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MSN: 9 Common Reverse Mortgage Scams
Is each of these truly a reverse mortgage ‘scam’? “Because reverse mortgages can be a ready source of cash, fraudsters might encourage seniors to apply by making misleading claims or committing outright fraud. Some pitches include:
1. ‘You can delay Social Security’…”
Paying back a reverse mortgage- Bankrate misses the mark
Fortune.com: A supply shock is about to hit the housing market
The MSN “scam” #1 re using a reverse mortgage to delay social security payments is apparently drawn from the CFBP Issue Brief, “The costs and risks of using a reverse mortgage to delay collecting Social Security” published in August, 2017. The CFPB’s conclusions were challenged by Dr. Wade Pfau in an article that appeared in “Advisor Perspectives” on 12/189/2017 entitled, “The CFPB is Wrong about Reverse Mortgages”.
The article can be accessed here: https://www.advisorperspectives.com/articles/2017/12/18/the-cfpb-is-wrong-about-reverse-mortgages
and I would encourage all to read it.
While I find little in the CFPB position to be recommended, neither do I wholeheartedly support the position of Dr. Pfau published in mid December 2017, since it is very dated. While the delay strategy itself has real potential to help many current and future retirees improve their expected cash flow after age 70, it is at the cost of debt; however, payment on this debt can be delayed until a maturity event occurs such as 1) the sale of the home, 2) not meeting minimum residency requirements, 3) not paying real estate taxes or insurance, or 4) the death of the last surviving borrower who lives in the home.
In corporate finance, there is a form of analysis employed that helps determine if an asset should be acquired and it is called the payback period. As applied to using a reverse mortgage to increase Social Security benefits through a delay strategy, it draws attention to one factor and that is when will the total increased benefits equal the theoretical payoff of the debt. In some cases, it is less than five years while in others, it is over 15 years —- after reaching 70 years old. The trouble is, if the borrower does not anticipate outliving the payback period, the estimated result would be an economic loss to the heirs of the borrower. Yet the payback period is but one way to evaluate delaying Social Security benefits.
Dr. Pfau’s article assumes that the reader has more fear of poverty in retirement than fear of not reaching life expectancy. It is my personal position that most readers have concerns on both fronts and that the tolerance of the client toward various risks need to be considered. Further, the analysis should be driven by the anticipated facts and circumstances of the client at 62 years old through 70 years old.
Then there is the amount needed to use the delay strategy and it can VARY. Say the client would receive $2.000 at 62 but $3,429 at age 70, and only needs $200 per month from a reverse mortgage to do that; this client should be far less reluctant to delay Social Security by using a reverse mortgage than one with same basic facts and circumstances who needs $1,900 per month from the reverse mortgage.
While the upfront fees on a reverse mortgage should be a consideration, they should NOT be isolated but included as part of the overall costs of the strategy. Focusing on components can result in making the wrong decision.
Like most reverse strategies, some will fit better than others but in some cases, none will fit at all. The problem with the reverse mortgage industry is that you will find various levels of honesty and integrity among its originators. While I am personally sold on the product, I am less than sold on several of the strategies promoted by some members in the industry but is that not the case with most sales activities?