“Curmudgeon” 

That is who a colleague said I sounded like when we were discussing the increasing coverage given to reverse mortgages. A simple definition of curmudgeon from the Merriam-Webster website is  ”…a person (especially an old man) who is easily annoyed or angered and who often complains.”

I feel older every day, but I am a fairly laid back kind of guy. Not much bothers me and I do not complain often but in this case I see his point. I was getting a bit cranky. One thing that often triggers a slip into annoyance and complaint is too much positive coverage about a financial product.

I think it started back in the early days of my career. The company I was with seemed to have a “training session” regarding variable universal life on a frequent basis. The VUL was good for just about everything: asset protection, retirement savings, tax-free income, college savings, and even an emergency fund. Presenters often called it the “Swiss army knife of financial products.”

It was off-putting, and it didn’t take long for me to develop a high level of skepticism whenever the new great thing is presented. Normally I don’t think well, or poorly, of a particular product until the use of the product is put into context. Sure, some products are heavily laden with negative attributes and some possess predominately positive attributes, but in the right context a less than desirable product can be quite useful and a wonderfully designed product can be misused.

My opinion of reverse mortgages has gone through three phases. The first phase was definitely negative. Products were costly, complex and considered only as a last resort.

Due to a number of reforms over the years the second phase was one of a general negative outlook that softened. The costs became much more reasonable and made their use a viable consideration in more cases. They fit in more contexts.

The academic community certainly seems to have tuned in to ways reverse mortgage products can be used in ways other than a last ditch effort to provide cash flow to a senior. A number of studies have come out illustrating various integrations of a reverse mortgage product and a retirement portfolio. These studies received a lot of attention from financial press particularly financial planning press. You’ll be hard-pressed to attend a conference that does not have a session on the wonders of a reverse mortgage. This coverage triggered my current curmudgeonly stage.

I am a passionate advocate for the practitioner and academic community to work together to better serve clients. So I welcome studies and their findings.

Unfortunately, the more and more I hear about the versatile uses of reverse mortgages, the more I have flashbacks to the Swiss army knife and more uncomfortable I become because I see too many advisors moving too quickly to use reverse mortgages with clients.

There is no doubt reverse mortgages today are a more attractive proposition than they were not that long ago, but I don’t join the love affair some seem to have with the products. There are several aspects that bother me.

Let me start with what I believe to be improper interpretation of the academic studies that show reverse mortgages to be helpful in sustaining retirement cash flow. I do not dispute the findings. It makes perfect sense that the retirement cash flow picture can be enhanced by tapping home equity.

The interpretation problem comes from treating the reverse mortgage like it’s a free ride. It ain’t.

Too many people treat reverse mortgages as something for nothing. That’s dead wrong. Reverse mortgages must be paid back. Because servicing payments are not required and the maximum payback is capped, they can look friendly compared to more conventional mortgage products. Zero mandatory periodic payments and zero reach back should it go underwater. Nice.

The cost, however, is not zero. The rates are higher than conventional mortgage products. As I write this, Bankrate reports average fixed rates of 3.4 percent on a standard conventional 30-year mortgage and 2.7 percent on a 15-year. That’s low.

In many cases the costs of a reverse mortgage are unknown because most reverse mortgages carry variable interest rates, usually tied to a short term LIBOR rate. The LIBOR rate is added to a fixed lender margin and mortgage insurance. At a recent conference session I attended, a member of the Swiss army boasted the combination of the insurance and margin was “only” 3.5 percent.

It is not hard to imagine a scenario in which a borrower that is attracted to a reverse mortgage because no current payments are required opts not to make payments and the compounding nature of interest increases the loan balance to the point the borrower can’t pay it off. The loan eats up all the equity in the home.

Rates don’t have to increase much to accelerate the process of wiping out the equity. That may be a perfectly acceptable trade-off for some, but the reverse mortgage is a debt that needs to be managed to optimize the use of the home equity asset.

Improper interpretation and poor strategic uses are avoidable through study and education. Here is a quick reading list to help with that.

"Increasing the Sustainable Withdrawal Rate Using the Standby Reverse Mortgage" - Shaun Pfeiffer, Ph.D; John Salter, Ph.D, CFP, AIFA; and Harold Evensky, CFP, AIF. (Journal of Financial Planning, 2012).

"HECM Reverse Mortgages: Now or Last Resort?"- Shaun Pfeiffer, Ph.D; Angus Schaal, CFP; and John Salter, Ph.D., CFP, AIFA. (Journal of Financial Planning, 2014).

"The Reverse Mortgage: A Strategic Lifetime Income Planning Resource" - Tom Davison, MA, Ph.D., CFP; and Keith Turner, CRMP (Journal of Retirement, 2015).

"Incorporating Home Equity into a Retirement Income Strategy" - Wade D. Pfau, Ph.D., CFA. (Social Science Research Network, 2015).

Another aspect to this that bothers me a bit relates to clients’ values. Some of the members of the Swiss army seem to think that clients will take the discussion of smart strategic uses of reverse mortgage products as creative, even fun and will view the advisor as an innovative thinker. I’m skeptical about that assertion.

In over a quarter century of working with retirees, I have yet to hear anyone say “I wish I owed money on my house”.  Reverse mortgages are different but they are still debt.

A lot of clients will not take kindly to the reverse mortgage concept. Their repulsion stems from their sense of control and independence. An owner of a paid-off home doesn’t answer to a bank or the government in the same way a borrower does.

I always credit former FPA President Elizabeth Jetton with this quote, but I think she got it from Einstein. Anyway, “Not everything that counts can be counted and not everything that can be counted counts.”

There is real and substantial value in the psychological benefits of being debt free even if that value is unquantifiable. 

A client who has worked a lifetime to be a retiree sans mortgage may have a hard time getting their head around the idea that they should now use a form of debt that could wipe out the equity. If a smart strategic use of a reverse mortgage could help them given their circumstances, of course, we owe it to clients to explain the reverse mortgage options. Part of acting with integrity is telling people things they don’t want to hear if that’s what they need, but we should also be prepared to receive some negative reactions.

Lastly, I want to bring up an ethics issue. I have attended many continuing education sessions over the years in which a case study of unethical behavior revolved around an “advisor” recommending that a client tap the equity in their home to buy an investment product.

Investing borrowed money is not in and of itself an ethics violation. The facts and circumstances determine whether a reasonable strategic choice has been made or if we are talking about predatory sales. Among those facts and circumstances are the representations made. 

Using a reverse mortgage to preserve an investment portfolio may make good sense, but if the reverse mortgage is not presented as higher cost debt or the lack of required servicing payments are used to present a reverse mortgage as free or cheaper than other debt, a line may be crossed.

I’m not saying reverse mortgage products are all bad or are always bad to use. They have improved, and I think they can be used effectively more often because of those improvements.  Our friends in the academic community are helping us identify some of the possibilities. 

Nonetheless, the products are a complex form of debt that need to be managed and come with a cost. It will take smart strategic use to benefit clients. The lack of payments won’t overcome an inappropriate context.

Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager and Worth magazines. He practices in Melbourne, Fla. You can reach him at www.moisandfitzgerald.com.