Then the Sacks brothers published a study showing the coordinated strategy of using money from bucket 2 and bucket 3 at the same time to make bucket 2 portfolio longevity increase.  But by far the most comprehensive research was done by Dr. Wade Pfau, Professor of Retirement Income from The American College who developed the RICP designation (Retirement Income Certified Professional).  He not only reviewed the past studies but also did thousands of his own Monte Carlo scenarios.  He then published books on Reverse Mortgages detailing all of his findings and tying all of the research together. 

Pfau’s books contain irrefutable evidence that home equity that becomes liquid with a reverse mortgage virtually guarantees three things. First, more cash flow; second, lower income taxes and third, most surprisingly, a larger net worth and thus a greater legacy to pass on to the next generation. Despite a reverse mortgage decreasing equity in bucket 3—Bucket 2 gains cash and longevity, which increases overall wealth. 

Hortz: With so much research and proven applications for retirement planning, why the negative connotations and resistance by retirees and advisors alike?

Accola: ALL products can alternatively be good or bad depending on how it is sold or applied; anything can be misused. Unfortunately those stories consistently take center stage and reverse mortgages have some lingering negative connotations.

Let’s review two very bad things that happened in our industry: First, because the product came out with an FHA guarantee in 1988 with no income or credit guidelines, many people with very little in reserves and bad credit jumped on board. While no payment is due until the end, it is required that the borrower continues to pay taxes and insurance. Many early borrowers did not have the means to pay taxes for the life of the loan so lenders were forced to foreclose on senior borrowers—in many cases—widows in their 70s 80s and 90s. Thousands of foreclosures got lots of negative media exposure. 

The second major black eye on the industry was the problem with underage borrowers (under the age of 62).  If a spouse was qualified in their 60s or 70s but they had a younger spouse, they were allowed to borrow by taking the younger spouse off title.  He, or she, was not protected when the older spouse died and had to pay off the loan or move. Widows were kicked out of their homes after their husbands died because a wrong decision was made.

Because of these things, now new rules and legislation from HUD requires borrowers to qualify and prove they are willing and able to pay taxes and insurance for their expected life time. AND if they have an underage spouse, they are required to be part of the loan and they are guaranteed to stay in the home for as long as they wish after the older spouse passes. 

But perhaps one of the biggest issues that still haunts many baby boomers is the memory of the depression. Their parents and grandparents told them about the need to have a home FREE AND CLEAR without a mortgage. Long before federal protections on both forward and reverse mortgages, many people lost their homes in the 1930s. This depression era thinking has not gone away and is rooted in heavy emotion devoid of facts.  Regardless it is a very strong cultural “rule” that your house should be paid off as you get older and should stay that way. That stigma must be addressed with facts appropriate to the 2000s.

Hortz: Are reverse mortgages suggested even for high net worth and very wealthy families? Are there any unique applications for them?

Accola: A reverse mortgage is a bit like a Swiss Army Knife that has a different tool for many different uses.  There are many things a reverse mortgage can accomplish for those who have “plenty of money”.  By far the biggest advantage is paying off their existing mortgages—which is better with a reverse mortgage than using money from a 401k or other investments to pay it off. That way you can utilize more of your funds for the investments.  Run the numbers—it is a very inefficient use of retirement funds or income to pay off low rate mortgages!