Positioning Reverse Mortgages as a Solution in a Down Market

One of the most prominent scholarly advocates for using reverse mortgages in retirement laid out a case last week for finding opportunity in the volatile stock market.

“A reverse mortgage helps preserve a portfolio and gives it a chance to recover,” Wade Pfau, professor at the American College of Financial Services, said at the 2018 Housing Wealth in Retirement Symposium in Washington, according to a Forbes report.

Pfau and fellow Home Equity Conversion Mortgage researcher Barry Sacks examined the ways the products can become more attractive in bear markets at the event, which was co-sponsored by the American College and the Bipartisan Policy Center, a Washington-based think tank.

Forbes contributor Ted Knutson laid out the hypothetical example of a retiree who needs $3,000 per month from her portfolio to cover expenses for a year. If her index fund had a value of $250 per share, she’d have to sell 144 shares to recover that amount — or 180 shares if the stock market causes the fund to dip 25%. 

“Home equity creates much more stability in retirement,” James Lockhart, the co-chair of the Bipartisan Policy Center’s Commission on Retirement Security, said at the conference, according to Forbes.

Back in February, when the stock market took its first tumble after seemingly endless good news, reverse mortgage originators told RMD that a short-term correction wasn’t enough to boost volumes — but that extended uncertainty could. Since then, the market has seen wild swings amid the president’s unilateral actions on trade, which could create an opening for HECMs to fill a need for retirees worried about a fluctuating Dow Jones Industrial Average.

Changing perceptions

Speakers at the conference noted the potential downsides of taking out HECMs, with MIT finance professor Deborah Lucas pointing out the costs and fees associated with a reverse mortgage. She pegged the average origination cost at $27,000, with a general guideline of $18,000 for $100,000 in HECM proceeds.

In general, however, the gathering emphasized the ways that the reverse mortgage industry have changed since the days “of operators evicting widows,” as Knutson put it. Former Treasury Department advisor Mark Iwry characterized home equity as a way to avert emergencies in retirement, while also acknowledging that retirement planners have largely neglected the asset class when looking at their clients’ overall financial health.

Jamie Hopkins, also an American College professor, suggested that employers should mention reverse mortgages to retirees during their exit interviews going forward.

“I find it shocking financial advisors haven’t paid much attention to housing wealth in retirement,” Hopkins said, per Forbes. “That has to change.”

Written by Alex Spanko

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