Reverse mortgage professionals have long sought financial advisors as referral sources, but might find that those professionals are not particularly willing to entertain the notion that the product would be right for their clients. But when confronted with volatility in the markets, advisors who are more concerned with the risk of loss might start to slowly open themselves up to more conversations.
Wade Pfau, professor of retirement income at the American College of Financial Services, has spoken academically on the topic of reverse mortgages as part of a retirement plan, including in dedicated books and with HousingWire’s Reverse Mortgage Daily (RMD) on multiple occasions.
Recent market volatility and the HECM line of credit
Pfau sat down with RMD to talk about the recent market volatility brought on by wider discussions about tariffs, which sent the market into a tailspin earlier this week. While most of the broader tariffs have since been delayed by at least 90 days, they’re not all lifted and the market reacted tepidly in active trading on Thursday.
But volatility is always a chief concern for financial advisors, and when asked how this latest bout might compare to the initial market response to the early days of the COVID-19 pandemic, Pfau said it was still a little too early to say definitively. But any onset of volatility will provoke a response.
“It’s always a matter of if you’re retired, and suddenly the market’s had this pullback and you need to take some distributions to meet expenses, being able to tap into something that’s not exposed to that volatility can be really helpful to manage your long term investment performance,” he explained. “So that was the original justification for the [Home Equity Conversion Mortgage (HECM)] portfolio coordination strategy. And indeed, I think it still makes as much sense today as at any point, nothing’s really changed in that regard.”
In the early days of the pandemic, Pfau spoke to multiple outlets, including RMD, about the use of a reverse mortgage as a “buffer asset.” When the market drops, someone with a standby HECM line of credit can tap that resource until the market stabilizes, and then resume tapping investments at that point.
“I looked at just a simple rule that when you retire, just record the value of your investment assets,” Pfau said this week. “And then moving forward from that point, if the current value of your investment assets is less than where you started, that would be the time to tap into the HECM.”
HECM benefits more visible for 2025 retirees
The solid market performance observed in 2023 and 2024 might delay, for some retirees, the necessity to tap their HECM line of credit at the immediate onset of a volatility bout, he explained. That could’ve been particularly true for recent retirees, but for those who may have entered retirement at the start of 2025, then someone in that situation may have more quickly reached a point where tapping a HECM made sense.
“In this kind of interest rate environment, you’re looking at probably around 40% of the home value, up to the lending limit as an initial line of credit principal limit,” he said. “If you have a home that has any value to it, that’s surely going to be enough to cover — as long as you’re not too profligate of a spender — a couple years’ worth of expenses.”
Not all of that would be taken out at once, but the amount would likely be enough to cover a period of volatility. In this case, it certainly would have been given that a sense of stability returned to the market once the tariff delay for most countries was announced earlier this week.
But that’s far from the only tool in the toolkit, Pfau said.
“Part of the reaction to this kind of market environment, too, is that you just cut back on your spending a little bit,” he said. “But to the extent that you need to take distributions to meet your expenses, open the line of credit on the HECM and tap into that as an alternative to distributing from your portfolio at this point.”
