By George A. Downey
Like the late comedian Rodney Dangerfield, reverse mortgages…don’t get respect. Not much anyway. Why? That question and the broader issue of seniors’ general reluctance to use home equity has been the subject of numerous studies. Most recently, examinations by The Center for Retirement Research at Boston College, the Bloomfield, NJ-based Reverse Mortgage Funding (RMF), a leading national lender, and Reverses Mortgage Daily, an industry trade publication, shed new light on this puzzling question.
Their conclusions are a bit disturbing, but insightful. Disturbing in the sense that home equity (housing wealth), clearly the largest asset most seniors own, is rarely considered in traditional financial wealth planning practices. Properly managed, housing wealth could potentially improve retirement security and reduce longevity risk and other risks of aging. However, most seniors, along with the majority of professional advisors, have yet to recognize this dormant resource as a mainstream solution. These studies provide some clues.
Blind Tests Yield Startling Results
RMF, as reported by Alex Spanko in Reverse Mortgage Daily (3/28/17) sponsored studies gauging consumer and professional advisors’ reactions to the merits of traditional bank Home Equity Lines Of Credit (HELOCs) against the FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage. Two comparison tests with the same information were conducted where: (1) The product names were identified at the outset; and (2) The product names were not known up front – simply identified as Product A and B. Separate groups of consumers and professionals were tested and then asked which product best fit retirees needs.
Product name KNOWN up front
Consumers 68% 32%
Professional Advisors 37% 63%
Product name NOT KNOWN up front
Consumers 42% 58%
Professional Advisors 57% 43%
More recently, RMF conducted another blind test fashioned after the Coke-Pepsi Challenge of days gone by, which included 88 consumers. This time 85 of the 88 chose the HECM reverse mortgage. These results conclusively demonstrate that consumers and advisors have limited actual knowledge of reverse mortgages and appear more influenced by perceived reputational issues and misconceptions. Consequently, the “reverse mortgage” name, it appears, may trigger pre-conceived negative attitudes that dampen further interest.
Is Home Equity An Underutilized Retirement Asset?
According to the Boston College Center for Retirement Research analysist, Steven A. Sass, home equity is the most underutilized asset in retirement financial planning. The Sass brief explains the foundational issues why it is not commonly used, and advises that downsizing and/or a reverse mortgage allow households to use their home equity as a valuable resource for retirement security. The brief’s key findings are:
ReLOC vs. HELOC
Well-known retirement researcher and planning expert, Tom Davison, PhD, Ohio State, created a new more descriptive label for reverse mortgage – ReLOC (Retiree Line Of Credit). If we can get around the name issue and open minds to new information, Dr. Davison makes some compelling points in his blog, Do You Prefer a ReLOC or HELOC? The following section, taken from the article, is especially significant.
ReLOCs share many features with HELOCs, three unique features make a ReLOC a line of credit designed for retirees:
Here’s the borrowing limits for a ReLOC and a HELOC for a 63-year-old in a $400,000 house who lives to age 99:By
ReLOC borrowing limit starts at $200,000 and grows at 4%. HELOC starts at $200,000 and lasts until the draw period ends at 10 years.
NOTE: When the $200,000 HELOC credit line closes in ten years, the ReLOC credit line amount available approaches $300,000, and continues to grow compounding monthly. This illustration assumes no withdrawals, which may not be realistic, but clearly demonstrates the value of compounding growth. Furthermore, the credit line growth is guaranteed by HUD/FHA and continues regardless of any change (up or down) in future property values.
Dr. Davison’s illustration clearly demonstrates the near and longer term potential a ReLOC provides compared to a traditional HELOC. Having guaranteed access to this growing line of credit for life (as long as the loan remains in good standing) without payment obligations or personal liability empowers the planning process to provide a higher sustained quality of life with reduced longevity risks.
Thus, with the foregoing in mind, does the label “reverse mortgage” arouse negative feelings and influence attitudes that cloud judgement? The group test results cited above would indicate it does. Would a new name like ReLOC, or another name, make a difference? Maybe, we don’t know yet. What we have learned, though, is that blind test comparisons conclusively favor selection of a reverse mortgage over traditional bank home equity lines of credit. That may be a game changer.