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Coming Out of Denial

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The Financial Industry Sees the Writing on the Wall

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“Refusal to believe until proof is given is a rational positions; denial of all outside our own limited experience is absurd.” These words ring no truer than when it comes to those who embrace or reject the federall-insured reverse mortgage. Reverse mortgage professionals encounter varying degress of denial in their dealings with potential reverse mortgage borrowers; but even more insidious is the denial of those in the financial community who often dispense advice which may be harmful to their audience.

Reverse mortgages have been the unwanted child of the mortgage industry for far too many years. Often spoken about in hushed tones as toxic, radioactive, predatory by critics the tide is beginning to turn. A recent article in the New York Times entitled “Love Them or Loathe Them, Reverse Mortgages Have a Place” reveals a substantial awakening amongst the financial and banking community.

Let’s face it, even traditional mortgages were not warmly received in their early days. Early mortgages prior to the Great Depression were mostly short term loans where the homeowner had to renegotiate the terms each year. Not surprisingly as home values plummeted in nearly one in ten homes were foreclosed upon. The early stigma was that mortgaging your home was a risky proposition. Even following the establishment of FHA mortgages were viewed as perilous until after World War II. Then let’s consider the economics of a traditional mortgage. A borrower with a 30 year mortgage will have very little of the monthly payment applied to the loan’s principal balance until after year 15. Let’s not forget a borrower could make payments almost exclusively to interest and lose the home after sinking in tens if not hundreds of thousand of dollars of their hard-earned money. So again, which is riskier; a traditional or reverse mortgage?

Fast forward to today. Retirees sitting with their financial advisor will hear the importance of asset allocation while often times they neglect to include their clients largest asset: their home. It seems odd and perhaps borderline malpractice to ignore what is typically one’s largest asset in the planning process. It would seem that even financial professionals can do harm merely by letting their biases and denial influence their recommendations. The good news is times are changing. Retirement reality is about to slap the collective public and the financial community in the face as nearly two thirds or pre-retirees have not saved enough money to live comfortably in retirement.

Alicia Munnel with the Center for Retirement Research at Boston College was quoted in the Times article of her convection of the increased acceptance of reverse mortgages saying “When I look forward, I don’t see how people are going to have enough, I really don’t. Our assessment going forward is that it’s (home equity) is a luxury we’re not going to be able to afford. There are going to need money, and this is the place where the money is.”

Even after twenty plus years the HECM remains at the vanguard of mortgage lending and thus is an easy target. Ironically the silver lining is the harsh reality of retirement unpreparedness which is dragging critics out of denial and into the real world in which most American’s live today.

Download a PDF version of this blog post here.

***UPDATE*** Bloomberg just released an article entitled “Why Financial Advisors Still Hate Reverse Mortgages” which speaks to the challenge we face in reaching financial professionals.

 

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4 Comments

  1. Brilliant. You are really drilling into the fabric of this product and the problems it helps to scribble out, not only for the properly guided user but by the misguided mis-user of info (planners and the press).

    Great points on how much interest someone had paid before principal really starts being applied too.

  2. Shannon, another fine piece of writing.
    Send this to the Journal of Financial Planning !

    • HECMVet, Thank you! I will contact the Journal to see if they would publish our articles. Thanks again!


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