HECM Reverse Mortgages

The following is the manuscript of a conversation MorningStar hosted on a June 2024 podcast featuring two industry subject matter experts on the subject of Home Equity Conversion Mortgage (HECM ) and Reverse Mortgages and the growing awareness of this financial tool in today's retirement world.

Amy Arnott: Please stay tuned for important disclosure information

at the conclusion of this episode. Hi, and welcome to The Long

View. I'm Amy Arnott, Portfolio Strategist for Morningstar.

Christine Benz: And I'm Christine Benz, Director of Personal

Finance and Retirement Planning for Morningstar.

Amy Arnott: Today we have two guests on the podcast, Don Graves

and Wade Pfau. Don Graves is the President and Founder of the

Housing Wealth Institute and an Instructor of Retirement Income at

the American College of Financial Services. He's considered one of

the nation's leading educators on incorporating housing wealth into

retirement income planning.

He's also the author of three books,Housing Wealth: An Advisor's

Guide to Reverse Mortgages, Housing Wealth Conversations, and

The Retiree's Guide to Housing Wealth.

He graduated from the Fox School of Business at Temple University.

Wade Pfau is Professor of Retirement Income in the Financial and

Retirement Planning Program at the American College of Financial

Services. He's also Co-Director of the American College Center for

Retirement Income and Retirement Income Certified Professional

Program Director at the American College. Pfau has written several

books, including his most recent Retirement Planning Guidebook.

He is a Co-Editor of the Journal of Personal Finance, and he

publishes frequently in a wide variety of academic and practitioner

research journals.

Pfau holds a Doctorate in Economics and a master’s degree from

Princeton University, and Bachelor of Arts and Bachelor of Science

Degrees from the University of Iowa. He's also a Chartered Financial

Analyst. Don and Wade, welcome to The Long View.

Don Graves: Thank you.

Wade Pfau: Thank you so much.

1. How Did You Get Started in Reverse Mortgages?

Amy Arnott: So, the first question is for Don.

Before we get started, can you tell us a little bit

about your career and how you first started

learning about reverse mortgages?

Don Graves: Sure. About 25 years ago, I was

the CEO of a non-profit in Philadelphia called

Habitat for Humanity. And my sister called me,

my older sister, and she said, “Little brother,

I've got something you should look at”. And she

described, and I told her, “Oh, no, you're going

to prison this time. You're taking old people's

houses”. And I didn't want anything to do with

it”. And I asked her, “Why would you think I'd

want to do something like that?”

Now, I didn't know anything. I was like most

people. And she said, “You love serving people.

That's part of your DNA. And this is a good way

for you to support your 3 children who are

school age”.

So, that was kind of my entree. It took me a

year after my sister talked about it. And I

visited HUD's Home Ownership Center in

Philadelphia, spoke to Fannie Mae, spoke to 3

to 5 housing counselors, because I wanted to

make sure that this is what it said. I wanted to

see the fine print, the aha, the gotcha. And only

after I did all of that could I look someone in

the eye and say, “This is an appropriate

resource for the right person”. So, that was my

entree into the world of reverse mortgages.

2. What is the Home Equity Conversion Mortgage

   (HECM)?

   
   

Christine Benz: So, we want to delve into the

products and the utility in the role of

retirement planning, but Wade, maybe we

need to cover some ground first, just on the

basics of reverse mortgages. And I'm hoping

you can talk about the type of reverse

mortgage called a Home Equity Conversion

Mortgage, sometimes shorthanded as a HECM.

Maybe you can give us some basic background

about what a HECM is and how it works.

Wade Pfau: Sure. And so, the vast majority of

reverse mortgages are HECMs. There are some

proprietary reverse mortgages out there and

generally they're for homes that are more

highly valued, well beyond a million dollars. But

the HECM program is usually what people have

in mind with the reverse mortgage. It was

created during the Reagan administration. It's

a federally administered program through

Housing and Urban Development and the FHA,

Federal Housing Authority.

And it's a framework and system and set of

standardized rules for how to allow individuals

to tap into their home equity through the

reverse mortgage so that there's the

borrowing capacity, they're able to borrow,

spend. It creates liquidity for the home

effectively to be able to incorporate that into

their retirement strategies. And it's really the

foundation for what people have in mind when

we hear the term reverse mortgage.

3. Why Did FINRA Change Their Position on

   Reverse Mortgages?

Amy Arnott: So, Don, we both have a copy of

your book. It's called Housing Wealth and it's

geared toward advisors. And you write that

HECM mortgages have been controversial in

the past. It sounds like it was an issue where

there were a few unscrupulous advisors that

were encouraging people to get these reverse

mortgages and basically using that to have

clients buy products that would earn them

commissions. So the NASD actually issued a

decree that none of their advisors could even

talk about reverse mortgages. But eventually,

FINRA ended up changing that position in

October of 2013.

Can you talk about the reasons behind FINRA

changing that position?

Don Graves: Sure. The history. When I started

25 years ago, the American Homeownership

Economic Opportunity Act of 2000 had a

provision that if you use your proceeds from a

reverse mortgage to purchase a qualified long

term care plan, they would waive the initial

mortgage insurance premium.

Also at that time, if you went to the AARP

website and you plugged in some information,

they would give you some quotes, a reverse

mortgage slump, some line of credit, monthly

payment and a fourth category, which

happened to be a chassis based on a John

Hancock single premium and needed annuity.

So at one point in time, reverse mortgages,

Congress was thinking, how do we strengthen

retirement? Now, the long term care didn't

take it. Too many glitches with that.

But what happened was some advisors at that

time would take the money and then purchase

some sort of lump sum product. And in the

industry, we would say to them, be careful

with that. As a matter of fact, don't do that.

Make sure there's enough liquidity. Don't be

greedy.

And what happened in Portland, Maine and

Seattle, Washington, 2 advisors independently

took Mr. and Mrs. Flintstone's lump sum,

purchased a whole bunch of annuity products,

which are not bad in and of themselves, but

they had pretty older surrender terms. Well,

after that, Barney Frank, Claire McCaskill, what

was the NASD got involved and said, “Hey, this

is inappropriate”. And they shut it down.

As NASD morphed into FINRA, I think weighed

around 2011, MetLife, Mature Market Institute,

Dr. Sandra Timberman began to say, we need

to look at this again. Housing, wealth, reverse

mortgages have an appropriate use. And that

started the conversation again. And so in 2013,

FINRA's official position, their written position,

where reverse mortgages should only be used

as a last resort until Dr. Behr Sachs's brother,

Stephen Sachs, really challenged that. And they

relented on some of that language. They

removed the last resort language.

Wade, you can add to that if I missed

something.

Wade Pfau: No, I think you got it right. I mean,

unfortunately, FINRA still has a negative

sounding title for their report. They didn't

change the title. It's still like reversal of fortune

or something like that. But if you actually read

the contents, they give warnings and things

about “Make sure you understand how reverse

mortgages work and so forth”. But they took

out some of that really restrictive language

about “This should only be used as a last

resort”.

And Don, I agree. I mean, my understanding is

effectively the research that Barry Sachs and

Stephen Sachs had published in 2012, they took

that to FINRA and were able to convince them

that that sort of last resort scenario really is

the worst way to think about incorporating a

reverse mortgage into a financial plan.

4. What Were the Regulatory Changes in

   2013, 2015, and 2017? 

Christine Benz: So there have also been some

regulatory changes. There's a series of

regulatory changes in the mid 2010s. Can you

talk about some of the key changes that were

made from a regulatory standpoint?

Wade Pfau: So it seems like every few years,

the government decides to adjust some of the

parameters of the program, always working to

strengthen it for the long term. And so in the

2013, 2015, 2017, we saw a lot of changes. One

was to create protections for eligible non-

borrowing spouses so that one of the rules of

the HECM is you have to be at least 62 years

old to be a borrower.

And that created a potential conflict for

couples where one person was over 62, the

other was under 62 before creating these non-

borrowing spouse protections. That spouse

was in jeopardy to have to settle the loan when

the borrower left the home. But after these

protections were established, eligible non-

borrowing spouses, they're not borrowers,

they can't continue to draw funds from the line

of credit, but they are protected to stay in the

home as long as they meet the basic

homeowner obligations, for as long as they

wish to stay in the home. So that was an

important change.

Another big change was creating financial

assessments and life expectancy set-asides. So

another concern with reverse mortgages, it's

always been this kind of last resort idea where

when people run out of options, the only thing

left is maybe they can tap into their home

equity through a reverse mortgage.

Now, that's not how we really talk about that in

the financial planning context of building a

responsible retirement income plan. But if you

were using a reverse mortgage as a last resort,

you might ultimately just be kicking the can

down the road. And if you don't have the

resources to pay homeowners insurance, to

pay property taxes, to do basic home

maintenance, there was risk that eventually

the home could be foreclosed upon.

And so the financial assessments came into

play to either say, this individual looks like it's

not going to be sustainable, or to create a lease

or life expectancy set-asides. Where at the

extreme, maybe the reverse mortgage is simply

used as a way to continue to stay in that home

because you'll be able to use the resources of

the reverse mortgage to pay those property

taxes or to pay for the homeowner's insurance

to do the basic home upkeep.

And so that was an important change to help

ensure people are able to stay in their homes.

And then they're always modifying the

parameters to help protect the mortgage

insurance fund and so forth to make sure that

the reverse mortgages do stay sustainable over

the long term.

5. Why Are Consumers Required to Go Through

   Counseling?

Amy Arnott: And as I understand, one of the

regulatory changes that was made is there's

actually a requirement that people have to go

through financial counseling before they take

out a mortgage like this. Do you think that that

kind of consumer education has been helpful?

Wade Pfau: Absolutely. Now, that's been a rule

for a long time. Don, I think that goes back

even further, but I don't actually know what

year did the financial counseling come into

play?

Don Graves: It's been around for pretty much

as long as I've been around, 25 years. And so it

is very helpful because it takes the oldest away

from the lender or the financial advisor. And

the purpose of it is to make sure that the client

understands what's going on. There's no

cognitive impairment. And they get a

certificate from the United States Department

of Housing and Urban Development saying

they've completed HECM counseling and that

they've met the requirements of understanding

and things of that nature. So it's a wonderful

safety feature.

6. Are Reverse Mortgages Less Appropriate for

   Those with A Strong Desire to Leave an

   Inheritance?

Amy Arnott: So one criticism of using a HECM

is that it can give retirees a lot more flexibility,

but potentially at the cost of leaving their

children or other heirs with less home equity

to inherit. Would it be fair to say that reverse

mortgages are less appropriate for people who

really have a strong bequest motive, who want

to leave something behind for their children?

Don Graves: I would say not necessarily. And

I'm going to ask Wade to chime in on this,

because a lot of his research says that if you

use the reverse mortgage in a certain way, you

have the opportunity to leave a greater

bequest, a greater legacy than if you hadn't

done it at all. And that's what the research is

bearing out.

So I wouldn't say if you've got a strong bequest

motive, you should ignore this. You may want

to lean into it. And my mom once said, my

Kentucky sensibilities, mama asked me, “When

we go, would you rather have the apple tree or

the orchard?” I said, “Well, I'd rather have the

orchard”. And that's what, again, Wade's

research says, “That if we leverage the house

to offset portfolio draws during down markets

and things of that nature,

that there's a distinct possibility and

probability that we'll leave more as a bequest

motive than if we don't”. Wade, you can chime

in on that.

Wade Pfau: Yeah. Let me chime in a little bit

too, because there's kind of 2 scenarios to talk

about with this. The media stories that say,

“Oh, the reverse mortgage took away the

child's inheritance”.

That's generally more the last resort scenario

where maybe the home was the only thing left.

And in this case, the homeowners decided to

use that home to help fund their own

retirement rather than to leave it for an

inheritance.

But at the end of the day, it's their asset. And

sometimes those media stories kind of are

written from the perspective of beneficiaries

rather than from the perspective of retirees.

But if we step away from the last resort

scenario that generally probably doesn't apply

to listeners and talk about the broader

financial planning scenario, which is you're

going to coordinate your assets to most

effectively meet your retirement goals.

You need to meet retirement expenses. You

may have an investment portfolio, social

security, home equity. How do you coordinate

that all together?

Then at the end of the day, money is fungible

and you can potentially bequest more by

strategically using reverse mortgage. You think

of legacy as what's left in my investment

portfolio plus the value of the home minus the

loan balance due on the reverse mortgage. And

with the sequence of returns, risk and

retirement and all the kind of retirement

income planning, what we talk about with

retirement risks, longevity, sequence of

returns and so forth.

Strategically drawing from the reverse

mortgage to help reduce the risk for the

investment portfolio can lay the foundation so

that you get these synergies that the portfolio

growth is greater than the cost of the reverse

mortgage.

And like I'm saying, then you're able to leave a

larger legacy at the end by strategically using

the reverse mortgage. And we should add the

reverse mortgage is non-recourse.

So there's never going to be a scenario where

the loan balance exceeds the value of the

home. So it creates a lot of opportunities to

just be more strategic with home equity. It's

not necessarily and generally, it's not going to

lower for a responsible retirement plan.

It's not going to lower the net legacy value of

assets at the end.

7. What Does It Mean That HECM’s Are Structured

   as A Non-Recourse Mortgage?

Christine Benz: So Wade, I'm hoping you can

kind of follow up on the non-recourse piece of

it. That term is probably not familiar to a lot of

people. Can you walk us through what that

means from a practical standpoint? I think you

just kind of said it, but I'm wondering if you

can amplify a little bit.

Wade Pfau: Individuals with HECMs pay

insurance premiums to the federal government

mortgage insurance fund for a number of

different protections. And one of those is this

idea of non-recourse that if at the end, the

loan balance is greater than the value of the

home, the homeowners not on the hook or the

beneficiaries are not on the hook to pay back

more than 95% - of the appraised value of the home at that

time. And then the lender is made whole

through the mortgage insurance fund, but it's

just a way so that if your home value stagnates

and just for numbers, you have a $200,000

home and it just sort of stagnated, but you

borrowed from the reverse mortgage, you held

it for a long time.

The loan balance ends up being $250,000.

Then you're not on the hook for paying back

more than the value of the home. And that's

the idea of non-recourse. And that applies to

home equity conversion mortgages or HECMs,

the main type of reverse mortgage in the

United States.

8. How Does the Average Person’s Home Equity

   Compare to Other Retirement Assets Like

   Iras and Pensions?

Amy Arnott: So we wanted to get into some of

the nuts and bolts of how these mortgages

work, but maybe before we do that, can you

talk about how much home equity the average

person has and how does that compare to

other retirement assets like IRAs and pensions,

etc.?

Don Graves: A few years ago, the census and

Jamie Hopkins and Wade talked about this and

their research said that the average retiring

couple has less than a $100,000 saved, but they

have a home that was in excess of $200,000.

So 68% of their total wealth was in their

housing wealth. Now, earlier this year, that

un-monetized senior home equity had

surpassed $13 trillion. So it's a large part of the

average baby boomers total wealth is their

housing wealth.

Wade Pfau: Yeah. The reverse mortgages are

the one retirement income tool I'm aware of

that actually benefit from a low interest rate

environment. And that's just because you have

a higher borrowing capacity when interest

rates are lower. So as interest rates rise, it's

going to lower the borrowing capacity through

the reverse mortgage. But that being said,

we're still not really in a scenario where

interest rates are very high. And when I do

now historical simulations using historical data

with reverse mortgages, we're nowhere near

the point where interest rates are so high that

there's not value from a reverse mortgage.

It's really 1982 when reverse mortgages,

HECMs didn't exist in 1982. But when I look at

the historical data and apply historical stock

bond returns, interest rates to today's HECM

rules, 1982, when we were talking about 15, 16%

interest rates, that was really the only time

that you really see that sort of, okay, interest

rates are too high at this point. But yeah, it is

the case that when interest rates increase, you

do reduce the initial borrowing capacity

through the reverse mortgage.

9. Are Reverse Mortgages Less Attractive When

Interest Rates Are Higher, Even with Significant

Home Price Appreciation?

Christine Benz: So in recent years, Wade,

we've seen significant home appreciation in

most areas around the country, but at the

same time, interest rates are also significantly

higher. So maybe you can talk about how rising

rates affect reverse mortgages and how that

interacts with home price appreciation. So it

seems like you've got a plus on one side, but a

negative in the form of rising rates.

Don Graves: And Wade, let me jump in with

that. That's one thing that happens, but also

because the line of credit, the growth rate on

the reverse mortgage is based off of the

prevailing interest rate, whereas at the

beginning of COVID, maybe the line of credit

interest on a reverse mortgage is growing at 3,

4%. Now it's 6, 7, 8% in some cases.

And so depending on what the borrower and

the investor is seeking to do, reactive or

proactive, actually having a higher interest

rate, lower starting benefit, but it grows

significantly faster because of today's

prevailing interest rate. And that can be used

to their advantage.

10. How Does FHA Determine the Benefit

    Amounts for Reverse Mortgages? 

Amy Arnott: So maybe we can talk a little bit

more about the effective interest rate and how

that's calculated. So from what I understand,

there's 3 different components. There's the

loan index amount, which is now based on

Treasury bond yields, the lender's margin, and

then the HUD mortgage insurance premium

charge, which you mentioned before. So what's

a typical lender's margin and how does that

end up impacting the overall effective interest

rate?

Wade Pfau: So the lender's margins do vary.

And I last checked… you can get all this data.

It's available through the government websites,

HUD websites. It's lagged a few months, but in

October of 2023, that's the most recent date I

had. I'm thinking that the average lender's

margin was right around 2¼%. And then it

generally fell within a range, a little bit under

2% to potentially a little over 3%, somewhere

in that ballpark.

And that's something that's fixed in the loan at

its initial, when you're assigning the contract,

these are the terms of the loan. So that will

feed into the growth of the loan balance or the

growth of the line of credit, whatever

composition you have there throughout the

lifetime of the loan.

11. What Are the Main Payment Options

    for Using Proceeds from A HECM?

Christine Benz: So, Don, there are numerous

ways that people can use proceeds from a

HECM. Can you walk us through the main

payment options?

Don Graves: Sure. A reverse mortgage is going

to make money available based on 3 primary

factors, the age of the youngest borrower,

someone has to be age 62. In most states, a

person has to be age 18, except for Texas. They

have to be both 62, value of the home and the

future projected interest rate, which HUD calls

the expected interest rate. So based off of

those 3 things, a certain amount of money is

made available. A reverse mortgage must be a

first mortgage.

So an existing mortgages or home equity loans,

lines of credit have to be paid off. And then we

have some money remaining. The question is

the remaining money, how can that be taken?

They can be taken as a lump sum. There are

some restrictions depending on which

program you use, a line of credit, a term

payment, which is, Don, I just want this for 5

years or 10 years or 12 years, a 10-year

payment, which means money will be sent to

you monthly for as long as you have the loan or

a hybrid where you take a lump sum and

maybe a line of credit and monthly payment.

So those are the 5 ways.

Wade Pfau: And just to add to that, to be clear,

that's for a variable rate HECM, which in fiscal

year 2023 was more than 99% of all HECMs.

But to avoid confusion, there's also a fixed rate

HECM where you don't have that ongoing

ability to borrow from a line of credit. You just

take out a lump sum at the beginning. But

again, more than 99% of HECMs are what Don

was just describing.

Don Graves:: Thank you, Wade.

12. Can You Explain How the Principal Limit

    Works in Reverse Mortgages?

Amy Arnott: And Don, you mentioned earlier

the amount that a person can borrow and

there's actually something called a principal

limit factor, which determines the percentage

of the home value that you can tap into. Can

you talk a little bit more about how that works?

Don Graves: Sure. And Wade can jump in.

HUD, this was one of the changes, I believe, in

2017. The PLF tables are produced by HUD and

it says based off of the lender's margin and the

expected rate, a certain amount of money is

going to be made available based on age. And

that could be 37.5 or 32.6 or whatever the

number is. So that number is what we call the

principal limit.

So the PLF, the principal limit factor, is a

percentage that HUD produces…that could

be found online as well. And so the principal limit

is the amount of money, the growth borrowing

capacity before any closing calls or any mandatory

obligations are paid off.

13. When Does the Reverse Mortgage Need to

    Be Repaid, And What Options Do the Family

    Have for Repayment When the Borrower Dies?

Christine Benz: So I'd like to discuss the

repayment options. It seems like the key

advantage of a reverse mortgage relative to

like a traditional line of credit on a home is

that the loan doesn't need to be repaid during

someone's lifetime. But can you walk us

through how repayment works and what types

of options the family has for repayment when

the borrower dies?

Don Graves: Uh-huh. And I can take that,

Wade, and you can chime in. But the heck, the

loan becomes due and payable when the last

surviving borrower permanently departs the

home, moves, dies, or has gone into a facility

for 365 consecutive days for physical or mental

incapacity. At that time, whatever proceeds

were advanced to the client, plus any accrued

interest, has to be repaid.

There are primarily 3 ways that can be repaid.

Number one, the heirs sell the property, they

pay off what's owed on the reverse mortgage,

and they pocket 100% of the difference.

Number two, they can refinance their reverse

mortgage and just take out a traditional

mortgage and make payments if they want to

keep the house.

And number three, they could

use other assets to pay it off. Maybe there was

life insurance or something else that way.

So those are your 3 primary ways to repay the

reverse mortgage balance.

Wade Pfau: Yeah, and that applies at death, as

you were noting with the question. But also,

you can make voluntary repayments over time

as well. And that's getting into, you can adjust

the composition between the loan balance and

the line of credit. And if you make a voluntary

repayment while you're still a borrower, that

just moves funds back into the line of credit so

that subsequently you'll get more growth in

the line of credit rather than having that

growth be in the loan balance. And then you

can tap into those funds again later as you go

through retirement.

14. How Does the Growing Line of Credit Work

    with Reverse Mortgages, Including an

    Example? 

Amy Arnott: So you've noted that the line of

credit actually grows over time in line with the

effective interest rate. And I know, Wade,

you've done some research about this and

looked at a strategy where a person might set

up a HECM at the beginning of retirement, but

then wait to tap into it until closer toward the

end. Can you talk a little bit more about how

that can work and that strategy can work and

why it seems to be beneficial?

Wade Pfau: Yes, the idea that a growing line of

credit can sound too good to be true. And I

think it may just… it was an unintentional

consequence, but it has really powerful

implications. I think when the rules of the

program were designed, the assumption was

people would pretty much want to borrow

whatever they could.

And so that principal limit, the initial

borrowing capacity, that would reflect loan

balance. And we can understand why the loan

balance would grow over time. But the

planning implication was you didn't have to

take out the full amount as a loan balance. You

could leave line of credit. You do need a

minimal balance to keep it open, but I can have

this line of credit that's growing at the same

rate the loan balance would be growing. And

it's really powerful so that when we look at,

well, if I think I might want to use the reverse

mortgage at some point, should I open it as

soon as I can at 62? Or should I wait until the

age that I first need it? The odds are really in

favor of going ahead and opening it at age 62

and letting that line of credit grow. Now, if you

wait until later, you may be able to borrow

more because you're older, so you get a higher

percentage of the home value.

And hopefully your home has been growing as

well in value so that you get a higher amount.

But it's really hard for that to beat the growth

you get by opening it at 62 and letting that

grow. 60 to 70% of the time with historical

data, you'd have faster growth by opening at 62

and letting that grow over time. But plus, even

if you open it at 62, you can always refinance.

And that's something we saw happening quite

a bit after the pandemic. Home prices were

appreciating very rapidly.

Interest rates were getting very low. And so we

were getting into scenarios where people who

did open it at 62, they could have gotten more

by waiting. Well, then they can go ahead and

refinance and tap into that larger equity at that

time. So really, either direction, you have this

opportunity that if you think you might use the

reverse mortgage, opening it sooner rather

than later and letting that line of credit grow is

probably going to lead to having a bigger

borrowing capacity when you do want to tap

into those funds at any point later in retirement.

15. Why Does Opening A HECM Line of Credit at

    Retirement and Delaying Its Use Until Later

    Create Stronger Retirement Income Protection? 

Christine Benz: Wade, in a related vein, you

have discussed a strategy of setting up a

reverse mortgage early in retirement and then

using it as sort of a buffer asset, sort of looking

at the portfolio's results. And if the portfolio

has had a loss, you'd take money from the

HECM rather than touch the portfolio in that

downdraft. Can you talk about that strategy

and how much, based on your testing and so

forth, how that helps improve the odds of

success during retirement?

Wade Pfau: Mm-hmm. Yeah. And that's

actually, so there were… in the Journal of

Financial Planning, which is one of the main

outlets for financial planning research, there

were 2 articles published in 2012 that really

made that same point. They didn't know about

each other's work, so they approached it in

different manners.

But you had Barry and Stephen Sachs in

February 2012, and then you

had, I call the Texas Tech University team,

Harold Iwinski, John Salter, Sean Pfeiffer,

published an article in August 2012. And they

both made the same point that opening a line

of credit on the reverse mortgage and letting it

grow provides a resource to help manage

sequence of returns, risk, and retirement.

That if your investment portfolio looks to be in

trouble, you can define that in any number of

ways, but market downturns, or you're lagging

behind where you need to be, the portfolio's

not performing at the level it needs to make

that retirement plan be successful, then you

temporarily draw your spending need from the

reverse mortgage, leaving the portfolio alone,

giving it a better opportunity to recover before

you then tap into the investment portfolio

again.

Because you have that growing line of credit,

and because it's not correlated with the

market, meaning if the stock market's down,

your line of credit doesn't decrease in value,

it's a classic buffer asset. There's really only 3

buffer assets out there, just cash, but then

you're giving up the yield on having assets in

cash, the HECM growing line of credit, and

then also whole life insurance. Cash value has

been described in this way.

3 different resources that can provide a

temporary bridge to tap into to avoid selling

from the portfolio when it's in trouble. And

that creates these synergies about if I don't

have to sell from a declining portfolio, if I let

that portfolio recover, the long-term growth

and benefit to that portfolio can more than

offset the cost of the reverse mortgage to

create that better overall financial planning

outcome to meet the spending goals and

retirement and to preserve more assets for

legacy at the end as well. Both of those

research articles illustrated that point.

And then I've also replicated their work, looked

at it and just created an even simpler rule,

where it's just you record what was the

portfolio balance at retirement. Whenever the

portfolio balance is higher than that spend

from the portfolio. Whenever the portfolio

balance has dropped below where it was at the

start of retirement, spend from the reverse

mortgage.

So lots of different options, but they all point

to this idea that synergistic coordinated use of

a growing reverse mortgage line of credit can

lay the foundation for better outcomes in

retirement.

16. Explain the 'Rule of 30' from Barry Sacks'

2017 paper in the Journal of Financial

Planning?

Amy Arnott: So, Don, another study you

mentioned in the book was a journal of

financial planning paper written by Barry

Sachs in 2017 called Integrating Home Equity

and Retirement Savings Through the Rule of

30. Can you walk us through some of the key

findings there?

Don Graves: I'm going to defer that to Wade

and because some of Barry's findings there in

2017, there was a different kind of economic

outlook is very powerful what he was

presenting. But Wade, would you unpack a

little that Barry's Rule of 30?

Wade Pfau: Yeah, so that article, one of the

highlights I remember from it was he was

looking at different compositions of “What's

the ratio of your home equity to your portfolio

balance”. So like if my home's worth $400,000,

what's my investment portfolio? Is it 200,000,

400,000, 800,000?

And he was just looking at different ratios of

home equity to portfolio balance and

demonstrating that the bigger the home

relative to the portfolio, the more benefit you

could get from the reverse mortgage. And I

think there was also some aspects of that

article that talked about using a withdrawal

rate based not just on the investment portfolio,

but on the combined value of the investment

portfolio and the home equity. But I must

admit it has been a while since I've read that

article. I don't know if I'm getting all the key

highlights or not. If you had some other ideas

about it, Don.

Don Graves: And I think he's refreshed some of

that as well, that if you had a home of 400,000

and a portfolio of 500,000, how do we

determine the initial safe withdrawal rate? And

that's kind of what his thinking was. But I saw

that Amy and Christine had incorporated that,

and I was going to call Bear and see if he had

updated it because there were some changes,

but I didn't get a hold of him.

Amy Arnott: Oh, okay. Yeah. So I think the

basic idea was, as you said, instead of just

looking at the portfolio value to determine a

safe withdrawal rate, you would combine the

portfolio value and housing wealth and then

divide by 30 to come up with a safe withdrawal

rate.

Don Graves: Yep. That was the premise. And

again, he's done some additional work since

then, and I can't speak on that right now.

17. How Does Using a Standby Reverse Mortgage

to Manage Risk and Volatility Improve Retirement

Success Odds?

Christine Benz: Okay. So I wanted to follow up

on that standby reverse mortgage idea that

you were discussing, Wade. I've talked to some

financial advisors about this, and one, I made a

comment that he felt that it makes total sense

on paper, but just that it's perhaps an overly

complicated way to address sequence of

return risk, that he said he would rather do it

with asset allocation and adjusting withdrawal

rates.

What's your response to that reaction, which I

would guess is pretty common among financial

advisors?

Wade Pfau: Well, yeah, I guess I would push

back on that. At the end of the day, there's

really only four ways to manage sequence risk

in retirement. One, you can just spend less.

That's kind of the logic of the 4% rule idea of

just, well, how low does my spending need to

go so that I don't have to worry about outliving

my money? Another is you can be flexible with

your spending. If I can cut my distributions

after a market downturn, that helps manage

sequence risk.

So it sounds like an advisor may have a

preference for that approach. Right. The third

is to manage volatility in some manner in

retirement. Now, that can get us down a big

rabbit hole of what actually works as a way to

manage volatility in a manner that doesn't

sacrifice too much yield. It doesn't simply

mean using a bond portfolio to fund

retirement, because as soon as you want to

spend more than the bond yield curve can

support, you're going to ensure that you

deplete that asset base.

But there's different ideas there with like

bucketing approaches or annuities can even

fit into that.

But then the fourth approach is this idea of a

buffer asset. And I don't think it has to be that

complicated.

Like I said earlier, there's a very simple

decision rule. If I have the buffer asset, if I had

a million dollars in my portfolio at the start of

retirement, I don't even have to inflate that

number for inflation. I just keep track of that

number. If my portfolio has fallen below that

balance, I'm going to tap into the buffer asset,

whether it's a reverse mortgage or some other

buffer asset.

I don't think it has to be all that complicated.

Now, it can get more complicated, and that's

the Texas Tech approach did get more

complicated because you had to track this is

exactly how much I should have in my

portfolio every year of retirement and use that

as a threshold to decide when you spend from

the reverse mortgage. But I think with a

simpler rule, it really doesn't have to be all that

complicated and can be done a lot easier than

some of the variable spending strategies that

also make complicated decisions based on

portfolio balance.

18. What Are the Foreclosure Risks Associated

with Reverse Mortgages?

Amy Arnott: We also wanted to talk about

some of the risks or negatives associated with

reverse mortgages. Wade, I'm wondering if you

can talk about the risk of foreclosure with

these products. The borrower doesn't need to

make payments, but they still have to pay

property taxes, home insurance, continuing

maintenance on the home.

Are there any statistics on the risk of

foreclosure who take out these products?

Wade Pfau: So, I haven't seen statistics on

foreclosure rates. And we do need to

emphasize, again, the difference between the

last resort scenarios and then the financial

planning scenarios. If you're listening to Tom

Selleck pitch reverse mortgages on TV and

calling the 800 number, that's because you

don't have other options. That's really where

that risk of foreclosure may be a relevant

consideration.

But that's where the government has tried to

strengthen the program with the financial

assessments to simply have set-asides put into

place. I can't tap into all of the potential

borrowing capacity because there's part that's

been carved out and set aside to pay the future

property taxes and homeowner's insurance

and so forth. And also to make sure that home

repairs are done so that the home meets the

requirements at the very beginning just to get

you on that right path.

Now, in the broader financial planning context

where it's not necessarily the case that people

are going to be running out of money, then this

conversation around foreclosure is really going

to be much less relevant. And probably for a lot

of listeners to the podcast, they're more in that

latter bucket where they're not going to be

completely deplete of all assets in retirement.

And so they're going to have the resources to

maintain their homeowner obligations.

19. How Does the HECM For Purchase Assist

Retirees in Downsizing and Alleviate Financial

Stress?

Christine Benz: So sticking with some of the

reasons that someone might not consider a

reverse mortgage, older adults often find

themselves in homes that are impractical to

age in. They might be too large or they have

stairs or they need costly repairs. Given that, is

relocating to a more practical space often the

better call than staying put and tapping home

equity via a reverse mortgage?

Don Graves: It all depends on what the client

wants to accomplish and where they live. For

example, someone in California, they had a

$400,000 home in San Francisco. It's worth

$1.5 million. And if they sell it, the capital gains

are going to be pretty extensive. And so one of

the ways to say, well, you don't have to sell it.

You could do a reverse mortgage and stay to

kind of manage your capital gains.

That's probably the exception. But for a lot of

folks, the home is not the right size anymore.

One of the things I ask, I train advisors for

what I do and said, ask your client this. “If we

could increase your cash flow, reduce your

expenses and add new dollars back to your

retirement savings, but admit moving to your

next last and best home, would you want to

see how it works?”

And that's a financial planning question.

So you've got a client, let's say they sold their

home and they've got 500,000 in proceeds left

over and they could go to a $500,000 home and

pay cash, or they could use the reverse for

purchase program that came about in 2009 that

would allow them to buy their next home today at

about 60% down payment and have no monthly

mortgage payments.

And then they'd have some excess money left

over to add back to their savings. So a client

says, well, Don, I'd like to do that. So here's a

$500,000 home and the reverse mortgage

would make 200,000 available as an example.

So we subtract that. So their down payment is

300,000 gets them to a $500,000 home. But

remember, they had $500,000 in proceeds.

So they're able to kind of reduce their expense

footprint and add $200,000 back to their

retirement savings. You couldn't do that with

just kind of the downsizing or moving. You'd

have some money left over, but using the

reverse for purchase amplifies that and

increases it. And I think it's an excellent

consideration for many people.

20. How Can the Higher Closing Costs of

a Reverse Mortgage Be Understood? 

Amy Arnott: Another negative we sometimes

hear about is the closing costs for a HECM

mortgage, which as with any type of mortgage

can be significant. And Don, I know you wrote

in your book, you cited an example, it could be

about 16,000 total for a $400,000 home. But is

that still, you know, kind of the average

number that you would see for that type of

mortgage balance?

Don Graves: For the HECM, there are 3 costs,

standard retail costs. 2% of their appraised

value of the house goes to HUD for the initial

mortgage insurance premium. So on a

$400,000 home, that would be $8,000. The

second cost is what goes to the lender. 2% of

the first $200,000, 1%, to a maximum of

$6,000. So any home over $400,000, it's

$6,000. So that's the second cost. And then the

third one's going to vary by where you live. So

in my book, I defaulted to ½%, I think.

But if you're in Florida, it's going to be more.

And if you're in Iowa, it's going to be less. So,

yes. So 2% goes to HUD, what goes to the

lender, then your third-party charges. And I

think Wade answered this question in COVID.

He had written an article, and I thought it was

fantastic. And someone kind of pushed back

and said, “Wow, isn't that a lot?” That maybe

the closing cost may have been $28,000. And

what Wade said, and I'll have him chime in, but

it was brilliant.

He says that I believe that the benefit derived

from any product plan or strategy should far

outweigh the cost. And that's when he did his

paper about kind of coordinating your

withdrawal efforts and what could be left as a

legacy benefit at the 30-year mark. And it's

something you said, Wade, at the end of the

talk, where you said, so do I think reverse

mortgages are expensive?

And you said, well, I suppose as long as they

were less than $4 million, because that was the

legacy benefit versus zero, no, they weren't

expensive at all. And so, Wade, would you

chime in on that when people talk about the

retail cost of the reverse mortgage? How do

you answer that?

Wade Pfau: Right. When you see that upfront

all-in cost, it can give some sticker shock

because for a more highly valued home, it

could be in excess of $20,000. And so that

makes people nervous. But when I do all my

research, I include the full retail costs as part

of that. And then ultimately, what does that

cost mean with respect to what your assets are

able to do in retirement? And that's kind of the

scenario Don's talking about there.

If strategic use of the reverse mortgage allows

me to leave a $300,000 larger bequest at the

end of retirement, net of costs, well, was it

really costly to do that? No, it's like a savings of

$300,000. So that's really how I try to frame

fees or costs. It's not so much just in isolation.

Yes, that number looks big, but in the totality

of retirement and what you're able to do, and

how you're able to build a more efficient

retirement income plan. If you're getting more

out of those assets, the cost is really irrelevant

to that.

It's what's the net value at the end of

retirement, and that can be a great net benefit

that well exceeds these costs to set up the

reverse mortgage.

21. What Are the Main Obstacles and Objections

from Financial Professionals?

Christine Benz: So Amy and I have been

offering, I think, some of the counterpoints to

reverse mortgages, but I'm curious if you could

both weigh in on what you hear from advisors.

What are some of the main objections that you

hear from advisors with respect to reverse

mortgages?

Wade Pfau: Well, I can start to just say that I

think everyone starts with a negative

impression of reverse mortgages, and that

includes advisors. And its amazing just how

many advisors still think that you somehow

give up the title to the home to use a reverse

mortgage, which has never been true, but it's

one of these enduring myths that just lives on.

And so everyone really needs to start from

overcoming their bias against reverse

mortgages.

And so when you're talking to someone, an

advisor or not, who is just, they have that bias

built in. So you have to overcome that hurdle.

But I think we're seeing more and more

advisors who have become more open to

conversations, who understand.

For me, it's really retirement income is

different from pre-retirement wealth

accumulation. Risks change post-retirement.

Retirement is an asset liability matching

problem. I'm not just growing my pot of assets.

I have to use my pot of assets to fund my

expenses in retirement. And when you use that

broader perspective, that's where things like

reverse mortgages can really have a much

bigger impact.

And as more and more advisors learn that

retirement income planning is distinct from

pre-retirement wealth accumulation, I think

we're seeing less resistance. More and more

people are coming on the board that at least

this is an idea worth exploring, and they may

have some clients who could benefit from a

strategic use of reverse mortgages in their

retirements.

Don Graves: I recently told a story about the

2007 New England Patriots football team that

had an undefeated record. And I said they were

going to play the New York Giants in the Super

Bowl. And Bill Belichick decided to do

something so bold and courageous that it

would go down in the history books for the

Super Bowl.

So instead of starting 11 men on the field, he

started with 10. And he proceeded with 10 men

on offense, 10 men on defense, 10 men on

special teams for the entirety of the Super

Bowl. And when the clock ticked off and the

confetti fell and the Patriots won, everybody

thought this is the boldest thing we've ever

seen.

And I told that story to a group of folks. I said,

have you ever heard that story? And people

said, no, I've never heard that story. I said,

because it's not true. I said that nobody would

take the stage at the biggest event and not put

all of their best resources on the field.

The typical retiree today has their income bucket,

Social Security, pension, employment, their

investment buckets, IRAs, 401ks, so on and

forth, their insurance bucket, fixed and

variable annuities, holding term life insurance.

And out of that, it's got to maintain purchasing

power, overcome expenses and all the other

risks for the length of their life. And I asked,

but is that all of the assets? Don't they have

another asset? Sure, 87% of retirees own a

home. And that's the 11th man. No one would

think of developing a retirement plan that

didn't incorporate all available assets.

And I think when you share that, and that's

really been my work over the years is to share

this with financial advisors and Wade's been so

helpful to me the past 10 years with it, is once

they understand that, can we take a look at

housing wealth? It's not new, it's not

dangerous, it's not spooky. We've used it with

30-year mortgages, home equity loans, launch

of credit, moving, selling, downsizing and

renting, but in the retirement income phase

coming down the mountain of retirement,

what's an age-appropriate equity release

strategy?

And if advisors can pause long enough to see

the research, the data, the metrics, and to say,

does it make sense? Let's show you how

incorporating housing wealth expands and can

help you have 25 different retirement income

conversations. Once they hear some stories

and see some examples, it's a lot easier.

22. What Ate The Dangers Of Misguided Incentives

to Financial Advisors

Christine Benz: Earlier, we were talking

about regulations designed to keep

unscrupulous advisors from leveraging up

their clients' homes to buy terrible

products. It still seems like there's room

for advisors to have some misguided

incentives around reverse mortgages

because the idea is that if you're not

touching the assets and instead tapping

the home equity, that leaves more fee-

generating assets in place. I'm wondering if

you see that as a potential risk in this

landscape, that some advisors might still

have misguided incentives to use reverse

mortgages.

Wade Pfau: Yeah, Christina, that's true in

theory. Certainly, that sort of thing can happen.

but that's part of the struggle of explaining the

value of reverse mortgages to advisors, that

yet the client can benefit because you're going

to allow for a greater asset base at retirement.

And so for advisors who charge an assets

under management fee, they'll be able to earn

more revenues.

But that would be a case where they're

benefiting the client by doing that. And it's

really hard to even get advisors to see that

point. So I guess at some level, it's kind of like

the arguments around advisors who tell their

clients to take Social Security at 62 so that

they won't touch the investments so that the

advisor can charge more fees on the

investments.

I suppose that scenario could apply where the

advisor has the client spend the home equity

down first to not touch those investments,

which may be another strategy that actually

benefits in the long term. But nonetheless, I

don't think we're anywhere close to the point

where advisors are doing this sort of thing. But

yeah, I mean, in theory, it's possible.

Amy Arnott: And Don, it sounds like a lot of

the advisors that you work with are still getting

pushback from their compliance departments.

Do you think that just goes back to kind of the

some of the previous issues prior to regulatory

changes in 2013, 2015 and 2017? Or are there

any other factors that you think compliance

departments tend to be more cautious about

these products?

23. Why Are Compliance Departments Concerned

About Reverse Mortgages, And What Are Different

Approaches to Address Their Concerns?

Don Graves: Sure. It's really hard to be a

compliance department and manage

thousands of representatives when only one

bad applicant calls a reputation risk avenue in

the front of the news. And so a lot of times it's

the policy is let's say no before we say yes.

Now, I think that's a dangerous position. I've

been pretty strong on that. And I know what

compliance folks, the four things they're very

cautious of is one, don't practice law without a

license. Don't go talking to Mr. and Mrs. Jones

about rates, terms, fees. Number two, don't

accept any compensation. Number three, don't

use the direct proceeds of a reverse mortgage

for any type of product placement.

And the fourth that everyone doesn't have,

which is don't recommend it. Don't say you

should do this, Mrs. Jones. And so one of the

things that happens is there's certain

compliance officers and Wade, you can jump in

where it used to be that you're going to buy life

insurance or buy an annuity or something like

that.

And the suitability form may say, is this money

coming from the proceeds of a reverse

mortgage? Well, our response, we know you're

not going to do that, but they would have that

box. It started to change about seven years ago

and they removed that. So now some of the

larger manufacturers don't say, oh, the

proceeds coming from a reverse mortgage. It

simply says, does this client have a reverse

mortgage period? And if you say, yes, they do,

then there's pushback.

Now, I think that's not a solid position because

what that says is, wait a minute, if a 62 year old

has a home equity line of credit from Chase or

city of Wells Fargo, or they have it from a

reverse mortgage, the same dangers apply to

both. You don't want Mr. and Mrs. Jones taking

the money out and buying it, but that's not a

reverse mortgage issue. That's a home equity

issue.

So either you say nobody who gets a product

from such and such or us can have a home

equity line of credit, or you do some training

and you put some parameters and you explain

to your sales force or representative force,

here's appropriate and non-appropriate uses

of home equity. And so most of the time, then

it's loosening and Wade, I don't know what

you're saying, but it had become pretty

draconian until we say that, I don't think that's

a good position to have.

Wade Pfau: Right. And it is changing. I think

we're increasingly seeing some big broker

dealers that traditionally their compliance

departments just said, no, advisors are not

even allowed to talk about a reverse mortgage

have come on board with at least allowing

those conversations.

So yeah, there's definitely been changes and

more and more advisors are allowed to talk

about reverse mortgages, but certainly there

are many advisors who are still restricted from

even having the conversation. And I think Don

explained very well about, it's just compliance

has to have these broad rules to make sure

that they don't get that one violator who could

cause the reputational risk to the company.

24. Are There Certain Individuals Who Shouldn’t

Use A HECM? Is There a Threshold of Assets Above

Which a Reverse Mortgage Might Not Be

Necessary?

Christine Benz: Okay. So I think it's clear that

you two are both pro-HECM in a lot of ways,

but are there any people who shouldn't be

using a HECM or is there a certain level of

assets above which you probably don't need

one, which I'm guessing would apply to a lot of

advisors who might be listening to this, their

clients, home equity might be kind of a drop in

the bucket relative to the rest of their

portfolios, but I'm hoping you can talk about

those issues.

Don Graves: I think it spans the gamut and

Wade, you can chime in. Most of the folks I've

served and I've had 16,000 consumer facing

conversations and 3,000 people have

partnered with me. And I would say the

majority of them did not need a reverse

mortgage. They wanted one for the planning

and it was not reactive, but it was proactive.

I had a person, they had a $45 million in assets

in La Jolla, California, and they looked into a

reverse mortgage.

Well, why? Why would someone need that?

Because they had a capital gains bill of $7.1

million and between the attorney, the

accountant and the advisor, what's the best

way to access $7.1 million? Well, he had a $10

million home and they came and we walked

through that and said, now, if you take out this

money from your assets, there'll be a tax

liability there. But if we use home equity and

the jumbo reverse mortgage, there's a way we

can strategically do that. And so that's the one

that you would say, well, that person's got $45

million. They would never do a reverse

mortgage, yet they did.

And so it really spans the gamut of what you're

trying to accomplish. And if you're looking at

home equity to say there are 52 strategies that

are for the needs-based borrower,

but most of the things I talk about and Wade

talk about are for financial planning, for very

proactive planning purposes. Wade, what

would you say?

Wade Pfau: Yeah. Yeah. I mean, in terms of like

who maybe shouldn't consider reverse

mortgage, you've got to be 62 for the HECM

program. If one spouse is a little bit under 62, I

generally suggest wait until they're both 62. If

you're planning to move within a few years,

probably just wait till you're in the home that

you anticipate staying in. And then just… I

emphasize the need that reverse mortgages

are part of a responsible retirement plan for

individuals who may not be able to manage

having liquidity.

It's like Odysseus tying himself to the mast.

They may be better off not having the reverse

mortgage to avoid spending frivolously in ways

that's really not part of a responsible plan. And

then, yeah, for the higher net worth scenarios,

the HECM limits this year, it's around $1.15

million on the home value of which the HECM

would apply to. So if you have a home that's

worth dramatically more than that, it's just at

some point going to limit how much relative

value you get from the HECM. It really is

something more for mass affluent retirees.

But, then Don mentioned the jumbo or the

proprietary reverse mortgages that can be

applied to homes worth as much as $10 million.

So that might be a consideration for some of

those higher net worth individuals as well.

Amy Arnott: Well, thank you both for taking so

much time to talk with us today. And I think

you have definitely shed light on how the

mechanics of these products work, but also

how they can be used in a broader financial

planning and retirement planning context.

Christine Benz: Thank you so much.

Amy Arnott: Thank you. Thanks, Wade. Thanks, Don.

Thank you for joining us on The Long View. If you could, please take a moment to

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Disclaimer

This is for informational purposes only and should not be considered

investment advice. Opinions expressed are as of the date of recording (June 26, 2026). Such opinions are subject to change. All investments are subject to investment risks, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives, and risk profile before making any investment decision.