The federally insured reverse mortgage product known as a Home Equity Conversion Mortgage (HECM) has been around for over 30 years. During many of those years the most vocal critic of the product has been author and radio personality, Dave Ramsey. Why is this important to nasdaq readers? Because Ramsey is one of the most listened to financial gurus on the planet.
Many Ramsey listeners who would be ideal candidates for the product are aggressively steered away, as he repeatedly calls it a scam. This “scam” has been enjoyed by homeowners who overwhelmingly rate they are “satisfied” or “highly-satisfied” with the results. Nevertheless, many older Americans are being hurt by Dave Ramsey’s continued misinformation and lack of knowledge about the product.
FOR EXAMPLE
Ramsey and his writers at Ramsey Solutions have repeatedly scared older homeowners with the claim, “You’ll Likely Owe More Than Your Home Is Worth.” 1 Ramsey Solutions also claims, “Not only are reverse mortgages a black hole of fees, but your older loved ones could also end up owing more on their home than it’s worth, or worse, losing their home altogether.”2
Both statements conflict with federal law regarding reverse mortgages.3 One of the first lessons a reverse mortgage prospect learns from their reverse mortgage specialist is that FHA guarantees this cannot happen. In fact, every reverse mortgage applicant is required to complete a HUD-approved counseling session where the non-recourse clause is covered. Let’s be clear, EVERY reverse mortgage in America is “non-recourse,” meaning neither the borrower nor their estate will owe more than the home is worth at the time the mortgage is due.
UNDERSTANDING LEVERAGE
The fundamental conflict between the reverse mortgage and Dave Ramsey is his overzealous hatred of debt. I get it, and for the most part, I agree. Many people in this country are over leveraged with credit card debt and we know that is dangerous. Mr. Ramsey recently claimed on social media ““THERE’S NO SUCH THING AS GOOD DEBT.” 4
I believe the CFO of every Fortune 500 company would respectfully disagree, because their understand leverage. This is no different in the mortgage world. Ironically, Dave Ramsey is a paid lead provider for Churchill Mortgage, a well-respected mortgage firm. However, 100% of their business uses debt to achieve the dream of home ownership. Apparently there is “good debt” that can be properly used. In my book, Home Equity and Reverse Mortgages: The Cinderella of the Baby Boomer Retirement, Chapter 6 is entitled, Sex, Drugs and Reverse Mortgages. Most of us would completely agree—many things can be good or evil— depending on how they are used
Consider a retired homeowner with a home valued at $450,000 with no existing mortgage balance. She decides to use some of her equity to pay off $50,000 in medical debt and high-interest rate consumer debt caused by unforeseen circumstances. Keep in mind, the resulting HECM balance is financed at 2% to 3% and has no required monthly principal and interest repayment obligation. It also does not disrupt the homeowner’s traditional retirement plan. In our view, that is a proper use of home equity in retirement.
Sadly, some Ramsey followers are so afraid of using the most powerful lever they own (home equity) that they may never be able to eliminate debt and withstand financial shocks on a fixed income.
Wealthier retirees will never discover the value of using reverse mortgage acquisition indebtedness to decrease their tax liability, avoid sequence returns risk, or creating better Roth Conversions if they listen to Ramsey's rants. When home equity is used as a substitute for withdrawals from retirement accounts, several financial planning researchers have proved that though equity may decrease, overall net worth INCREASES which creates greater wealth while alive and is instrumental in leaving a larger legacy for the next generation.
FACT-CHECKING RAMSEY CLAIMS
Let’s fact-check some of Dave Ramsey’s most harmful claims about reverse mortgages.
Claim #1: “Over 100,000 reverse mortgages have failed, resulting in foreclosures and evictions”1
FALSE.
In this statement, Dave is parroting information from a national publication. Yes, in the aftermath of the housing meltdown 12 years ago there were about 100,000 foreclosures that involved homeowners that had reverse mortgages. However, those foreclosures were not failures of the reverse mortgage.
Almost all those foreclosures occurred from 2008-2012, and almost all of them were what we would describe as “beneficial” or “neutral” foreclosures from the borrower’s perspective.
By “beneficial” I mean that more money was borrowed than a home sale could satisfy after the death of the last borrower. This occurred in the years following the housing crash. The heirs naturally walked away from the “underwater” property. The lender (or HUD) foreclosed on the vacant property to sell the home at a loss.
By “neutral” I mean that the foreclosure was the result of property tax default, and not because the borrower had a reverse mortgage. As every homeowner should know, if you don’t pay your property taxes, you WILL lose your home whether you have a traditional mortgage, as reverse mortgage, or no mortgage at all.
Think about it – a reverse mortgage eliminates the required mortgage payment and gives the borrower cash. This does not make them more likely to default on their tax bill.
Claim #2: “If you die before you’ve sold your home, those you leave behind are stuck with two options. They can either pay off the full reverse mortgage and all the interest that’s piled up over the years, or surrender your house to the bank.”1
FALSE.
This statement is designed to create fear that the reverse mortgage will stick the heirs with a bill or cause them to lose the home.
The US Department of Housing and Urban Development (HUD - the regulator of the HECM product) and The Federal Housing Administration (FHA, the insurer of the HECM product) allow heirs 6 months to sell the home and up to two 90-day extensions (up to 12 months) to sell the home. This sale is a form of inheritance for the heirs and Dave ignores this common, and favorable, option for the heirs.
Keep in mind, most heirs are content to sell the home and receive the remaining equity. When no equity remains, the heirs often fail to recognize that without the reverse mortgage paying for the costs of aging, the heirs would’ve been left with the bills the HECM paid.
And if the heirs sell the home— even if it is underwater— they have the potential for a tax deduction— but that is the discussion in a separate column!
Claim #3: “…you won’t qualify for a reverse mortgage if your home is worth more than a certain amount.”1
FALSE.
This is nonsensical, and underscores how little Dave knows about the HECM product. No lender has ever disqualified a borrower for a HECM because their appraisal came in higher than expected. Yes, HUD does establish HECM limits each year. 6 However, when a home appraisal exceeds the HECM limit, this does not hurt the borrower’s chances of qualifying for a HECM in any way.
For example, the HECM product in 2021 provides insurance to the lender of the home’s value up to $822,375. This limit simply restricts the home value to $822,375 when calculating the proceeds.
For example, a borrower with a $1mm home who qualifies for proceeds of 60% will not qualify for $600,000 in principal. Rather they will qualify for 60% of $822,375, or $493,425. In essence, a borrower with a home value that exceeds $822,375 has simply maximized their initial principal limit for this product.
OTHER FALSE CLAIMS
While we won’t have time to cover each false claim in detail, here are some notable past statements from Dave Ramsey and Ramsey Solutions that unfairly disparage the HECM product:
“…you’ll pay a hefty mortgage insurance premium that protects the lender (not you) against any losses.”
FALSE. The primary purpose of the Mortgage Insurance Premium (MIP) is to pay for losses resulting from the non-recourse nature of the product. This is primarily for the benefit of the borrower and their heirs as well as the investor who owns the paper. That lender would likely not have made that same loan—for the benefit of the borrower without the guarantee from the FHA mortgage insurance.
“You are also required to take a loan for the maximum amount you qualify for.”
FALSE. Not only is false, but the Federal Government PROHIBITS borrowers from taking all the proceeds up front unless needed to pay off large mortgage balances at closing. This has been HUD’s policy since 2013 called “initial disbursement limits.”
“The interest rates that they’re calculated at are horrendously bad.”
FALSE. For most of years since beginning in 1988 HECM rates have been at, or below, conforming interest rates.
“Servicing fees. These are another monthly expense coming your way with a reverse mortgage.”
FALSE. While HUD permits the use of Servicing Fees, we haven’t been seen a HECM servicing fee in over 10 years.
The federally insured reverse mortgage product is continually improving with new consumer protections and long-term advantages for those who wish to age-in-place. Do your own research and don’t let radio personalities with little knowledge about a product impact your retirement cash flow decisions.
If you want to know why the product is advantageous in retirement planning, I’d suggest my book titled, Home Equity and Reverse Mortgages – The Cinderella of the Baby Boomer Retirement.
If you want to learn more about the nuts and bolts of how a reverse mortgage works, I’d suggest Understanding Reverse – 2021 by Dan Hultquist.
Lastly, for a deep dive into the strategic financial planning uses of the product, read Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement by Wade Pfau.
As always feel free to contact me with questions or comments at accola4@gmail.com or via cellphone at 715-207-9991
- Ramsey Solutions - What Is a Reverse Mortgage?
https://www.ramseysolutions.com/real-estate/how-reverse-mortgages-work
- Ramsey Solutions - Elder Fraud: How to Protect Seniors From Scams
https://www.ramseysolutions.com/insurance/protect-from-elder-fraud
- 12 CFR § 1026.33
https://www.consumerfinance.gov/rules-policy/regulations/1026/33/
- Facebook – 7/18/21
https://www.facebook.com/daveramsey
- HUD 4330.1 CH13-29
https://www.hud.gov/sites/documents/43301C13HSGH.PDF
- 24 CFR § 206.3
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.