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 New research suggests the products may actually be worth a look if
one can tune out the possibly shady sales tactics.
Reverse mortgages allow homeowners aged 62 and above to borrow
against their home equity, and to receive either a lump sum, a
series of monthly checks or a line of credit that can be tapped as
needed. The debt does not have to be repaid until the borrower
leaves the home by selling it, moving out or dying.
The Consumer Financial Protection Bureau slammed industry
advertising earlier this week, saying it misled people about the
risks and costs of such loans. Older homeowners in the bureau's
focus groups "were generally confused" by the ads, director Richard
Cordray told a news conference.
The ads gave people the impression that a reverse mortgage is "a
risk-free government benefit" rather than a loan with fees and
compounding interest that increases the balances owed over time, he
said. Reverse mortgages typically are insured by the federal
government but are made and serviced by for-profit private lenders.
Cordray also took aim at ads that feature celebrity endorsers such
as Henry Winkler, Robert Wagner and former U.S. Senator Fred
Thompson, without mentioning them by name.
"These well-known actors, even a former senator, add a false air of
credibility to the products," Cordray said.
FLIPPING THE CONVENTIONAL WISDOM
Financial planners have long shared consumer advocates' dim view of
reverse mortgages, viewing them as an expensive source of credit
suitable only as a last resort for people who have depleted their
other assets.
However, recent research, published in the influential Journal of
Financial Planning, suggests that reverse mortgages can help make a
retirement portfolio last longer by allowing homeowners to tap their
equity when markets are down.
Retirees who sell stocks during bad markets have a greatly increased
chance of running out of money, since they are pulling the funds
from a shrinking pool of assets and the stocks that are sold do not
have the chance to rebound.
Setting up a "standby" reverse mortgage - using the line of credit
option - would allow an investor to avoid selling stocks in a
downturn and instead use his or her home equity for income.
"We find this risk management strategy improves portfolio survival
rates by a significant amount," researchers John Salter, Shaun
Pfeiffer and Harold Evensky wrote in a paper published in the
Journal of Financial Planning. "The improvement in survival rates is
attributable to the mitigation of the volatility drain - the risk of
having to sell investments when depreciated."
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Evensky is a respected fee-only financial planner in Coral Gables,
Florida, while Pfeiffer is an associate professor at Edinboro
University in Pennsylvania. Salter is an assistant professor at
Texas Tech University and a wealth manager at Evensky's firm.
The portfolio preservation strategy changes the conventional wisdom
about when to set up a reverse mortgage. The Consumer Financial
Protection Bureau recommends borrowers avoid tapping their equity
too early because of the risk they will run out of money. But
planners recommending the portfolio preservation approach suggest
setting up the line of credit as soon as possible.
The amount you can borrow with a reverse mortgage typically declines
with age, but setting up a reverse line of credit and leaving it
unused can actually increase the amount of credit available over
time, said fee-only financial planner Michael Kitces, a partner and
research director for Pinnacle Advisory Group in Columbia, Maryland.
The credit limit increases each year by about the same amount as the
reverse mortgage interest rate.
Kitces, who blogs at Nerd's Eye View and who has led workshops in
the strategy at financial planning conferences, also questioned the
wisdom of delaying a reverse mortgage for people who have few
assets.
The older you get, the less you can borrow, which means people who
wait may not be able to squeeze sufficient income out of a reverse
mortgage, he said.
Shady advertising certainly can victimize people who do not
understand how reverse mortgages work. But that does not mean the
loans are always a bad idea. With the right planning and objective
guidance, reverse mortgages can play a role in helping people
through their retirement years.
(Editing by Beth Pinsker and Matthew Lewis)
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