Curmudgeon. That is what 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 frequently had “training sessions” about variable universal life. The VUL was supposedly 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 it’s put into a working context. Sure, some products are heavily laden with negative attributes and some possess predominately positive ones, but in the right context a less-than-desirable product can be quite useful while a wonderfully designed product can be misused.

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

My outlook softened in the second phase as the product saw a number of reforms over the years. The costs became much more reasonable, so the product fit in more contexts.

The academic community certainly seems to have tuned in to the ways reverse mortgages can be used other than as last ditch efforts to provide cash flow to seniors. A number of studies have come out illustrating various integrations of the product with retirement portfolios. These studies have received a lot of attention from the press, particularly the 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 of the products triggered my current curmudgeonly stage. I see advisors moving too quickly to use them, and I have flashbacks to the Swiss Army knives.

There is no doubt reverse mortgages today are more attractive than they were, but there are several aspects that bother me.

First, I believe people are improperly interpreting the academic studies about the products’ usefulness for retirement cash flow. I do not dispute the findings (of course the cash flow picture can be helped by those tapping home equity). But the reverse mortgage is treated like a free ride—something for nothing. It ain’t. It must be paid back. 

Sure, it has no servicing payments and the maximum payback is capped. These things can make the reverse mortgage look more friendly than conventional mortgage products. The product also boasts zero mandatory periodic payments and zero reach-back if your house goes underwater. Nice.

But the cost is not zero, and the interest rates are higher than they are in conventional mortgages. As I write this, Bankrate reports that the average fixed rate is 3.4% on a standard conventional 30-year mortgage, and it’s 2.7% on a 15-year mortgage. Those are low.

Meanwhile, in many cases the costs of a reverse mortgage are unknown because most of them 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 that the combination of the insurance and margin was “only” 3.5%.

It is not hard to imagine a scenario in which a borrower, attracted to the product because there are no current payments required, opts not to make payments and then, because of the compounding nature of interest, sees the loan balance increase to the point the borrower can’t pay it off. The loan then 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 if the borrower wants to get the most out of home equity as an asset.

Improper interpretation and poor strategic uses are avoidable if investors get educated. (Among stories they might read are “Increasing the Sustainable Withdrawal Rate Using the Standby Reverse Mortgage,” by Shaun Pfeiffer, John Salter and Harold Evensky in the Journal of Financial Planning or “HECM Reverse Mortgages: Now or Last Resort?” by Pfeiffer, Salter and Angus Schaal, also in the Journal of Financial Planning.)

I’m also skeptical about how these products will align with client values. Some members of the Swiss Army seem to think clients will view them as innovative thinkers who are putting a creative (even fun) product to smart, strategic use. But 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 still debt, and a lot of clients will not take kindly to the idea, which harms their sense of control and independence. The 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: “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 his or her head around the idea of now using debt that could wipe out the home’s equity. If a smart strategic use of a reverse mortgage could help borrowers with specific problems, of course, we owe it to them to explain reverse mortgage options. Our integrity requires us to tell 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 his or her 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. It also depends on how the choice was presented. 

Using a reverse mortgage to preserve an investment portfolio may make good sense. But if the mortgage is not presented for what it is—higher cost debt—or if it is presented as something free or cheap because of its lack of required servicing payments, the advisor may be crossing a line.

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

Nonetheless, they are a complex form of debt that needs to be managed and comes with a cost. It will take smart strategic use of these mortgages to benefit clients.