As the reverse mortgage industry continues to grapple with the “loan of last resort” reputation, the line of credit feature may be the product’s best bet in becoming a serious retirement planning tool in the eyes of retirees and the financial professionals working with them.
Notable changes to the Home Equity Conversion Mortgage (HECM) program, including the Financial Assessment, have arguably made reverse mortgages more sustainable products for borrowers, their non-borrowing spouses and the Federal Housing Administration.
In turn, this has fostered a big push to increase exposure of the reverse mortgage product to the untapped market opportunity of qualified borrowers who would benefit from a HECM. Perhaps even more top-of-mind has been the push to reach financial advisors and educate them on how a reverse mortgage could be a viable supplement to their clients’ retirement portfolio.
But while more education still needs to be done to raise awareness of using reverse mortgages in modern-day retirement planning, the line of credit feature could be the ticket to helping the HECM ditch that “loan of last resort” reputation once and for all.
“If you are talking about planning, then yes, that has to be the focus,” says Dr. David Johnson, associate professor of finance in the John E. Simon School of Business at Maryville University in St. Louis.
A standby reverse mortgage line of credit can offer borrowers-those who are planning for the long-run and not seeking a last resort-peace of mind in knowing that they will have funds, which grow over time that they can access for a number of reasons, be it to pay for unexpected health emergencies, supplement income or delay drawing Social Security benefits.
“Clearly, there are so many different ways you can use that line of credit,” he says. “I’m confident that if you do a reverse mortgage and have a line of credit-whether you access it or not-it still changes people’s minds and gives them peace of mind knowing they have money that they can access in a short period of time if they need to,” Johnson says.
There are so many different ways to use a line of credit, Johnson said during a recent appearance on Savvy Senior Resources…Talking With Experts, a local cable segment in Minnesota, as well as on YouTube, hosted by Certified Reverse Mortgage Professional Beth Paterson of Reverse Mortgages SIDAC that is spreading the word about reverse mortgages to seniors and their adult children.
“It’s almost like a nest egg that’s going to grow even if you may not need the funds right now,” said Johnson, an academic who previously worked as a reverse mortgage originator in the Las Vegas area just prior to the housing crisis.
Johnson is also one of three co-authors of a paper titled “Retirement Trends, Current Monetary Policy, and the Reverse Mortgage Market,” which assess the current and future challenges facing retirees, and demonstrates how a reverse mortgage can be used to provide supplemental retirement income.
But he is not alone, as others in the financial planning community have also tackled the topic of the hidden value of the standby reverse mortgage line of credit in retirement planning, and how this feature can benefit borrowers as they prepare to fund their longevity.
“We need to start thinking about and planning what we’re going to do in the future, because most of us are going to outlive our assets and if we don’t have some alternative, it’s going to be much tougher when it occurs,” Johnson said in the Savvy Senior Sources segment.
While a reverse mortgage has the potential to help many retirees, a lack of education is still the biggest hindrance to greater utilization.
“There’s so much misinformation about reverse mortgages,” Johnson says. “People don’t realize how creative you can be; how many different ways you can use it; and how it makes sense to set it up now even though you may not need it now, because you can use it in the future.”
But what’s even tougher is getting people to change their opinions of reverse mortgages.
“You can’t force people to become educated,” he says. “You can provide different avenues for them to become educated, but it’s tough. If someone out there has a strong opinion that there’s something wrong about reverse mortgages it’s difficult to change their opinion.”
“If we can educate them, at least we’re making a start,” he says. “But we’ve got to find a way to trickle the message down to get more people to understand it.”
Jason Oliva, ReverseMortgageDaily