HECMS: A Risky Proposition?

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Ken Fisher (‘the I hate annuities” guy) says reverse mortgages are a risky proposition. What about seniors with little retirement savings?

“I hate annuities. We don’t sell annuities. I would die and go to hell before I would sell an annuity”. Those words may sound familiar If you’ve seen Ken Fisher’s television ads or heard his radio spots for Fisher Investments. Recently he penned a national column for USA Today- “Considering reverse mortgages? Better to reverse course on this risky choice”. Is Mr. Fisher an expert on reverse mortgages?

6 comments

rmadvisor May 6, 2019 at 1:08 am

Overcoming objections is a necessary practice in a selling environment. But when is a reverse mortgage a risky proposition?

For example, a friend is a caregiver. At times she is asked to care for family members. She is paid but sometimes must travel and live with the family member for periods of up to one year. Since her family obligations can take her away from her home for periods exceeding six months, she realizes that her reverse mortgage could be involuntarily terminated. The size of the proceeds needed to pay off her existing mortgage is high and the historical rate of home appreciation in the area she lives is low. Looking at a modified amortization schedule prepared by her accountant, she realizes the crossover point where the balance due is likely to exceed the value of the home is long before she wants to retire. She wants guarantees that her loan will not be terminated if she is away from home caring for her family for more than a year. She sees the reverse mortgage as a risk of losing her home when she is older. How do you address her concerns?

Change the facts a little and your consumer wants to use a HECM to buy a new home but after the sale of her existing home she will have more than $100,000 left over even after paying off her all of her debts and buying the new home WITHOUT a HECM. Somehow she believes that getting a fixed rate H4P is the best solution for her situation. Yet her income is adequate to care for her projected needs for years to come. The proceeds from the loan plus the $100,000 will be held in Treasury instruments that will earn at a rate less than the projected growth rate despite her HECM growing at a rate projected to be about twice the Treasury rates. How would you advise her especially since she expects to move in 15 years to a community to where her friends are moving?

Is not that risk does not exist with HECMs and other reverse mortgage products but rather how we work with consumers to minimize such risk. Here the issue is not the rather obtuse NRMLA Ethics but rather the moral issue of helping a protected class of individuals from entering into transactions that are most likely not in their best interests. Perhaps readers have better or more relevant examples.

Reply
Bob Sparrow May 6, 2019 at 3:10 pm

I’m a reverse mortgage originator, a senior who has a reverse mortgage and have my portfolio with Fisher. When I saw the USA Today article, I sent the following to my VP contact at Fisher. He says he will move it up the line. I made some of the same, obvious, points you did. My comments are in red, but don’t show up in red here. Thanks for your video – I enjoy your comments weekly.
Bob Sparrow

Considering reverse mortgages? Better to reverse course on this risky choice
Ken Fisher, Special to USA TODAYPublished 7:40 a.m. ET April 28, 2019 | Updated 12:39 p.m. ET April 28, 2019
To Save or not to Save? Buzz60’s Natasha Abellard tells us why it may no longer be an option.Buzz60
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TV commercials label reverse mortgages simple fixes for elderly homeowners needing cash – a financial easy button. Here Ken is referring to one lender, AAG, and I would agree that they are doing a disservice to the industry by targeting their marketing to those who are ‘strapped for cash’ – that is not the highest and best use of a reverse mortgage, but I’m sure you know that.
Sorry, there is no such thing.
Yes, reverse mortgages can be attractive. Folks older than 62 (actually 62 or older) can unlock cash from their home without selling. They can simply draw monthly income, a line of credit (this feature, which is brushed over very lightly here, is one of the most amazing features of the reverse mortgage – more later) or lump sum from their home equity, with no repayment until the home is no longer their primary residence. Staying current requires covering property taxes, homeowners insurance and maintenance. ‘Staying current’ with ANY loan require you pay taxes, HOI and maintenance, but it’s ALWAYS something that the less-informed bring up hoping to scare a potential reverse mortgage customer.
But be careful. Read the fine print. Would Ken not recommend reading the ‘fine print’ in ANY document you sign? This isn’t money you lend yourself. It’s a loan using your home equity as collateral. That means interest, typically at a high rate, plus other fees and costs. Most loans have interest, in fact some forward mortgages have higher rates than reverse mortgages; all loan have ‘other fees and cost’. Ken is sounding like Suze Orman, who always mentions the liabilities of ALL loans and make them sound like they are peculiar to reverse mortgages. Worse than paying that interest monthly, it compounds, magnifying what you owe. When you sell, you repay the principal plus all compounded interest. Ken probably doesn’t know, or chooses not to mention, that you can actually make a monthly payment on a reverse mortgage if you choose.
Elderly retirees need their finances to be simple, clear and available until they die. Does this mean that no elderly retiree should ever get an annuity – they’re typically not simple and clear? Reverse mortgages’ ballooning costs can cut against those basic needs.
Reverse mortgage calculators show interest’s huge impact. Pretend you did one borrowing $2,000 per month for 10 years – $240,000 in total. At a 4.5% interest rate, your total due after 10 years would $303,530 – before fees. What fees? That’s $63,530 in interest alone. Bump it to 20 years of payments and your final bill is $779,160 – $480,000 in principal plus $299,160 in interest. Thirty years? You owe $1,524,468. Less than half of that, $720,000, is your principal. The majority is interest. The longer, the uglier – until your home’s entire value is the lender’s. Whoever wrote this (I’m hoping it wasn’t Ken), is perpetuating the MYTH that ‘your home’s entire value is the lender’s’. The lender NEVER owns your home, unless, just like with a forward loan, you don’t pay your taxes, insurance, Homeowners or keep up with the maintenance.
These loan amounts aren’t realistic for everyone. They’re illustrative, showing the key risk: underestimating your life expectancy, living far longer than you anticipate, and ending up aged and broke, unable to meet late-life health expenses. If you’re in great health with a good family history, you could live into your 90s or beyond. Planning for a longer life is key to not exhausting your money. Again, the person that wrote this clearly doesn’t understand the options of getting ‘life-long’ payment or realizing that a reverse mortgage is best used as part of a comprehensive retirement plan. Life-long payments and a line of credit that gives you access to more cash as time goes by are a couple of reverse mortgage features that address the above risks inherent in a longer life.
Reverse mortgages often do the opposite, with perverse incentives. The longer you live, the bigger the lender wins, while your compounding interest burden balloons. Do you really want to be cash-strapped and in debt while trying to fund assisted living or other late-life care? Perverse incentives?! Cash-strapped?! This paragraph confirms that the writer couldn’t tell you the difference between Max Claim and Principle Limit.
Some disagree, (anyone who really understands reverse mortgages would vehemently disagree) arguing reverse mortgages can insure against depleting your savings before you die, working alongside an investment portfolio. They can. This view rightly considers folks’ assets in totality, rather than in buckets, avoiding a common error.
But it requires the elderly to invest well. Are you a strong investor? Will you be? Are you willing to risk being forced to sell your house late in life to cover a ginormous compounded interest debt, hoping there is enough left to live off of? At an age when most people need simplicity and ease, this seems unwise. Did anyone who understands reverse mortgage proof read this?!!! There is NO compounded debt that forces you to sell your house. Another feature that might help Fisher understand reverse mortgages and makes this statement look foolish, is that the reverse mortgage is a ‘NON-RECOURSE LOAN’. Look it up!
Beware products charging big fees for something you can do easily with cheaper, more simple investments. If you’re younger, save now and invest in your 401(k), reaping compound growth’s rewards rather than having them work against you. If you’re younger, you can’t get a reverse mortgage. Stay invested throughout retirement without excessive binge-type withdrawals, (‘excessive binge-type withdrawals are not a feature of a reverse mortgage, but it helps put it in the worst possible light) and you should readily cover normal late-life expenses.
More security, less debt. Wouldn’t you rather have that control?
Ken Fisher is founder and executive chairman of Fisher Investments, author of 11 books, four of which were New York Times bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter: @KennethLFisher

Reply
Shannon Hicks May 7, 2019 at 7:32 am

Bob- Much appreciated. Thank you for sending this to Fisher Investments. Please let us know when you receive a response.

Reply
Kevin Vasquez May 7, 2019 at 6:24 am

More validation of what I have been saying for many years!!!!!

Why is our industry placing such a high value on financial planners in the first place?

Most of them can’t stand reverse mortgages and furthermore, they only represent a very small percentage of seniors (maybe 20% at best), most of whom do not need a reverse mortgage.

The industry is somehow hell bent on making the reverse mortgage out to be a sophisticated financial tool for “affluent” seniors as opposed to what it was really designed to be, which is a financial helping hand for average, below average and poor senior homeowners.

THE REVERSE MORTGAGE WAS NOT CREATED FOR RICH SENIORS!……. DUH!!!!…WAKE UP ALREADY!

Doesn’t it make more logical sense to focus marketing efforts toward the 80% of seniors who actually need the reverse mortgage to enjoy a better quality of life, rather than hoping to convince some financial planner “representing 20% of the seniors” to convince a small portion of their clients to get a reverse mortgage, even though they don’t need it?

I just don’t get it?

It goes against all common sense logic but for some reason I feel like I am the only one who gets it.

I read the response to this Ken Fisher article on Reverse Mortgage Daily.

Great job on that!

But it’s after the fact.

It’s like once you see an article claiming that someone has horribly abused another person then the masses automatically form a negative opinion.

Even if later the individual is acquitted of the crime that negative opinion will carry on.

What I am saying is that the damage is already done.

Plus many more people read USA today than reverse mortgage daily so I would argue that the vast majority of people who read his hugely negative Ken Fisher article about reverse mortgages will never even see the rebuttal article.

After several years of me pointing out how ridiculous the concept of courting financial planners is, Reverse Mortgage Daily finally did an article using my commentary on the subject.

You can view the article at the link below.

https://reversemortgagedaily.com/2019/04/16/the-pros-and-cons-of-financial-planners-as-reverse-mortgage-referral-partners/

Reply
allan b. May 7, 2019 at 10:48 am

“Don” panic?!!!” I admire that our industry continues its efforts in always patching up a broken market, but the reality continues to prove itself out. Mr. Kent and the suits at Live Well were no novices. If you are not making money, you close the door… it is that simple! If any of us were to actually start over in our careers and “consider” the reverse mortgage industry and come in as “newbies” now, would we be “hanging on” like this or CHOOSE to try and make a living and support our families tethered to a mortgage product that has had its ass kicked repeatedly, all while relying on a commission based livelihood?? ? MIP costs, financial assessments and LESA wiping out many applicants and now a likelihood of 2nd appraisal reviews ( if our files even get that far ). Endorsements down almost 50% and nothing but excuses and “forecasts” for a better future… come on! NRMLA has fallen way short in its “public advocacy” of this program, as once was promised. No commercials, no national campaigns. I have been in this industry for 16 years and we have made NO progress at all, we are sliding backwards with no brakes. Way too much government internvention by DEMAGOGUES that have no real clue on how this product works.

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James E. Veale, CPA, MBT May 7, 2019 at 8:43 pm

Mr. B.,

Profit and cash flow are not the same. Some of our largest corporations have had losses for years. Perhaps you have never heard of Amazon, Twitter, or Snapchat. Many recent IPOs, like Uber, will not have profits for any time in the near future. Yet none of these companies lack CASH FLOW. Your idea of no profit ends in business termination does not jive with modern business principles.

What kills most businesses is less cash inflow than required outflow. Many times it is not even the amount of inflow as it is its timing.

In the reverse mortgage industry little of the cash which flows into the lender is revenue to it. Most comes in the form of debt from a warehouse line of credit and secondary operations from securitizing their loans through Ginnie Mae or selling closed loans to those who securitize them. The lenders’ revenues are only a small percentage of those cash proceeds.

Apparently what happened is that Live Well suddenly lost its warehouse line and could not timely find a substitute line in time to fund the loans in its pipeline. That would leave Live Well no way to fund its loans, forcing it to shut down. This was an issue of cash flow NOT profit. Very few companies have the kind of cash reserves to fund a growing base of forward and reverse mortgages as was the case with Live Well.

The trouble I have with originators who do not understand the importance of cash flow to a mortgage lender is that they generally have little idea that reverse mortgages are nothing more than a specific type of nonrecourse cash flow mortgage product. Many times this is because originators have not had sufficient courses in bookkeeping or accounting while in high school or college.

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