CNBC’s Diana Olick makes sure no one understands reverse mortgages, I make sure they do.
Â NOTE: CONTAINS BREAKTHROUGH THINKING, SO PLEASE READ TO END.
Maybe itâ€™s to be expected.Â You take the mortgage industryâ€¦ add in seniors over age 62 as the customersâ€¦ tell the seniors they shouldnâ€™t take out a reverse mortgage unless facing a financial crisisâ€¦ mix and serveâ€¦ and youâ€™re bound to have a certain amount of mess to clean up.
I mean, this is the industry that was selling Option ARM loans to borrowers based on their low initial interest rates and ability to make a negative amortization payment that would ensure that youâ€™d never have equity in your home, and almost certainly lose it to foreclosure at some point.Â And some were selling this risky loan to people who barely spoke English and never graduated from High School.
If the securities industry operated in the same sort of way, weâ€™d be selling hedge funds swaps to warehouse and migrant workers as a retirement savings planâ€¦ because that would be destined to end in disaster as well.
I started researching reverse mortgages almost a year ago now, and Iâ€™m constantly amazed at the negative press and misconceptions surrounding reverse mortgages, because the bottom-line is they are an absolutely wonderful product that almost everyone over 62 years old should have, and yet in a year of talking to seniors about them, I have never found a single person who understood them accuratelyâ€¦ and that includes many from the mortgage industry.
Just today, in fact, I ran across a negative story about reverse mortgages, written by CNBCâ€™s Diana Olick and titled: Reverse Mortgages Backfiring on Some Seniors.
When I saw the headline I couldnâ€™t wait to find out what part of a reverse mortgage could possibly â€śbackfire,â€ť since the last thing that I had backfire was a â€™67 Buick Skylark, and thankfully it only took a few seconds to figure it out, in large part because Iâ€™ve heard the story numerous times before:
Senior couple takes out reverse mortgage, but only one of themâ€¦ the older oneâ€¦ stays on the title and goes on the loan.Â Then the older one dies and the surviving spouse is forced to refinance to pay off the reverse mortgage, but since the home has dropped in value, or income is inadequate for refinancingâ€¦ the house goes into foreclosure.Â
Bad reverse mortgageâ€¦ bad reverse mortgage!
In Dianaâ€™s sensationalistic hit piece, the couple did exactly what I described, but in addition Mr. Bennett says that his lender told him that he could be added to the mortgage later, which he learned wasnâ€™t true after his wifeâ€™s deathâ€¦ so thereâ€™s that on top of everything else.
Now, before I say anything else about reverse mortgages, letâ€™s get one thing straight right off the bat: No one should ever take their name off of their mortgage or their title without knowing exactly what the ramifications areâ€¦ period.Â And that applies to any kind of mortgage.
There are legitimate reasons for a senior couple to do this. Â Let’s say the husband is 79 and the wife is 65, and putting it in his name alone would mean getting a lot more money from a reverse mortgage… and she understands what will happen if he dies, and that it’s highly likely that he will go before she does… BUT… she doesn’t want to stay in the house after he’s gone anyway. Â And at least with a reverse mortgage, the surviving spouse would have 6-9 months to make arrangements to sell or refinance the loan.
So, not only did the Bennetts in Dianaâ€™s tale of woe do something they shouldnâ€™t have done without careful consideration, but in addition, they were simply lied to by their loan originator when he or she said that Mr. Bennett could be added to the mortgage later.
The point is that NONE of this has ANYTHING to do with a reverse mortgage, by the way, itâ€™s just yet another case of a mortgage loan originator lying to a borrower, which is something like finding out that a used car salesman lied to someone about the condition of a used car.
Reverse mortgages are just mortgagesâ€¦
Hereâ€™s the deal: A reverse mortgage is just a mortgage.Â Letâ€™s stop using the â€śreverseâ€ť word for a minute and perhaps it will be easier to understand what Iâ€™m saying.
A (reverse) mortgage is just a mortgage that offers the most flexible repayment terms imaginableâ€¦
- You can make interest only paymentsâ€¦
- You can make principal and interest payments
- You can create your own balloon payment.
- Or you can choose to make no payments on the loan, in which case after the second spouse dies, the lien is repaid from the sale or refinance of the property by the heirs.
And whatâ€™s so different about that outcome?Â If you die with any mortgage in place, the same thing happens, right?
Letâ€™s say I die with a $200,000 mortgage balance, and my wife has already passed on, so I leave the property to our only daughter.Â She can either decide to sell the home and keep the proceeds beyond the $200,000 lien, or she could refinance the property and pay off the lien that way, in which case she keeps the house.
Itâ€™s six of one, half dozen of the otherâ€¦ reverse mortgages are just mortgages with the most flexible repayment terms imaginable.Â Assuming youâ€™re dealing with an ethical loan originator, theyâ€™re not scary, and thereâ€™s nothing riskier about them than any other type of mortgage.
And memo to CNBCâ€™s Diana Olickâ€¦ Reverse mortgages donâ€™t backfire. Â And nothing backfired related to the couple in your story. Â
Good Lord, Dianaâ€¦ how long did it take you to come up with that sort of inflammatory headline?Â Didnâ€™t you realize what actually happened to the Bennetts? Â Â I think you did, and you just didnâ€™t care about anything but garnering readership by exploiting peopleâ€™s irrational and uninformed fears.Â And that makes you someone exacerbating the problem for seniors.Â Shame on you.
Reverse mortgages are a benefit of being a senior citizen in this countryâ€¦ like Medicare or Social Security.Â Would you write an article that misinformed seniors about their Medicare benefits?Â I would hope not, but after this article, I guess I canâ€™t be sureâ€¦ maybe you would if you thought it would get you an extra hundred thousand clicks, or whatever.
Reverse mortgages are regulated by the U.S Department of Housing and Urban Development (â€śHUDâ€ť), and their insured by the FHA, which provides yet another advantage.Â If, after the death of both spouses, the homeâ€™s value has fallen below the balance owed on the reverse mortgage, then the heirs can simply walk awayâ€¦ owing nothing.
That wouldnâ€™t be the case with a regular mortgage.Â With a regular mortgage, you owe the balance no matter what the homeâ€™s value is at any given time.
And here’s something you haven’t heard before…
Those are only some of the advantages of reverse mortgages over regular mortgages, but there are so many more that Iâ€™ve come to realize that used properly, reverse mortgages can become every bit as important a benefit to seniors in this country as Social Security.Â Yes, you read that rightâ€¦ and not only am Iâ€™m about to tell you why I say that, but Iâ€™m positive that youâ€™ve never heard what Iâ€™m about to tell you before now.
A reverse mortgage can be thought of as a â€śsource of capital,â€ť as can any mortgage.Â Mortgages are a source of funds, secured by real property.Â And the truth is, no one wants a mortgageâ€¦ they want housesâ€¦ and mortgages are simply the only way people can buy the homes they want to live in without having to save for 30 years before being able to move in.
When you attend graduate school to get your MBA, you learn all about the different sources of capital that can be used to finance your business.Â Thereâ€™s â€śfriends and family financing,â€ť thereâ€™s â€śangel financing,â€ť thereâ€™s Venture Capital, bank loans via the Small Business Administration, debt financing, and then thereâ€™s equity, which is whatâ€™s meant when a company sells stock to the public as part of an IPO, or Initial Public Offering.
And you learn that the different sources of capital each have certain advantages and certain disadvantages.Â Credit card financing, for example, although relatively to get, also carries a high interest rate, so can be very expensive.Â Selling stock might sound great, but unless your business is already well established and growing, the chances are that not many people will be willing to buy shares in your company.
Now, consider that today, retirement isnâ€™t measured in years, itâ€™s measured in decades.Â Today, at 65 years young, your life expectancy is just under 20 years, according to the Social Security Administrationâ€™s actuarial tables.Â If youâ€™re 80 years young today, the SSAâ€™s tables show that your life expectancy is roughly 10 yearsâ€¦ and the average 90 year old today will live until almost 95.
That means that if you retire at age 65 today, you have to be prepared to support yourself or your spouse for 30 yearsâ€¦ and almost no one retiring today is financially prepared to do that.Â The other thing is that few people at age 65 want to just sit around for 30 yearsâ€¦ to be 65 today is to still look and feel quite young, compared to what it was to be 65 years agoâ€¦ when life expectancy for a 65 year old was less than 70.
As a result, many â€śseniorsâ€ť arenâ€™t actually retiring at 65â€¦ some just keep workingâ€¦ others are going back to school to train for second careers, and others are starting businesses in order to supplement their incomes in their retirement years.Â And besides, who wants to just sit around for decades.Â Iâ€™ve known several guys that retired, played golf for maybe six months and then started a new company simply out of boredom.
I know one recent retiree from the NYPD who just bought a Pizza Hut franchiseâ€¦ I know another who is planning to start a deep sea fishing charter boatâ€¦ a neighbor of mine started a specialized bedding company after he retired from his day job and he now sells his product line through department stores and specialty catalogsâ€¦ and my wife has always talked about starting some sort of retail store once sheâ€™s retiredâ€¦ maybe a flower shop, Iâ€™ve heard her say.
Starting any business requires capitalâ€¦
Starting a company always costs money.Â To begin with, you need to establish your company as a sole proprietorship, partnership, or corporation of some kindâ€¦ or maybe yours is to be a non-profit organization, and then youâ€™ll need to pay for the various state licenses, and the legal work to make sure your business is set up properly.
You may need insurance for the business, you may need office spaceâ€¦ if you want to have your own deep sea fishing charter, youâ€™ll need to buy a boat and probably hire a few people and do some advertising before you start bringing in enough revenue to cover your costs.
You could hire an experienced MBA as a consultantâ€¦ like me for exampleâ€¦ to help you create your business plan and get things off the ground, and one of the first things Iâ€™ll want to know in order to write your business plan is how much capital you have available and what are the repayment terms.Â Are you finding your company with your own personal savings, or are you borrowing the money from some other source?
What they never taught anyone in business schoolâ€¦
You see, in an MBA program, while they taught us about the different types of capital from which entrepreneurs can chose, they never taught us about a type of capital that one could borrow without ever having to repay itâ€¦ if thatâ€™s what you want to doâ€¦ meaning the source of capital that only comes from a reverse mortgage.
Letâ€™s look at my recently retired friend who has his heart set on starting a deep sea fishing charterâ€¦ weâ€™ll call it Captain Jackâ€™s Tuna Tours, just for fun.Â My advice to him was to use a reverse mortgage to buy his boat and fund his other start-up expenses, then hang out his shingle on the dock where the other charters are found in his marina, and start taking people fishing.
Heâ€™ll have to do some advertising so people that like to go deep sea fishing will know heâ€™s there, but unlike other deep sea fishing start-ups, it shouldnâ€™t be too hard for him to get people to notice his adsâ€¦ have you already figured out why?
Because Captain Jackâ€™s Tuna Tours will almost certainly be the ONLY charter company that DOESNâ€™T HAVE A BOAT PAYMENT, or doesnâ€™t have to repay loans that were taken out to cover the companyâ€™s start-up expenses.Â And that gives Captain Jackâ€™s a very powerful â€ścompetitive advantageâ€ť over his competitors.Â
He can be â€śthe low price leaderâ€ť of the deep sea fishing charters that operate out of his marina, so if the others are charging $300 to go out for the day, he can offer to take his customers out for $200â€¦ or $150 even.Â He can operate that way because his source of capital is uniqueâ€¦ it doesnâ€™t have to be repaid.
Imagine starting a limousine service without having to make a monthly limo paymentâ€¦ or having a flower shop that can sell a dozen long-stem roses on Valentineâ€™s Day for half the price of what the others in town charge.
Usually, Wal-Mart is blamed for putting small businesses out of business, but now Wal-Mart will have to struggle to compete with you, because if they offer a dozen roses for $20â€¦ you can sell your for $15â€¦ and if they match the $15 priceâ€¦ you can drop yours to $10.
Todayâ€™s only 2 paths to business successâ€¦ Â
To succeed in business today, there are only two paths to chose from: you can be DIFFERENT or you can be CHEAPER.Â Thatâ€™s it.
Nordstrom is differentâ€¦ Wal-Mart is cheaperâ€¦ and everyone that used to fall somewhere in between is historyâ€¦ goneâ€¦ bankrupt or about to be.Â Robinsonâ€™s/Mayâ€¦ K-Martâ€¦ Montgomery Wardâ€¦ Bullockâ€™sâ€¦ Marshall Fieldâ€™sâ€¦ Kaufmanâ€™sâ€¦ and those are just the oneâ€™s I can think of without Googleâ€™s help, but you might as well add Sears and JC Penny, which although still around are almost certainly dead men walking.
Different or cheaper, those are your options if youâ€™re going to succeedâ€¦ and letâ€™s be clear about somethingâ€¦ cheaper is better, but few if any can afford to build their companies by being the low price leader, which is why thereâ€™s only one Wal-Mart.Â Therefore, almost all start-up companies in this country today have no choice but to differentiate their products and services from those offered by their competitors.
But, differentiating something is much harder than running an ad that says:
â€śCaptain Jackâ€™s Tuna Tours â€“ The LOW PRICE LEADER in Long Beach Harborâ€¦ Brand new 57 foot fishing boat for half the price of othersâ€¦ ONLY $150 PER PERSON ALL DAYâ€¦ and 20 Percent Off for Groups of 4 or More, Monday â€“ Friday.â€ť
With your competition charging $300, as in this example, where do you think the lionâ€™s share of the business is going to go?Â The only thing Captain Jackâ€™s has to worry about is being able to answer all the calls that come in every day.
Succeeding in business today, or tomorrow, requires a competitive advantage, and not only is finding a sustainable competitive advantage the single hardest thing for entrepreneurs to find these days, but not finding such an advantage is always the number reason that businesses fail.
BUT, when your source of capital is a reverse mortgage, itâ€™s also your competitive advantageâ€¦ and that should be earth-shattering thinking for seniors all over this country.Â It means that being over 62, and having equity in your home, makes your retirement years the single best time in your life to start your own businessâ€¦ because you can use a reverse mortgage as your source of capital, while your working age competitors canâ€™t.
With this thinking, this countryâ€™s seniors could turn our economy aroundâ€¦
Thereâ€™s no limit to where you can go with the source of capital they donâ€™t teach you about in business schoolâ€¦ the reverse mortgage.Â In the case of Captain Jackâ€™s, the founder actually has a brother whoâ€™s also retiring from the NYPD this year, and he too can access capital via his own reverse mortgage.Â Now imagine what four brothers could accomplishâ€¦ Captain Jackâ€™s might become a fleet of deep sea fishing charter boats available from San Diego to San Francisco.
My wife and her friend could open a restaurant instead of a flower shopâ€¦ or maybe my new low cost limousine service can start with multiple cars on the road on prom night, instead of just one.Â Obviously, all of these are all just food for thoughtâ€¦ the limits of what you can do are yours aloneâ€¦ maybe youâ€™ve always wanted to open a driving schoolâ€¦ maybe itâ€™s a piano schoolâ€¦ or maybe itâ€™s a nursery school that you see as your opportunity of a lifetime.
Regardless of what type of business you want to open, by using a reverse mortgage as your source of capital, youâ€™ll have a competitive advantage that will improve the odds of your success dramatically.Â Thatâ€™s not to say that there arenâ€™t numerous other issues you want to consider before deciding to become an entrepreneur these days, but thatâ€™s always true.
I’m also not saying that you should never repay your reverse mortgage. Â What I’m saying is that when you do it, or if you do it… is totally up to you, and that’s enough to give you the capital advantage no one else has without a reverse mortgage.
Oh, and maybe you donâ€™t know what type of business youâ€™d want to open, but your son or daughter has an idea or twoâ€¦ so join forcesâ€¦ or bring them into the new family businessâ€¦ because Captain Jack & Sons Tuna Tours sounds better anyway.
77 MILLION BABY BOOMERSâ€¦ and roughly 10,000 of them turns 62 every day.
Consider what this insight could do to for our deeply troubled economy.
Unemployment might just get reduced by half, back to the 3-4 percent range, which would mean millions of Americans back to workâ€¦ and since many would presumably be younger people who are now unable to find work, think how that might impact family formation, and improve the ability of those with student loans to repay them, thus averting another crisis thatâ€™s otherwise sure to come going forward.
Millions of seniors would become productive members of the countryâ€™s work force again, and itâ€™s easy to forecast that our GDP would rise faster than it has since 2006.
Credit quality would also have to improve in the aggregate, which would bring back the first time home buyer to the housing markets and actually increase the organic demand for housing all over the country, and that would strengthen our financial institutions like nothing else on the horizon possibly could.
Americaâ€™s economy has always depended on the entrepreneurial spirit of its citizens, and baby boomers have been our most powerful entrepreneurs in our nationâ€™s history.Â Itâ€™s true that this last crisis hit boomers hard, but understanding the source of capital advantage offered by a reverse mortgage could bring back the same people that drove our countryâ€™s growth for the last 30 years, and put them back in the driverâ€™s seat going forward.Â And thatâ€™s precisely where we need them todayâ€¦ more than ever.