Advisors Need a Fresh Look at Reverse Mortgages
Through inertia and stubbornness, old ideas die slowly. Financial advisors maintain a dismal view about reverse mortgages. However, much has changed in just the past few years. Revisit your outdated thinking with an open mind about a tool that is on the cusp of more widespread use.
To the extent that there ever was a conversation about reverse mortgages as a retirement income tool, it focused on either real or perceived negatives of the traditionally high costs and potentially inappropriate uses for these funds. Those conversations often suffered from misguided ideas about the homeowner losing the title to their home and hyperbole about the American Dream becoming the American Nightmare. If there was an accepted use in financial and retirement planning for reverse mortgages, it was only as an absolute last resort once all other resources and possibilities of liquidity had failed. Bad press still plagues reverse mortgages.
But much has changed in the past several years.
Since 2013, the federal government, through the Department of Housing and Urban Development, has continued to refine regulations for its Home Equity Conversion Mortgage (HECM) program to improve the sustainability of the underlying mortgage insurance fund, to better protect eligible non-borrowing spouses and to ensure that borrowers have sufficient financial resources to continue paying their property taxes, homeowner’s insurance and home maintenance expenses. The thrust of these changes has been to better ensure that reverse mortgages are used responsibly as part of an overall retirement-income strategy rather than simply as a way to fritter away assets in an unsustainable and irresponsible way.
Meanwhile, on the academic side, a series of research articles published since 2012 have demonstrated how responsible use of a reverse mortgage can indeed enhance an overall retirement-income plan. Recently, I reviewed and replicated past findings and extended the analysis further in my own research article. Importantly, these research articles have all incorporated realistic costs for reverse mortgages, both in relation to the upfront costs and the ongoing growth of any outstanding loan balance. The benefits found are net of the costs.
The reverse mortgage should be viewed as a method for responsible retirees to create liquidity for an otherwise illiquid asset, which in turn creates new options to support a more efficient retirement-income strategy (more spending and/or a larger legacy). This liquidity is created by borrowing against the value of the home with the flexibility to defer any repayments until after the borrower has permanently left the home.
It is odd that more advisors are not embracing reverse mortgages for clients wishing to stay in their home as reverse mortgages improve the odds for clients to enjoy a greater overall net worth while also supporting a greater financial portfolio for the advisor to manage.
Because there are so many biases against reverse mortgages, it can be hard to view the matter objectively without a clear understanding of how the benefits can exceed the costs. To understand their role, let’s step back and clarify the overall retirement-income planning problem we seek to solve. The key is to understand that retirement income is not an assets-only investment problem; those assets are funding the retiree’s liabilities.