As the reverse mortgage product continues to evolve, so too does the academic research examining its use as a financial tool in retirement. Last spring, David Johnson and Zamira Simkins from the University of Wisconsin–Superior joined the ranks of those studying the HECM’s effectiveness with an article exploring its use in the Journal of Financial Planning.
The article, “Retirement Trends, Current Monetary Policy and the Reverse Mortgage Market,” examines demographic and economic trends impacting America’s retirees.
“Current and future retirees face a series of challenges that will have a significant impact on their life in retirement,” the article states. “The recent recession negatively affected the value of their investment portfolios and the bursting of the housing bubble diminished the value of their homes. The aging of the baby boomer generation, increased life expectancy, and deteriorating dependency ratios are putting upward pressure on the government’s implicit liabilities and debt… Furthermore, lack of planning and unrealistic expectations about future costs of basic health care and long-term care will place many retirees in an untenable financial position. Therefore, identifying and using alternative sources of retirement income has become critical for current and future retirees.”
One viable alternative resource, the article concludes, is a reverse mortgage. The authors suggest that retirees re-examine their views on reverse mortgages and consider implementing one as part of their retirement plan in order to better prepare for the challenges ahead.
Johnson, an associate professor of finance, was once a reverse mortgage originator himself, giving him a unique perspective on the loan and its abilities. He worked for Financial Freedom for five years and then Generation Mortgage for three before the housing market took a downturn, prompting him to return to the world of academics.
Now, in addition to teaching, Johnson focuses his research on financial literacy and reverse mortgages. He says his time in the industry prompted him to conduct research on the HECM’s potential. “When I was in the reverse mortgage industry, I would constantly read all these negative stories in the news or someone would say something [negative] on a news program, and as an originator I was always trying to correct that misinformation,” he says. “When I got back into academics, I thought, ‘Well, the first thing I want to do is try to set the record straight, to get some correct information out there, because it is such a great product, and so many people still don’t understand it.’”
Johnson says part of the problem is that a stigma surrounds the idea of accessing one’s home equity, even though it can be tremendously beneficial when done properly. “I have seen so many people benefit from a reverse mortgage… I’ve never heard a single person complain about the fact that they did one. In fact, when I would run into [former clients] later, without a doubt, they would all say, ‘I wish I had done it earlier,’ because it had changed their lives. People did it for all different kinds of reasons, but they were all happy with it.”
Johnson says research like the work he and co-author Simkins published is part of an effort to break down this stigma and educate not only the public, but financial planners as well. He says embracing the benefits of a reverse mortgage is increasingly important as more boomers enter retirement age. “Even if people were diligent—saved for retirement, made good investments—they are going to outlive their assets,” he says. “We are living much, much longer than we ever anticipated.”
In order for the HECM market to truly grow, though, Johnson says the housing market needs to rebound.
“The biggest help for the industry right now would be a rise in home values, because the benefits have shrunk quite a bit, especially in certain areas,” he admits. “A lot of people overextended themselves, so now if they want to do a reverse mortgage, there’s just not enough equity there.”
Johnson says that for this to happen, banks need to loosen their lending requirements. “I think the banks suffered when the housing crisis occurred—there were foreclosures, they lost quite a bit of money—so they have kind of gone overboard… they have become overly conservative. I think that’s starting to change a little bit now; it just hasn’t happened as quickly as I thought it would.”
In the meantime, he says, promoting research that explores the benefits of reverse mortgages can help propel the industry forward. “I think highlighting academic research is certainly going to help, because most academics don’t have any skin in the game and they are going to give an unbiased opinion. If there’s something wrong, they are going to say it.”
“I’m happy the industry is starting to look toward academics and I think it has even supported some research, which is great, because the more they do that, the more information will get out there. Hopefully, we’ll get to the point where this is no different from a forward mortgage. People are going to understand how it works, and they’ll be able to make a decision if it’s best for them or not, and they won’t be misled by the misinformation that’s out there.”
Johnson also says positive coverage in the mainstream press will help. While the media is beginning to write more positive stories, he says it’s the negative articles that gain a lot of the traction. Reverse professionals, he says, need to get creative about how they are helping to spread the word. “People who have been in the business for a long time need to retool and remake themselves to try to determine how to get the message through,” he says. “We can’t keep trying to do the same thing over and over again. Whatever worked in the past might not work in the future.”
Johnson says he hopes to continue to publish research on the benefits of the HECM. “These are things that I think about all the time,” he says. “I’m trying to come up with some way to break that wall down, because I really believe in this product and I want everybody to understand it, and then they can make an informed decision.”
