Letter Re: Reverse Mortgage

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Hugh-

I wanted to know what you and/or Jim’s and/or The Econocobas’ opinion is of reverse mortgages. The missus and I have moved to the Redoubt and own our location outright. I was mentally extrapolating the possible outcomes of a reverse mortgage should the balloon go up, but I always value other people’s thoughts. Also, forgive me if this has been addressed previously. – D in Southern Idaho

HJL Responds: I have never considered reverse mortgages, as I always considered the land worth something but the cash out value as a loss due to inflation. Call me old fashioned, but a reverse mortgage allows you to cash out the equity of your home and generally draw on it as a retirement wage. It is somewhat of a gamble, as no one really knows just how long you will live. So, the bank may end up paying out more than it is worth, or more likely, they will pay out less than it is worth. In the end, the short time I looked at them, there wasn’t anything to pass on to your children (unless you passed on some of the regular draws). It wasn’t right for me, so I didn’t spend much time on it. I did send your request on to Mr. Econocobas though.

Mr. Econocobas Responds: The issue of reverse mortgages or even just mortgages is an interesting one, and I have been doing some considerable thinking on it myself. I don’t know that I have a perfect answer for you, but let’s just look at the issues (from an economic standpoint) that will help you make the decision. What we are really talking about is debt, and in this case it’s debt that is based in U.S. dollars. Without getting too far in the giggleweeds on the causes and reasons for why there is such things as inflation and deflation, we can say with certainty they exist. Unless your question is regarding whether anybody will even be there to collect your debt, your concern is inflation or deflation and the effects on your debt they might have.

It is my belief that we are structurally in a depression from years of central bank and government-driven bubble economics that stole prosperity out of the future (which is now) to consume and expand in the present (now in our past). Depression is by its very nature deflationary. However, the debt based fiat currency system we are under (run of the Federal Reserve) literally cannot have deflation, it will collapse because it requires every expanding supply of currency to pay the debt. So we have central bank policy that is highly inflationary, Zero Interest Rate Policy (or ZIRP) and now in some other countries Negative Interest Rate Policy (or NIRP), and we also have debt monetization (money printing or quantitative easing to sound less benign). So in effect they are fighting deflation with inflation. I say all this to lay the ground work on the inflation vs deflation argument. In theory in a deflationary environment, debt based in the deflating currency is harder and more costly to repay. In theory in an inflationary environment debt based in the currency will be easier and less costly to repay. So what is it, what will we have? Well, again I said in my opinion we are in a depression, and what we need is to let the market actually function, clearing mal investment and allow the economy to restructure, which at this point will be a very painful process. However, as mentioned, banks will collapse under deflation, so they are only going to tolerate so much deflation that under the auspices of “saving the economy” they will pursue even more highly inflationary policies. In the end I think we will continue to get seesawed with deflation and inflation, with each pass those waves get bigger and finally the inflationary wave will wipe out any confidence in the dollar.

So back to the mortgage, if I believe that inflation will ultimately destroy the value of the dollar then I should answer to get the reverse mortgage and take the money now and the debt will be wiped out in inflation. However, I don’t see it playing out that easy. I think debt could wipe you out in the seesaw action of deflation and inflation. I would also never put it past government and large banks to rewrite any contacts under emergency powers, or many other possibilities. It is my belief that the best policy to be debt free and owning things outright (obviously property tax laws throw a wrench in that), and admire your position of owning your home outright. I wish I could say the same right now.

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