REALITY CHECK: “Reverse Mortgage Realities” According to The New York Times

 

 

Lately, I’ve started to feel like I’ve got a part time job beating up on The New York Times over their coverage of reverse mortgages. It’s not like I want to devote time to beating up on our “newspaper of record,” it’s just that the once venerable news source can’t seem to stop getting the facts about reverse mortgages wrong. And I hate that.

Reverse mortgages are part of a program created by Congress for American homeowners over 62, they’re regulated by the U.S. Department of Housing and Urban Development (HUD), and they’re insured by the FHA. Wouldn’t it seem with that sort of background, The New York Times could figure out a way to get the facts about reverse mortgages right? And yet they can’t seem to manage it.

The latest example to come across my desk is by Lisa Prevost, writing for The New York Times last April 10th, who begins her article, which promises to present the “realities of reverse mortgages” by stating: “Adult children have reason to be wary when their parents start talking about reverse mortgages.”

Okay, can I first just point out that’s just an icky way to start talking about reverse mortgages, no matter what you want to say about them.

For one thing, as it relates to “losing” a “presumed inheritance,” it’s not necessarily a true statement. In fact, I’d go as far as to say that it’s not true in many, if not in most cases. What an adult child inherits or doesn’t inherit from his or her parent or parents is dependent on far more important factors than what a reverse mortgage impacts.

And, for another, I can’t even agree that an adult child has “reason to be wary” of anything simply because his or her parents “start talking about reverse mortgages.” Such a statement is so broad and the uses for reverse mortgages so individually specific that conceptually it’s just a train wreck of a sentence.

Lisa’s second sentence then reads as follows… “The loans make sense only for those who plan to stay in their homes for the rest of their lives and can afford to pay property taxes and insurance for that long.”

This is also NOT an accurate sentence, the problem being the use of the word, “only.” It would be true to say that reverse mortgages make sense “for those who plan to stay in their homes for the rest of their lives and can afford to pay property taxes and insurance for that long,” but that’s not the only group for which reverse mortgages make financial sense.

You don’t have to plan to stay in your home for the rest of your life to find that a reverse mortgage makes sense for you. In fact, I recently saw someone use a reverse mortgage knowing that he’d only be keeping the loan for 2-3 years, after which time he plans to use a reverse-mortgage-for-purchase to downsize into a home close to his grandkids.

A few paragraphs later, Lisa, quite predictably starts off saying, “The Loans can be costly, but they are sometimes the only option for older homeowners who are cash-poor and facing high health care costs,” but in the specific instance to which I’m referring, NONE OF THAT WAS TRUE.

The homeowner I’m referring to was NOT “cash poor,” the reverse mortgage was NOT the only option, and it had NOTHING to do with health care or its costs, high or otherwise. The homeowner I’m thinking of chose the reverse mortgage simply because it was the least expensive alternative, nothing more — nothing less.

You do, however, as Lisa correctly states, have to be able to afford your property taxes and insurance, because a reverse mortgage notwithstanding, it is your house, after all. You have to pay property taxes and insurance on the house that you own and live in no matter what… even with no mortgage that’s true, right? If you own property, then you’ve got property taxes to pay… period… and I can’t think of an exception to that rule.

I do want to say though, that even with such inauspicious beginnings, Lisa is far from being the worst offender when it comes to journalists writing about reverse mortgages today. She doesn’t understand them as thoroughly as she should, to be sure, but she’s trying to make a few points about inheritances in general that I would readily agree are worth making.

As pertaining to the use of reverse mortgages in the future, she also correctly states: “Their use is expected to rise as baby boomers age. In 2013, half of all Medicare beneficiaries had savings below $61,400, according to a recent Kaiser Family Foundation report.”

I don’t know about the accuracy of the $61,400 number… I’ve seen other surveys report that number to be in the $150,000 range… but it’s not a difficult number to believe either. I’ve said before that outside of the very rich, there are only two kinds of people: those who are not adequately prepared to maintain their lifestyles throughout their retirement years… and those who are lying about it.

So, it doesn’t matter which number you choose to believe, neither is anywhere close to being enough to sustain one through more than a year or three of retirement, in the vast majority of cases. I guess there may be a few who could make that amount of money last 4, 5 or 6 years, but that would be about it.

When you consider that retirement today is measured in decades, not years, it’s a state of affairs that could easily be considered an emerging crisis for tens of millions of Americans, and therefore for our country as a whole. And although everyone’s situation is different, there are certainly millions of older American homeowners who would benefit significantly from using a reverse mortgage to improve their financial security in their retirement years.

But I digress… let’s get back to Lisa Prevost writing for The New York Times on April 10, 2014… under the headline: “Reverse Mortgage Realities.” And let’s forget and even forgive the fact that she starts off such an article by getting her facts about reverse mortgages wrong … I think the rest of her article proves that she means well, and at this point, I’m willing to take that as a “win.”

Her point is that, from her interviews, “elder law and reverse mortgage experts say they frequently encounter resistance from children less concerned about the terms of the loan than about losing their presumed inheritance.”

Obviously, we’re talking about the reaction of adult children, whose parents are talking about using a reverse mortgage, being more concerned about losing their inheritance than anything else, including their parents well-being. It’s not an attractive picture being painted here, we should all understand, but if The New York Times feels it important enough to address, then who am I to ignore it?

Why should the heirs to a reverse mortgage be happy? Because chances are, they get more with one than without one.

The thinking here should be simple to understand: If my parents get a reverse mortgage, I’ll inherit a home with less equity than I would otherwise. That about covers it, right?

The problem with this thinking is that it’s seriously defective. In fact, the opposite is probably true.

What I’ll inherit, assuming my parents want to and can leave me anything at all, doesn’t depend on them getting or not getting a reverse mortgage, and if anything… their getting a reverse mortgage will more than likely increase what I’m able to inherit… not decrease it.

To illustrate this comparison, we first need to eliminate the possibility that my parents are going to take the cash from a reverse mortgage and bet it on a long shot at the track, or something equally as frivolous. I’m sure that’s possible, but it’s also so highly unlikely that it’s not worth considering.

So, that means, that my parents are going to use some of their equity for some productive purpose, like to pay off an existing traditional mortgage, or to pay other expenses that without the reverse mortgage would have to be paid by some other source of funds.

If they’re using the reverse mortgage to pay off an existing traditional mortgage, to open a line of credit, purchase a home better suited to retirement, or even buy income producing property, then they may very well accomplish things that are accretive to what may be inherited by their kids.

1. They’re protecting the home from foreclosure. If someone’s income falls and/or their expenses rise unexpectedly during retirement, such that they are unable to make the mortgage payments on a traditional mortgage, they can lose the home to foreclosure.When there’s a reverse mortgage, you can still pay off the house if you want to, but there are no mandatory payments to be made or missed. And since foreclosed homes don’t get inherited… a reverse mortgage may turn out to be the proximate cause for heirs to inherit the home, not the reason they won’t.
2. When you switch a traditional mortgage to a reverse mortgage, you stop having to make the monthly payments that were required by the traditional mortgage. If the parents were to put those payments, let’s say $2,000 a month, into a savings/investment account and earn a modest 5 percent annual return, over a 10 year period they could expect to accumulate roughly $315,000.Over 15 years, that amount would be roughly $535,000. And either of those amounts could mean the difference between having to sell the home during retirement and being able to live in it for life… in order to be able to leave it to their heirs.
3. Another reason to have a reverse mortgage is because the line of credit grows each year by the amount of the interest rate, and that line of credit, if used properly, can prolong the life of a retirement portfolio invested in equities. As a result, more can be left to heirs than would otherwise be possible. (ERISA attorney Barry Sacks has published a great deal on this topic, and you can listen to him explain how this works HERE.)

4. When you switch a traditional mortgage to a reverse mortgage, you don’t have to make the payments, which also means you don’t have to pay the interest that would normally create a mortgage interest deduction. But, that deduction doesn’t evaporate, it adds up and the heirs can use it after the reverse mortgage is paid off or refinanced.Depending on how long the reverse mortgage is in place, it’s generally not an insignificant amount either. In fact, it could easily be six-figures and used to offset capital gains tax owed as a result of the heir(s) selling the home they’ve inherited. Of course, the heirs wouldn’t inherit any such tax benefit were there a traditional mortgage on the property they inherited.
5. Or maybe the parents want to use a reverse mortgage to downsize into a smaller, more manageable home through a reverse-mortgage-for-purchase. By doing that, they would likely conserve a large percentage of the proceeds from the sale of their home, and have no mortgage payment for life on top of that.Picture this… they sell their home for $500,000. They put $200,000 down on a $400,000 home and use a reverse-mortgage-for-purchase. They put the remaining $300,000 into their bank account. And since they don’t have to make mortgage payments, they’ll be better able to deal with unplanned expenses, should they arise.If you’re concerned with maximizing your inheritance, that scenario should sound pretty darn good, especially as compared with the far less savory alternatives.
6. Or perhaps the parents used a reverse mortgage to purchase a duplex or triplex in order to create income to supplement Social Security throughout their retirement years. In that case, while the heirs might inherit a home with a lien on it, they would also inherit the duplex or triplex that might be free and clear by then.Again, not only do you have to consider the income producing property, but you have to ask yourself what would have happened to the parents without that additional retirement income. Would they have been able to meet all of their expenses without selling the family home? Would they have had medical liens that needed to be repaid from the home’s equity once the heirs sold the property?

You can never know everything about what would have happened, but it should be clear that there are many instances where the use of a reverse mortgage wouldn’t decrease an inheritance… instead it would increase what could be inherited.

What is a reverse mortgage, really?

I could go on with that list, as there are essentially an unlimited number of applications for the funds made available via a reverse mortgage. And why wouldn’t there be? What is a reverse mortgage, after all?

It’s a source of funds available at a relatively low interest rate, that doesn’t have to be repaid on any certain schedule, if at all by the borrower. How can that necessarily be good or bad… doesn’t it simply have to depend on how the money is used, and what it allows or prevents?

It’s also helpful to remember that we’re talking about the parent’s equity… they worked hard to create it over many years. And in many cases they did so with the idea that their equity would be there to help them during their retirement years. So, one response to heirs concerned about inheriting their parent’s home unencumbered by liens, might be: “Get a job and buy your own house.” (I’m just saying…)

So, what types of things do have a major impact on the amount of someone’s inheritance?

What parents leave to heirs isn’t primarily dependent on a reverse mortgage. In fact, as shown above, a reverse mortgage might be used to increase what they leave to heirs.

What parents end up leaving their children is far more dependent on things like their need for medical care, assisted living and/or skilled nursing or home care during the last five years of their lives. Or, as we saw occur in 2008, 2009 and 2010… it could be the economy collapsing that wipes out the best laid plans of mice and men.

It’s also helpful to realize that reverse mortgages are designed to have equity throughout the life of the loans, because if they don’t then the borrower or the borrower’s heirs can simply walk away, and if that’s what happens then FHA has to make up the difference. FHA is just like any insurance company, and that means that they don’t want to have to make up shortfalls, so it stands to reason that reverse mortgages are designed not to end up underwater.

Can they end up underwater? Of course they can, any loan CAN end up underwater, we should all have learned that from our experiences over the last five years or so. But no one plans for home prices to get crushed as they did in 2008, 2009 and 2010. That sort of crash in home prices hasn’t happened in roughly 70 years, so it’s safe to say that it’s not the norm.

So, the reverse mortgage is designed so that there will still be equity in the home when your heirs sell the home, but if they don’t, no worries at all… neither you nor your heirs can never owe more than the property is worth, so if no equity remains, your heirs can simply walk away.

Reverse mortgages do exactly what they’re supposed to do…

Reverse mortgages today are called Home Equity Conversion Mortgages or HECMs for short, and they do exactly what they’re supposed to do… which is whatever you want them to do. If you’re concerned about the interest building up beyond a certain level, then make some interest only payments and that problem is solved.

If you want to pay off the mortgage, then you can make principal and interest payments whenever you want to, monthly… or annually… or every few years, if that’s better for you. It’s all up to you and no one else.

But when you hear or read someone saying that reverse mortgages mean you’ll inherit less stop and think about what the reverse mortgage is making possible that wouldn’t be possible without it, or would have to be paid for from some other source of funds without it.

If it’s being used to prolong the life of a retirement portfolio, then presumably your going to inherit more from that portfolio as a result of your parents having the reverse mortgage to draw from during downturns in the stock market. Sure, there may be less equity in the home, but the stock portfolio is in much better shape thanks to the reverse mortgage.

If a reverse mortgage was used to purchase income property, then although there might be less equity in the home you inherit, you’ll also be inheriting the income property.

If the reverse mortgage was used to buy a $250,000 motorhome, then you might have less equity in the home you inherit, but you’ll also be inheriting the $250,000 motorhome.

And if your parents used the reverse mortgage to supplement their income during their retirement years then you have to ask whether you’d even be inheriting the home were the reverse mortgage not been available. Without it, they may have lost the home to foreclosure or been forced to sell it to meet expenses they were able to meet because of the reverse mortgage.

As Arlo Guthrie once said: “You can’t have a light, without a dark to stick it in.”

Well, assuming you don’t use the proceeds from a reverse mortgage to buy magic beans, then you can’t have a reverse mortgage without eliminating some other financial drain or mitigating some other financial risk.

But for whatever reason, writers like Lisa Prevost in The New York Times, never seem to mention what would have been without the reverse mortgage, or what else was… because of the reverse mortgage. They seem to only want to look at one number… the balance due on the loan… and yes, if you make no payments it does grow each year by whatever the rate is.

Of course, so does the value of your home… it goes up each year too, at least under normal circumstances, so it’s not just your loan balance that’s rises, while everything else stays the same, which I think is what some people want you to believe happens when you have a reverse mortgage. Why? I really don’t know the answer to that one. All I know is it’s not true.

A very rude awakening…

Lisa’s article goes on to include quotes from various lawyers who are advising the parents about a reverse mortgages, and apparently often find that the adult children are against the idea because the kids say: “You’re spending my inheritance.”

(Oh my, I just threw up in my mouth a little bit. I need to get something to drink.)

Her article also quotes another attorney who, talking about the adult children, adds… “Sometimes there’s just no getting through to them because they’re just being selfish about their inheritance possibility.”

(Oh dear, that was close… I almost threw up all over my keyboard that time. I better cut it off here. I don’t think I can take much more of that sort of thing.)

I’ve never personally met any adult children like that… at least I hope I haven’t. They remind me of adult versions of the obnoxious children from “Willie Wonka & The Chocolate Factory,” the musical version staring Gene Wilder as Willie Wonka, of course.

If you don’t remember what happens to bad eggs, click PLAY below to see Veruca Salt perform the anthem of spoiled brats everywhere… “I Want it Now!”

Lisa’s “experts” also admit that there are some parents that say that they don’t have to tell anyone about their decision to get a reverse mortgage, and other times I suppose they do want to tell the kids about their decision.

Personally, I don’t have an opinion on which way is the right or better way… as far as I’m concerned, it’s up to the parents. It is their home… their equity… their retirement years… and their lives… after all.

I know for sure that my father would never have felt it the least bit important to tell me about his decision to get a reverse mortgage, and I wouldn’t have expected him to tell me either. I didn’t tell him about the last time I refinanced my mortgage, and I don’t think I would feel obligated to tell him if I decided to use a reverse mortgage myself. His house was always his house, and mine has always been mine.

My guess is that the parents that don’t want to tell their kids about their reverse mortgage don’t want to tell them because they know they’ve got greedy brats for kids, and they don’t want to be reminded of that fact by hearing what they might say upon being told the news.

To any parents reading this that may be wrestling with these sorts of questions, I would only offer the following…

I don’t think it’s actually possible to be truly financially prepared for decades of retirement. No one’s done it successfully before? How do we know that it’s something that can even be done? Unless you’ve got untold millions, of course, and if that’s the case why are you reading this at all?

So, take care of yourselves first. Do whatever you can do to protect your future financial security first… not just for what you see coming, but to whatever degree possible, take steps to protect yourself against what cannot be seen as well.

Then live your lives as you want to live them… this is NOT a dress rehearsal. And when it’s all over, leave your heirs whatever is left. Simple as that. It doesn’t matter if it’s a house or it’s cash, stocks or bonds. Leave them a motorhome or a boat… leave them whatever you can’t take with you. If you want to know what I would want most… well, I’d like a photo album or two… nothing more.

But most of all… leave them as many years of unconditional love and support as God allows you, and as many precious memories as you can make with them. Leave them your knowledge and your caring about others. Leave them with the knowledge that they were everything to you, and don’t just pray that they know that… tell them everyday while you’re still here.

Because one thing about this story we call life is that it ends badly for all of us.

And if you’re thinking that your inheritance is somehow more important than your parent’s financial security, maybe you should ask them if they wouldn’t mind checking out a little early to protect some of that equity you’re counting before its hatched.

Just thinking out loud…

Mandelman out.