issue is this: people will have to make use of all their wealth to fund their retirement. Why? Because most of us don’t like living way below our means and there isn’t enough in our savings, IRAs, and 401-k’s to pay for a 20+ year vacation (retirement). Financial advisors and reverse mortgages help people efficiently make the most of the wealth they have.
Just below the web version of the Bloomberg article is another article titled: A Recession Is Coming, And Maybe a Bear Market, Too, by Gary Shilling. Gary is very smart, often right, and always worth reading. If Gary is right, the time to consider a reverse mortgage is before his predictions come true; i.e., while home values are high and you still qualify.
If you’d like to see how much you can get with a reverse mortgage, click the Reverse Mortgage Qualifier button below.
About the Author
Kent Kopen earned his Reverse Mortgage Specialist credential in March 2007. Last year Kent earned the CRMP (Certified Reverse Mortgage Professional) designation. There are less than 170 CRMP designees in the United States. Mr. Kopen also provides education, tools, and strategies to professionals who offer financial and legal advice to others. "Our resources help financial advisors, CPAs, and estate planning attorneys help seniors optimize their home equity to provide greater security and peace of mind."
