Inflation is at its highest level since 1982
The latest inflation numbers are out and they’re downright unsettling, especially for retired Americans living on a fixed income.
Last week inflation in the U.S. jumped to its highest level since January 1982. CNN Business reports the Consumer Price Index rose 7.9% in the last 12 months. The Bureau of Labor Statistics tracks consumer costs using what’s called a ‘basket of goods’. That basket is heavily influenced by housing and rental costs, food, and energy costs; each of which has skyrocketed in the last year.
For example,
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energy costs have spiked 25% from February 2021 to February 2022. And that number does not include the 70 cents per gallon surge in the price of gas at the pump last week alone!
The honest truth is inflation will be with us for some time and will not go away quickly. Prudent older Americans should prepare for a continued increase in the cost of living.
So how does a reverse mortgage transform mortgage debt into an asset? If you define an asset as a benefit to the borrower then it certainly is. If you use the accounting definition we find that a reverse mortgage is not an asset that offsets liabilities. However, what a reverse mortgage does provide is the asset or benefit of increased cash flow.
A homeowner refinancing their existing traditional mortgage into a reverse allows them to stop making monthly principal and interest payments altogether. That’s why reverse mortgage borrowers never receive a payment book to submit regular payments or any payments whatsoever. Can they choose to make payments? Of course. And just like any mortgage, the homeowner must continue to pay property taxes and homeowner’s insurance to avoid defaulting on the loan.
What about homeowners with no mortgage balance? If they’re retired then they are likely living on a fixed income that cannot absorb the erosion of the dollar. When the cost of filling their gas tank increases by $50 in a month where will they find the extra money to make up the difference? What expenses can they realistically cut? Just how far are older homeowners willing to give up the things that give them the quality of life that includes as eating out, driving to visit family, or social engagements? At what point does paying off a mortgage become more important than one’s own happiness and sense of well-being?
Inflation is likely to worsen forcing many older Americans to become miserly or creative. The creative option is more widely available thanks to today’s low interest rates and high home values. However, with the Federal Reserve planning to enact a series of interest rate hikes, that window of opportunity is closing fast. Transforming mortgage debt into the asset of a loan with no required installment payments not only frees up much-needed cash each month, it allows the prudent to prepare for what may be one of the most tumultuous economic periods in American history.
Who will sound the alarm? Who will inform older homeowners that there are options to convert their housing debt into a non-recourse loan that doesn’t require principal and interest payments? Their financial advisor? How about their accountant? Will their mortgage broker who helped them refinance their loan 2 years ago enlighten them? Likely neither will. That’s where dedicated reverse mortgage professionals like yourself can begin reaching out to both homeowners and professionals alike before it’s too late.
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3 Comments
Hi Shannon, I love this..thank you 🙂 Linda
An asset is tangible or intangible property in which you have the right of use and that can be passed on to heirs if you died today. A benefit that is available to you but has conditions (and reverse mortgage proceeds do) that must be met before you can receive them and that cannot be inherited are not outright assets, especially if an equal amount of liability is generated by obtaining the benefit. At best the growth in the line of.credit of a reverse mortgage creates a contingent asset AND a contingent liability of an equal amount.
BUT does one call an increase in the credit available on a Macy’s credit card, an asset? Those who do are generally thought of by most of us think as deluded and financially desperate.. Why is it any different with the increase in a line of credit of a reverse mortgage? Advocating that an increase in available credit is an asset is nothing more than a disgraceful sales tactic.
Some might argue the recourse nature of a reverse mortgage versus the recourse nature of a credit card. But the nonrecourse nature only restricts a lender from obtaining a deficiency judgment at termination. Whether the value of the collateral will be less than the amount due at termination can only be accurately determined reasonably near the time of termination. Yet in some cases, some or all of the line of credit could BECOME a contingent asset with little chance of collectible liability but that amount can NEVER be inherited by a non borrower, unless the borrower takes the cash from the line of credit but in that case, the non borrowing heir is inheriting cash, not any part of the line of credit itself. Death of the last surviving borrower terminates any available amount in the line of credit, period.
Trying to redefine “asset” to include an extension of credit is deplorable unless our goal is to confuse what a reverse mortgage is and what it does. This does not enhance our own integrity or make our products more suitable in the eyes of the competent and ethical financial advisers with fiduciary responsibilities (imposed by law or contract) to their clients. It is OK for our marketing to push to the edge of the envelope but this blog goes beyond. Examples of pushing the edge is adopting the term “buffer asset” and the THEORY of the coordinated distribution strategy. As of yet there is NO empirical evidence (not even an insignificant number of reverse mortgages proving this theory) lifting this theory to the level of “factual.”
Shannon,
I must apologize for overstating and inappropriately adding to your case.
Reducing cash outflow or increasing cash inflow with an adjustable rate reverse mortgage can be a very useful and effective strategy in getting a senior’s finances under control. While I do not condone raising its value to the level of an asset, it is a valuable feature of a mortgage that is nonrecourse with no monthly payment requirements. This cash flow strategy should never be undersold. We, as an industry, need to develop a new term for thie VALUE of this strategy that attracts both seniors and their financial advisers and also causes them never to forget the strategy and its relative value.
This is one strategy that based on the percentage of first time borrowers, who use their proceeds to pay off (both voluntarily and involuntarily) debt that requires monthly payments, is not just sound theory but it is also backed by overwhelming empirical evidence.. The strategy not only provides cash outflow relief but it also can reduce the cost associated with HIGH cost debts, including most credit card debt.
While not willing to call the impact of this strategy an asset, reverse mortgages can truly and factually be used to improve cash flow.
Readers, be careful though. When a reverse mortgage pays off a typical 30 year mortgage with seven years of payments left, the strategy only improves cash flow directly for seven years. It does not directly improve cash flow beyond the seventh year. BUT indirectly what the borrower does with the increased cash flow CAN improve cash flow throughout retirement; this is a possible indirect value and benefit from this strategy.
So my long time friend, Shannon, I leave my apologies with you.
James