Spendthrift Risk & Negative Interest Rates

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Spendthrift homeowners pose a risk

I’ll never forget it. As I drove down the wooded driveway I saw it- a 40-foot used RV. I was a bit perplexed as I approached the front door of the couple who had inquired about a reverse mortgage the week before. There was no application submitted or even completed for that matter. I quickly learned they assumed their loan would go through and decided to buy the RV to treat themselves for an upcoming family reunion. Sadly they didn’t qualify.

The lesson? The poor spending habits of older homeowners not only continue after they get a reverse mortgage, but are often one of the largest contributing factors why they needed to eliminate an existing mortgage payment in the first place...

 

1 comment

James E Veale September 2, 2019 at 1:02 pm

Shannon,

Great vlog.

Is there anything inherently wrong with being a spendthrift? Not necessarily so. The problem is many people spend when they should save. Just look at the example Shannon gave.

I had a prospect who financed the purchase of a new motorhome for well over $100,000 so that he and his wife could travel the nation. His children saw the purchase as financially disturbing. As the prospect and his wife were finishing their planning, his wife unexpectedly passed away. By the initial meetings about a reverse mortgage, the value of the motorhome was just $40,000 even though it had barely been used since being purchased five years before. The Social Security benefits and annuity distributions of his wife helped pay the monthly payments on both the motorhome and the house; both stopped at her passing. After determining that the likelihood he would use the motorhome for travel was low, I suggested he sell the motorhome so that further loss would end and then get a HECM to pay off the last three years of his mortgage and the motorhome financing which had an unpaid balance due of slightly less than $50,000. He was OK with the idea until his daughter started hounding him on his poor decision of getting the motorhome and really hated the idea of getting a HECM. Unfortunately, he kept the motorhome because he did not want to hear anymore from his daughter (did not seem logical) and refused to get the HECM because he did not hear about making two major financial mistakes from his daughter. Our neighbor who introduced us to the prospect tells us he is almost out of money….

In 1984, spending $30,000 a month by a retiree and his wife sounded not only extravagant but also excessive to friends and neighbors but none of them knew how the retiree and his partner had saved over the years due to aggressive cost controls at their business; yet the couple were also quite charitable with their money and their time. Their spending has generally grown with inflation. Yet the retiree bought out his partner at a premium but sold his business at a huge discount to his son as part of his own retirement. With their cost controls, they were able to make hefty contributions to not only their profit-sharing plan and its related to 401(k) but they also were able to make maximum contributions to their defined benefit plan at moderate costs for employees. He and his partner were not only prudent and careful about their costs but they found a business where they could acquire “remainders” from textile manufacturers and sell them at premium prices to designers who served the wealthiest communities in Los Angeles. Due to his prudent and studious investing, the retiree had a rather large portfolio. Further, they had carefully chosen their home decades before and as the motion picture and television industry grew in Los Angeles, so did the value of their home by about 3500%. Despite their high spending levels, they managed to have a rather large estate to pass along to their children.

The first retiree in this comment needed a HECM but failed to get one. The other retiree would be insulted if you suggested that he and his wife needed a reverse mortgage. While the first retiree could be called a spendthrift, I find it hard to call the second retiree as anything other than prudent.

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