Preserving Capital With Reverse Mortgages
Peter R. Orszag, the director of the Congressional Budget Office, is generally regarded as one of the good guys in Washington, someone who deals fairly with everyone, regardless of their politician preference.
Orszag is now being mentioned in news reports as a possible budget director for the incoming Obama administration. Should that be the case there would be widespread approval in Washington considering of Mr. Orszag’s past dealings with federal officials and the public.
For our objectives, however, we are particularly interested in testimony given by Mr. Orszag last October 7th before the House Committee Education and Labor.
“details from the Federal Reserve propose that the decline in the value of financial assets cost pension funds (private-sector and public-sector combined) roughly $1 trillion — nearly 10 percent of their assets — from the second quarter of 2007 to the second quarter of 2008 (the latest period for
which notes are available), and there has been a significant further drop in asset prices since soon after.”
Let’s see: On July 31st, the end of the second quarter, the Dow Jones Industrial Average closed at 11,378.02. In comparison, last Friday the Dow finished at 8,046.42 — up 494.13 for the day after word leaked that the expected new head of the Treasury will be New York Federal Reserve chief Timothy Geithner.
If we take 11,378.02 and subtract 8,046.42
Such a steep decline raises a question: Even though home values have fallen in many areas, is now the instance to get a reverse mortgage?
The reason to ask is that: What whether like the stock market home values continue to fall? That would mean less equity for many homeowners and a reduced ability to benefit from a reverse mortgage.
In a sense, getting a reverse mortgage now might well be a hedge against future real estate declines, should that happen.
With stock you might have sold in July and bought back shares in November at a lower price. With a reverse mortgage the reason to consider one now is that you may only qualify for a smaller loan in the future whether real estate prices continue to fall.
None of that is a happy thought, but have you read the paper or watched the news lately? The real world is looking ugly, and until matters change one needs to think about the preservation of capital in the same way that it once made sense to think about rates of return.
Orginal post by Peter G. Miller
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