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Changes In Retirement And The Reverse Mortgage Market
In recent years American’s views on retirement have changed substantially. Many are working longer not from choice but need. Dan Gorin, supervisory policy analyst for the Federal Reserve said “The definition of retirement has changed dramatically. In the past when we asked people surveyed, those who were planning to work forever had answers that were twofold; some said ‘I like to work,’ and some said, ‘I need the money.’ More recently, more people saying they’re never going to retire because they need to work.” What is ironic is that only 8% of those aged 62 or older have even considered a reverse mortgage and 2% actually took one according to a nationwide survey conducted last December by the RAND American Life Panel.
So what are the other 92% doing? It may boil down to denial and resistance in seeking assistance. Gorin says fewer than half, yes half of Americans actually seek advice on housing and retirement finances. This is tragic as the the home represents the majority for even moderately affluent individuals pre-retirement wealth. Many Pre-retirees are aware of the benefits of non-taxable home sales gains, mortgage interest tax deductions and energy tax credits but oblivious of the assets full potential when employed in a comprehensive retirement plan. Not surprising since most senior homeowners have no experience in converting debt into cash flow. This chart from the American Housing Survey in 2007 shows the sleeping giant of home equity with 64% having no mortgage whatsoever and 35% holding some combination of a mortgage, second or line of credit. Today’s retirees overlook their home being more concerned with equity security than income security. Equity security is hard-wired into the American psyche. Work, save, payoff your mortgage and retire with no mortgage payments as you transition into the fixed income years of your retirement. Income security however, lends itself more to truly solving the most vexing issue in retirement…
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3 Comments
I agree with your comments but one factor that I believe based on my personal experience is that same old issue we have faced from the beginning.
They, the seniors, don’t want to “loose” their house, they want to leave it to their heirs, and the cost of the reverse and loss of equity that they don’t receive over time. No matter what or how much we tell them, it’s the reality of our business.
Always enjoy your info.
Sandy Sasser
Ms. Sasser,
This is exactly why we need a marketing message which clarifies those issues. As one friend used to tell me with great frequency, we can emphasize inoculation (correct wrong ideas) in our ad messaging or try to find the right hook to get the immediate origination; the choice is ours.
When seniors talk about leaving their home to their children that is usually a good sign that they have not done much serious estate planning which included their children. Unlike what most people think, estate planning is not all about taxes; it is about a well thought out plan of the passage of residual assets to heirs.
It is understandable why seniors believe they lose their home when they do a HECM. Too many times there is a huge stress on some kind of nonexistent conversion. For example, if home equity is an asset on my balance sheet (and it is), then its conversion must have been into a lesser amount of cash, right? Here is where legal equity and mathematical get wrongly treated as one. With a nonrecourse mortgage even if my mathematical equity goes negative, my legal equity does not change unless the terms of the mortgage require it.
Because HECM land is full of irrational and illogical comparisons and marketing ideas, we confuse too many seniors, despite our efforts to “educate.” Our marketing efforts should mirror our education; too many times they do not.
Reverse mortgages, particularly, HECMs are indeed the sleeping giant among retirement cash flow options. While some jump up and down declaring that HECMs for Purchase are today’s sleeping giant, the issue is much, much broader.
While there will always be some percentage of seniors who have not looked into reverse mortgages, 92% is far too high. Obviously with all of the advertising which is done on reverse mortgages, that is not the significant problem. It is our message.
We all know the adage that if it is good to be true, well then it is. Our message has generally emphasized easy money (“the house pays you”) and enjoying excess. While it is not as exciting or does not provide an immediate hook, we need a message which emphasizes long-term cash flow and prudence, not exactly the most exciting of subjects.
Those who watched CNBC ads on Municipal Bonds will have some idea of the type of advertising I am referring to — strict, factual, and without much fanfare. While this style does not need to be all of our advertising, it should be a significant portion of it.
This is not about converting even a loan into cash, it is a very simple transaction, cash from a mortgage, with very beneficial features which confuse many. Before looking into HECMs I never heard about an unused line of credit which can grow methodically even though residually. Nor did I hear about a mortgage where the borrower chooses each month how much to pay, if any. It was very refreshing to read that like borrowers on late payments, lenders will be penalized for late payments to borrowers.
Despite how many have heard about the costs of reverse mortgages, it seems we have failed to communicate its benefits. On Friday a CFP educator asked me if I thought a HECM should be in his future. He was taken back by the unusual benefits of a HECM. He then stated that he was merely curious when he asked but now he would take it to heart. When we discussed the financial risks of the nonrecourse aspect of HECMs to note holders, he realized its costs are reasonable.
We are at a crossroad. What route will we take?
(The views expressed are not necessarily those of RMS or its affiliates.)