(Editor’s note: NRMLA President and CEO Peter Bell submitted a Letter to the Editor to Forbes.com that responded to an article written by economics professor Teresa Ghilarducci that was especially misinformed in its characterization of reverse mortgages. On balance, Forbes.com does a good job explaining reverse mortgages. American College Professor Wafe Pfau and Jack Guttentag aka “The Mortgage Professor” have been especially helpful contributing articles that examine reverse mortgages from a variety of angles that help explain their versatility as a personal financial management tool. Following are some excerpts from Bell’s Letter to the Editor with a link to the full response at the bottom.)
Teresa Ghilarducci’s recent article, Four Reasons to Avoid Reverse Mortgages (February 9, 2019), could very easily be turned into four reasons to explore a reverse mortgage.
Home prices may not appreciate—and they may even depreciate, Ghilarducci warns. Well, yes, although over the longtime horizon, despite occasional downturns, home prices have historically reverted to the norm and continued their upward trajectory. Furthermore, if you lock-in the principal limit on an FHA-insured HECM reverse mortgage and the home’s value subsequently declines, the available line of credit remains intact and, in fact, the unused balance in the line continues to grow.
If you have too much house in your 50s and 60s and you think you are going to downsize later, downsize now, Ghilarducci advises. Helpful advice — if smaller, affordable, more accessible homes exist in your neighborhood or in a community that you want to relocate to. For most people, few such options exist.
There are often no smaller homes, designed for aging in place, in or near the community where homeowners have established their lives over the past decades. Furthermore, moving to a smaller new home can often cost more than remaining in a current home. Buying a smaller older home can be stepping into unknown problems and maintenance issues, rather than remaining in a property with which you are familiar. Renting might be an option, but most homeowners I know would prefer to be in a home they own, rather than a rental property.
If moving to another home to downsize, a reverse mortgage can be used for purchase, as well, under the HECM for Purchase option.
Ghilarducci’s third reason to avoid a reverse mortgage is concern that the current home might not be suited to aging in place. Oftentimes, it is the best alternative and the proceeds of a reverse can be used for modifications to make a home a safe environment for aging adults. In fact, home modifications such as adding a ground floor bedroom or bath, widening doorways, eliminating a front stoop, changing flooring, etc. are often the reason borrowers obtain reverse mortgages. Paying for in-home care and personal assistance are also common uses for reverse mortgage funds.
Finally, Ghilarducci warns that reverse mortgages are unattractive if you can’t keep up with the property taxes and maintenance costs as you age and as health care costs take up more of your disposable income. That is true of home ownership, in general, and not unique to reverse mortgages. If you own a home free and clear, but can’t pay the taxes, you can face foreclosure. If you have a regular mortgage, the same is true.
To help assess prospective borrower’s ability to meet their requirements for paying taxes and insurance, the reverse mortgage origination process includes a financial assessment of the homeowner’s cash flow and expenses. If there is not enough disposable income, a set aside of reverse mortgage funds can be established to pay these expenses. If there are not sufficient funds to establish a tax and insurance set-aside, the homeowner would not be eligible for the reverse mortgage.
It is easy to cite problems people might face as they age; it is more challenging to devise solutions. The wealth that many older homeowners have amassed in their homes, through both paying down a mortgage and home price appreciation, is an important resource for funding longevity. A reverse mortgage is a useful tool for tapping that home equity to fund longevity. Ghilarducci should not dissuade older homeowners from exploring reverse mortgages.
President & CEO
National Reverse Mortgage Lenders Association