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Monte Carlo?
Not the vacation destination, but a complex financial model. For seniors with assets under the management of a financial professional it’s more than just’getting’ a reverse mortgage. Â In part two of our exclusive interview, Â Dr. John Salter of Texas Tech discusses what a Monte Carlo simulation is, capital needs analysis and retirement horizons. A great insight into the world of comprehensive financial planning. When should a retiree sell or hold stocks in their portfolio and what sources of cash can they use including a ‘standby’ reverse mortgage?
2 Comments
Monte Carlo simulation is a rather old process which today is found even in Excel. In business school over four decades ago, it and random number generators were used to provide tools in operations management courses as well as many capstone undergraduate business school courses. Back then most of us were using math tables to calculate annuities, discounted cash flows, future values, amortizations, internal rates of return, and other financial computations. For those of us who did such calculations frequently in business, software was available for mainframe or mini (actually very, very large computers) computers but such computing was generally considered expensive and reserved for clients who could afford that level of service.
While Monte Carlo simulation and random number generators are very helpful in designing less subjective tests of how a financial plan might work under varying assumptions, their use has to be tailored to the concerns of the client. As Dr. Salter was pointing out, discounting cash flow and time value of money are the fundamental tools used in analyzing the present position of the client and comparing it to the benchmarks of where the client was supposed to be in their financial plan.
As to how to present the subject of reverse mortgages to the financial community, what Dr. Salter is doing has yet to be seen in our endorsement numbers. What MetLife and Wells Fargo did showed up in our endorsement numbers. In the calendar quarter ended September 30, 2012 (including the September 2012 Outlook report which was release and withdrawn with no re-release date even approximated), the Saver endorsement volume was less 45% of what it did for the same period last year.
Be careful what you are recommending in the way of research. If you cannot offer the Saver without full or even partial origination fees, remember most of the early presentations relied on no origination fees. As of today it is unclear how the financial community will respond to higher than presented upfront costs.
Long term the type of presentation Dr. Salter is making will work with CFPs. The hook in the Salter approach is doing what is best for the client. The hook in the approach used by MetLife and Wells Fargo was much different.
Right now, Saver endorsements are less than half of what they were last year. Will this trend continue? No one knows. Unfortunately case number assignment data does not reflect what type of HECM the certified counselee selected so the only market level data available on Savers (and HECMs for Purchase) is found in HUD reported endorsement information in its Outlook report.
Good post