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Dave Ramsey is WRONG!

Why Can’t Dave Ramsey Get his Facts Straight on Reverse Mortgages?

I had heard of Dave Ramsey before today, although I can’t claim to have been all that familiar with his radio show, or anything else that he does.  According to his website, “The Dave Ramsey Show is the third largest nationally syndicated Radio Talk Show, with more than 500 affiliates nationwide speaking to more than 6 million listeners weekly.”

So… wow.  He’s huge… which makes him being wrong about something important a real problem, because he can spread incorrect information like a virus, infecting millions of people, and causing significant harm as a result.

Well, when it comes to reverse mortgages, Dave is wrong and being a jackass.

Do you think he’d have me on his show to debate the issue?  I’m betting he wouldn’t.  I’d certainly love to have him as a guest on a Mandelman Matters Podcast so we could have the debate… but I’m guessing he won’t want to do that either.

Also from his website, “The Dave Ramsey Show is about real life and how it revolves around money. Dave Ramsey teaches you to manage and budget your money, get out of debt, build wealth, and live in financial peace.”

So, okay… that sounds like a terrific program.  There’s nowhere near enough financial education going on in this country, and if he’s talking to six million people every week, that’s should be a positive thing.  He’s also the author of the book, “The Total Money Makeover,” which apparently was a New York Times Best Seller, and he’s been featured all over the country teaching people how to get out of debt, save for retirement and manage their finances.

I tuned into his radio show today to see what he’s all about and it seemed to me that if Rush Limbaugh and Suze Orman had a baby boy… throw in a little evangelical preacher and he might grow up to be Dave Ramsey.

Now, let me be very clear about something… I don’t dislike him.  In fact, some of the things he says I think are great.  Like when he tells people that the government isn’t going to come fix their lives… that they’ll have to do it for themselves… or when he rants, “get your work done, stop whining”… I think that’s all great.  It’s certainly true and the latter is good advice.

But then he says some other things that are just sort of Loony Tunes, in my opinion, such as these three gems from today’s show…

“This is the greatest time to be in business… to be in the economy, that the world has ever known.”

“In much of the country, housing is booming.” 

“There’s people sitting out there with a 5 percent mortgage that are too lazy to refinance.”

Well, alrighty then… if you say so, Dave.  I’m pretty sure that there are… oh, I don’t know… maybe three hundred million people in this country that would vehemently disagree with those statements, and a fair number would be found on a list of the nation’s most respected economists.

There’s no question that Dave’s a cheerleader for self-empowerment and preserving through adversity to find financial success… or “financial peace,“ as Dave puts it.  He advocates such radical ideas as getting out of debt and setting money aside for emergencies.  I mean, I’m not sure that anyone would take the other side of that non-argument.

He tells people to cut up their credit cards, because he says they are never “an answer,” even when times are bad.  He refers to credit cards as being, “a stupid plastic crutch.”  While I was listening today, he convinced a woman who called in to literally cut up what she claimed was her very LAST credit card on the air so everyone could hear it being cut up.

Now, this woman went on to explain that she had started her own business recently, but that it wasn’t making any money yet, but her part-time job was bringing in about $400 a week… and she also shared that her husband, a Realtor, wasn’t making any money at the moment either.

Dave’s response was that her husband should deliver pizzas at night in order to bring home an additional $1,500 a month, and that she needed to set money aside because she could come up short and not be able to buy food.

Now, I’m not here to defend credit cards.  I hate them, and there’s no question that they are never a great way to go.  But I wanted to scream out to this woman, “No, wait… stop.  Do not cut up that last card!”  Dave telling this woman to do that was absolutely horrible advice, and I can’t believe he would do it… but he did… and she did.  And that’s just crazy stuff.

The fact is that all small businesses all need access to credit for any number of reasons… almost all are undercapitalized… and there’s a big difference between companies using debt to create growth, and individuals buying too much at Macy’s because it fits onto their credit cards. 

The other thing to remember is that bad things happen to good people… all the time.  And when you get smashed into from behind by a drunk driver… or your doctor tells you that your scan came back showing a tumor that is malignant and you’re going to need to start chemotherapy next week… having a credit card or two could not be considered a bad thing.


The Problem with Dave’s “Ugly Truth of Reverse Mortgages” is that it’s largely NOT TRUE

The reason for my sudden interest in Dave Ramsey’s teachings was that today a reader of mine pointed out that he had an article posted online titled, The Ugly Truth of Reverse Mortgages,” and having written a couple dozen articles about reverse mortgages in an effort to correct the misinformation that’s become so pervasive throughout the mainstream media, I’ve decided that I’m just not going to let that sort of thing go unanswered anymore.

He opens by saying that claims like, “lifetime income,” or “you’ll never lose your home,” are misleading, and he’s sort of right.

As he explains later in his article, there have been companies that have placed advertising containing, “misleading marketing claims about reverse mortgages.”  I think that’s true about most industries… there are always some that make statements they shouldn’t make in ads from time to time.

But, under the heading, “The Lies Revealed,” Dave claims to have debunked two statements he points out as being misleading

“Lifetime income – Income from a reverse mortgage stops if you sell your house or move.”

Well, okay… that’s technically correct.  The ad should have said, “Lifetime income, as long as you live in your home as your primary residence.”  I’m not sure that omitting the “as long as you live in your home,” in an ad, quite rises to the level of being considered a “lie.”  And pointing out such an obvious omission just doesn’t require much “debunking. 

“Never lose your home – You can lose your home if you can’t afford to pay taxes, insurance, or maintain the home.”

That’s also correct, but it’s more of the same misleading crap about property taxes and reverse mortgages that’s been repeated countless times.  Look, even if you own your home free and clear, if you don’t pay your property taxes you will ultimately lose your house.

Doesn’t it occur to everyone that if you can’t pay your property taxes, insurance or basic maintenance, then you wouldn’t be able to keep your home no matter what?  That has nothing to do with a reverse mortgage, so why do so many try to connect the two things as if they are somehow related… when they’re not.

Ramsey lists two more supposed, “Lies Revealed.”

“Never owe more than the value of your home – If your loan exceeds the value of your home, you or your heirs will have to make up the difference if the home isn’t sold when the loan is due.”

No, Dave… that’s NOT correct.

With a reverse mortgage you won’t ever owe more than the value of your home.  For one thing, it’s a non-recourse loan, so your heirs can simply walk away if they don’t want the home.  And for another it’s insured by the FHA so that investors are protected in the event the home is worth less than the amount of the loan.

Also, if the home is worth less than the loan amount, your heirs can purchase it for 95 percent of the current market value.  What other type of loan allows for that to happen?  The answer is none. 

“False implications that a reverse mortgage is a government benefit rather than a loan – Some lenders even use government logos to convince you to buy.”

Dave is drawing a distinction between “a government benefit,” and a HECM reverse mortgage because he doesn’t think it should be advertised that way… and that’s fine.  If that’s misleading people into doing something (which I seriously doubt it is), then don’t do it.

To be clear…the HECM reverse mortgage is a program created by Congress, regulated by the U.S. Department of Housing & Urban Development (HUD), and insured by the Federal Housing Administration, better known as the FHA.  If you’re the legal research type, the legal authority for the program is found in Section 255 of the National Housing Act (12 U.S.C. 1715z-20). Regulations are at 24 CFR parts 200 and 206)

The stated purpose of the code section is:

(1) to meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income, through the insurance of home equity conversion mortgages to permit the conversion of a portion of accumulated home equity into liquid assets; and

(2) to encourage and increase the involvement of mortgagees and participants in the mortgage markets in the making and servicing of home equity conversion mortgages for elderly homeowners.

To summarize, the federal government created the program to meet the “special needs” of older Americans.  The program is designed to help address challenges caused by “reduced income and increasing costs,” which is another way of describing “retirement.”  And, as it says in part two, the government wants to “encourage and increase the involvement” of homeowners in the program.

So, does that make it a government benefit?  I suppose you could say it doesn’t, but at the same time, it sort of does, right?  I mean, it’s not like Social Security or Medicare, but the HECM program certainly provides many “benefits” to older Americans that they wouldn’t be able to get otherwise… and it’s certainly being made possible by the federal government.  So, whatever… call it whatever makes you comfortable.

And Dave doesn’t stop being wrong there, he goes further, thus proving that what he knows about a reverse mortgage could be put in a thimble.

  1. “Crazy Fees”

Dave claims the fees associated with originating a reverse mortgage are too high, which is another point I hear made a lot, and that’s just not true.  He lists the costs as including the following…

  • An origination fee – True, but HUD caps the origination fee at $6,000, which would be one percent
  • Standard closing costs – True about any mortgage loan.
  • Mortgage insurance premiums for coverage to make up the difference if your home doesn’t sell for enough to pay the loan – Correct, this is exactly the same as any FHA loan, and I don’t hear people objecting to those loans, so why these?
  • A monthly mortgage insurance servicing fee – I’m not sure what he’s referring to here, but it’s part of the FHA insurance so it’s not a big deal, if it even exists in the first place.
  • Fees for mandatory credit counseling, which you pay whether or not you get the reverse mortgage – True… but we’re talking about $110 here, so what’s the big deal?  Also, the counseling is required to make sure that people understand the HECM reverse mortgage and have not been misled by a lender… or Dave Ramsey, for that matter.

 

  1. Ramsey says the HECM reverse mortgage, “one of the worst financial products out there.”

That ridiculous statement reminds me of what Daniel Patrick Moynihan once said, “Everyone is entitled to his own opinion, but not to his own facts.”  Calling the HECM reverse mortgage “one of the worst financial products out there,” is irresponsible to the point of being asinine… especially when it’s obvious from his other statements, that he doesn’t understand several basic facts about how the HECM reverse mortgage works.

Consider the following facts and tell me how anyone could describe them as contributing to “one of the worst financial products out there.”

  1. The HECM reverse mortgage is just a mortgage that offers the most flexible repayment terms imaginable.  You can make interest only payments, you can make principal and interest payments… or you can make no payment whenever you want or need to.

That’s a bad mortgage?  I wish I had such a terrible mortgage as that.  Mine requires that I make payments by a set date every month, harms my credit score when I’m late, and will foreclose on me if I miss too many in a row.

  1. The HECM reverse mortgage can also be used as a line of credit that’s available at a relatively low interest rate, and that doesn’t have to be repaid on any certain schedule, and that increases every year by whatever the interest rate is on the loan, regardless of whether your home’s value goes up or doesn’t.  And it can never be cancelled, as long as you live in your home.

There are people in places like Las Vegas whose lines of credit are worth twice what their homes are now worth, which makes the line of credit option a hedge against your home’s value dropping in the future.

Why wouldn’t everyone want one of those?  I mean, if you never need to borrow the money, then good for you.  But, if you do find you have the need for some additional funds at some point, you can access your credit line and not have to worry about when you repay the loan.

Again, I wise I could get a line of credit under such terms… why Dave finds those terms objectionable… I have no idea.

  1. The HECM for Purchase is another way homeowners over age 62 can use the power of a reverse mortgage to make their retirement years safer and more comfortable.  With this program, you put a percentage down, let’s say 50 percent as an example, and then the other half is made up of a reverse mortgage.

So, you could put $250,000 down, buy a $500,000 home… and then decide whether you wanted to make interest only payments, principal and interest payments, or no payments at all, if that’s what you wanted to do.

If you choose to make no payments on the loan, then the loan will be repaid when the second spouse dies, or when you sell the home, or when it is no longer your primary residence.  Is there interest that gets added to your loan balance… yes, of course there’s interest… it’s a mortgage.

Do you know of any mortgages that don’t charge interest?  Zero percent mortgages?  Not a chance.

None of those uses for a HECM reverse mortgage would be possible any other way.

The tragic part of this whole run-in with carelessness when it comes to describing reverse mortgages is that it actually has succeeded in scaring some percentage of older Americans away from using them when by doing so, they’d significantly protect and improve their financial futures.  I just can’t believe anyone could feel good about that, especially someone like Ramsey who holds himself out as an expert in financial matters.

You see, I don’t see the difference between Dave Ramsey when talking about reverse mortgages, and some predatory lender who lies to seniors to get them to do something they shouldn’t. 

Dave scares them away from something that perhaps they should do, by misstating the facts… and predatory lenders talk people into doing something perhaps they shouldn’t do, by misstating the facts.  No difference, as far as I’m concerned.

Why can’t we just be ACCURATE about this subject?  It’s not like it’s some fad diet or new-fangled weight loss plan, in many cases, it’s hundreds of thousands of dollars available to older Americans on very favorable terms… and that’s enough money to change someone’s life in significant and positive ways during their retirement years.  Why would anyone do something that could jeopardize that sort of outcome?

And he seems to think that using money from a reverse mortgage is “not income, it’s debt.”  I beg to differ, David… it’s not debt… it’s EQUITY… and if I were the one with the reverse mortgage, it would also be MY EQUITY we’d be talking about.  Why are so many people presuming to tell others what they should or shouldn’t do with their equity?  How about you do what you want with your equity, and I’ll make my own decisions in that regard, capisce?

Lastly, check out what Dave says in closing… 

“If you or anyone you know is considering a reverse mortgage—stop now!  If money is short, cut back on your lifestyle. Sell your house and get something more affordable to free up money for your needs.”

Good Lord… sell the house?  Sell the house?  Why are so many people so ready to tell seniors to sell their homes?  Don’t they know any seniors?  Dave, selling their home is precisely what most are trying to avoid, you pompous prick.

I’m not saying they shouldn’t downsize if that’s what they want to do, but they’ll have the same problems and needs in the new home as they did in the last, because that’s the thing about living through 20-30 years of retirement… few if any are truly prepared because anything can happen.

And if they do want to downsize, why shouldn’t they use a HECM for Purchase to purchase their smaller and more sensible home?  Or, have you not heard about that program until now?  Maybe you should take a few minutes and read HUD’s website on this subject before making statements as some sort of expert when you clearly are not.

And then his final words are…

“If you’re ready to buy or sell a home, Dave and his team can help you find a trustworthy real estate agent. Connect with one now!”

Excuse me, counselor… are you chasing my ambulance?

Is that how it is, Dave?  Was all of this some sort of roundabout way to solicit listings and sales for real estate agents that sponsor your site or show in some way?  Lord, I sure hope not because that would be unbelievably

 ~~~

By the way, that’s not ALL Dave gets wrong about financial matters during retirement…

Look around online and you’ll find countless articles about how Dave Ramsey is wrong about one thing or another.  Here’s a link to a great site on financial matters written by a former hedge fund manager, called, “Bad Money Advice,” and the article is titled: “Ten Things Dave Ramsey Got Wrong.”  And here’s another titled: “I Like Dave Ramsey, But He is Still Wrong.”  And yet another from Modest Money, titled: “Yet Another Reason Dave Ramsey is Wrong.”

Even worse than what he’s got wrong about reverse mortgages, Ramsey advises people that they should invest their retirement savings into growth mutual funds, because he claims that you can earn returns of 12% a year.  This is not only wrong… it’s dangerous and will lead people to significantly underfunding their retirement investment portfolios.

As a Certified Financial Planner (CFP) on the GenYWealth.com site explains …

According to Morningstar, over the past 10 years, the top five performing funds in the growth category and their ten year annualized returns are shown below:

CGM Focus = 19.11%

Century Share Institutional -= 7.96%

Calamos Growth & Income A = 4.41%

Prudential Jenneson 20/20 Focus A  = 4.39%

CGM Mutual =  4.27%

The category average over the past 10 years was negative 2.63%, so if you manage to earn 12 percent… you essentially employed the same sort of skill it takes to win the lottery.

And far worse than the illusive 12% expected rate of return that Dave says exists somewhere, he also advises people that they can expect to withdraw 8 PERCENT of your portfolio as income each year during retirement, which isn’t just wrong… it’s laughable.

The same CFP quoted above used the Firecalc retirement calculator to see what the success rate of withdrawing 8 percent a year would be, assuming 30 years in retirement, a starting balance of $1,000,000 that’s all invested in the S&P 500, and annual withdrawals of $80,000 each year…  adjusted each year for inflation at 3%.

Want to know the results?  Well, the success rate of being able to maintain an 8 percent withdrawal rate based upon the history of the stock market is, 16.5%.  Or, in other words… you have an 83.5% chance of failure taking 8 percent out as income every year.

As I said earlier, I like some of what Dave Ramsey has to say about financial matters, but after looking into his total picture… I would have to say that listening to Dave Ramsey about retirement finance has the potential to be a bit like taking money management classes from Evander Holyfield, who in case you weren’t aware, managed to make about $200 million as a heavyweight champ, and now can’t afford to pay attention.

 

 

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