Coming Out of Denial

The following was originally published in September 2014.

The Financial Industry Sees the Writing on the Wall

“Refusal to believe until proof is given is a rational position; 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 federally-insured reverse mortgage. Reverse mortgage professionals encounter varying degrees 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 that 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 thousands 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 oftentimes 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 of pre-retirees have not saved enough money to live comfortably in retirement.

Alicia Munnell 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.

***UPDATE*** Bloomberg 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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