Hard lesson

As a certain pathetic blog has told you in the past, reverse mortgages are wonderful tools if you hate your children.

Apparently lots of people do. Volumes have been growing even faster than regular home loans, despite the fact interest rates on these things run four times higher. Why?

Simple. Real estate lust, WFH and the slimy little pathogen have driven house prices squirrely. But incomes have not gained. Especially for retirees, whose beloved GICs and HISAs are now cruel jokes. Nobody can live off interest or government pogey as corporate pensions disappear into the ether. So a lot of people – masses of them, in fact – take out a reverse mortgage, sucking equity from their properties to provide living capital.

The trouble is these mortgages (unlike normal ones) get bigger every year. Yes, the money received is tax-free. Yes, there are no payments. And, yes, the principal need never be repaid until you sell or (more likely) croak. So this means your heirs’ inheritance dwindles annually as the reverse mortgage debt grows. In general, these are bad ideas. Most seniors would be better off to get a secured LOC at a lower rate, with more flexibility, then invest in a balanced portfolio of ETFs for routine income (plus the interest-only monthly payments would be 100% tax-deductible).

Or, better yet, sell that inflated house, collect your windfall profits from the hides of some nice young couple willing to choke down dollops of debt, and rent a luxury condo, snickering at a world gone mad.

But wait. Seems a new driver of reverse mortgages is parental guilt. HomEquity Bank (the largest RM outfit, now with $4 billion in loans outstanding) says the wrinklies are Hoovering their homes for the benefits of kids. These folks are taking loans at an average of 5-6% (as opposed to sub-2% for traditional ones) to generate downpayments for the kiddos. Of course, this transfer of wealth – from paid-for real estate to leveraged real estate – just fuels the housing bubble, driving valuations higher. The parents take on a growing liability. Their offspring buy into an inflated market and shoulder epic debt.

Nobody wins. Except the reverse mortgage company. And now teachers.

So this week the Ontario Teachers Pension Plan Board bought HomeQ Corp, which owns HomeEquity Bank. It’s a brilliant move, even though the teachers probably paid through the nose (the price was not disclosed). Not only does this bolster the pension’s board’s stable of financial assets, but it takes shameless advantage of a global pandemic. Fear of the virus and of seniors’ homes has convinced a lot of oldies to stay in their houses…forever…and yet the death of pensions and the collapse in interest rates has caused a heap of financial stress. “Nobody wants to move and they certainly don’t want to move into some sort of group setting,” says the company.

This (plus gifting money to kids) helps explain why reverse mortgage volumes have tripled recently. So far in 2021 alone, HomeEquity has papered a billion in new loans. Because these are 100% secured by real estate and carry a fat rate, they are financial gold. The only risk is a real estate collapse which – after the Trudeau romp on Monday – looks remote in the next few years.

Now for the irony part.

The pension board buying up these reverse mortgages, which drain equity from seniors who are almost always in financial stress and succumb to the Faustian loan, will use them to fund the defined benefit pensions of public sector workers. Yup, the golden ones. Those DB pensions are for life, indexed, and provide a steady, no-surprises income stream which amounts to at least 60% of the cash flow members earned when working.

So, seniors funding seniors. From the troubled to the privileged. A nation fueled by ever-more debt and social obsession with a single asset. Don’t scorn the teachers, of course. Just be careful around them.

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It’s a trope now in the comments sections that ‘rates can never rise.’ That’s bunk. They can. They will. CBs cannot leave the cost of money in the ditch since it would be reckless and dangerous to do so. Assets inflate. Debt spirals. Bubbles happen. Plus, when the next downtown occurs, central banks will be out of bullets, unable to drop borrowing costs to get things moving. So what you see is not what we will get.

This week the US Fed declared as much. The stimulus tap will start to turn off by the first week in November, a prelude to rate increases commencing in one year. The benchmark rate will rise by about a quarter point each three months and, yes, the Bank of Canada will follow. It always does. It has to, lest our currency plop and inflation fly.

“We’re seeing a Fed that is getting more hawkish,” said a prominent US analyst as the latest monetary policy report was tabled. Borrow accordingly.

About the picture: “I owe my financial independence to learning from my wise parents, and reading money books including all of yours. I am eternally grateful,” writes Dianne. “This is 3 year old Baylee, rescued and adopted by her big hearted single mom, Jane. Baylee has just had one hip replacement surgery with ensuing complications, and will still be needing her other hip replaced, as well. She’s such a sweet, sweet, girl. Unwilling to ask for help or handouts, Jane instead set up a small online Etsy.ca business, under the name of FernwoodFashionista in an effort to fund Baylee’s surgeries and aftercare. She doesn’t know I’m making this request, but would you consider posting Jane’s business info, in case any of your dog loving followers would like to check out her Etsy store and help Baylee?”