Do Reverse Mortgages Transform Home Debt into an Asset?

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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3 comments

Linda March 14, 2022 at 9:01 am

Hi Shannon, I love this..thank you 🙂 Linda

Reply
James E. Veale, MBT March 14, 2022 at 10:11 am

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.”

Reply
James E. Veale, MBT March 14, 2022 at 11:45 am

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

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