Ep 40: Reverse Mortagages with David McKnight and Harlan Accola

August 7, 2019
Harlon Accola is the National Reverse Mortgage Director for Fairway Independent Mortgage Corporation, and reverse mortgages are all he’s done for the last sixteen years. More recently he’s been training other professionals in how reverse mortgages mesh with overall financial planning. It is true tha...

Episode Transcript - Reverse Mortagages with David McKnight and Harlan Accola

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David: Hello there. Welcome to The Power of Zero show. This is David McKnight, your host, author of The Power of Zero, Look Before You LIRP, and The Volatility Shield. If you want to learn more about me, you can go to If you are interested in getting advice on how to create a roadmap on how to get to the 0% tax bracket, we can also help you on that same website.
Today we are going to talk about reverse mortgages and I was fortunate enough to have had the opportunity to interview one of the foremost experts on reverse mortgages in the entire country. This is someone who is responsible for radically redefining my perspective on reverse mortgages, something that has been viewed largely negatively by the general public. Take a listen to the interview that I had with him recently.
I am excited to have a conversation today with Harlan Accola who is the National Reverse Mortgage Director at Fairway Independent Mortgage. Today we're going to talk about reverse mortgages. Harlan, thanks so much for being with us.
Harlan: I appreciate the opportunity. Thank you, David.
David: Harlan, can you just tell our listeners, tell us a little bit about yourself, your experience in the reverse mortgage industry?
Harlan: Absolutely. All I've done for the last 16 years, I've been personally involved at the kitchen table with probably a thousand of them, and then now I do training across all 50 states with all of our folks that are reverse mortgage planners at Fairway, and probably the biggest thing that's important to your listeners is I teach CE classes for CFPs, for insurance professionals, NAIFA, FPA, and so on about how reverse mortgages mesh together with overall financial planning. That's probably the biggest benefit that I can be to your listeners.
David: Okay, very good. Now, I have to tell everybody that I saw you present in Madison, Wisconsin a month or two ago, and as a lot of people are, I was skeptical about reverse mortgages, I didn't want to have much to do with them. I’d had actually people approach me before and say, “Hey, aren't reverse mortgages technically tax-free? If so, why don't you talk about them in the book?” I just didn't want to muddy the waters. So I approached this whole thing, your presentation, very skeptically, and to be frank, you won me over. I really liked the manner in which you approached it and that was basically you asked the audience to basically throw out all of the skepticism and objections that they had to reverse mortgages and you systematically dismantled every single one of those objections, and the process won me over. I started to think about reverse mortgages completely differently than I had in the past.
What I'd like to do today is to go through some of those objections. I'm going to throw some objections out to you, Harlan, and if you be so kind, just talk about how you might resolve or respond to those objections. The first objection that I understand is commonly thrown out is that if somebody does a reverse mortgage, they're simply going to be losing their equity and that's a bad thing. How would you respond to that?
Harlan: There is no question that is the most common scenario and a thought process. It is true that if you do a reverse mortgage, you will lose equity, but it's not really about losing equity, it's about spending equity. Quite frankly, if you take money out of a cash flow, your life insurance plan, if you take money out of an IRA or 401(k), you're technically losing it, you're using it, you're spending it, but when people take money out of their house, they regarded as losing. It's simply another bucket that they can spend out of. You've taken years and years and years, you have done hundreds of thousands of dollars into a typical home, just like you've found hundreds of thousands of dollars into an investment product or a life insurance contract. This is simply a way to get the money back out in a tax-free way that makes sense to fund retirement and it's really no different than any other bucket. It's a place that stores money.
So yes, you will lose equity, but you will gain cash, and that's what people forget about, you're giving up equity but you're gaining cash because you don't have to pull that money out of some other source, and so because of that, all of your other investments do better and you accomplish more in the managed money world and in life insurance contracts because you're not pulling the money out of there, you're taking it out of your house.
I saw a sign outside of church a long time ago that said, “The cost of living is high but it's still extremely popular,” it costs money to live, the only question is where you're going to get it from? Which bucket does it come from? This is [just another 0:05:23] bucket.
David: Right, very good. The number two objection is that reverse mortgages are simply too expensive, how would you deal with that claim?
Harlan: It's odd because everything is expensive if you don't understand the value. None of us would buy anything if we didn't think we're getting more from it than what we were losing. Theoretically, for example, life insurance policies are expensive, but because of what they do, they outperform most other places that you could put your money. Certainly, a life insurance policy is much more expensive than a CD but it does a whole lot more than a CD and it accomplishes a whole lot more in what your plans are, you can't get a legacy out of a CD, you can't beat inflation with a CD, there are all kinds of things that it doesn't do. Is a reverse mortgage more expensive than most other mortgages? Yes, because there's mortgage insurance that is paid to the government to ensure that you will never outlive your money, that you will never be upside down, and that you will never make a payment even if you live to be 110.
The guarantee of not having to put money into your home after you live 62 is much cheaper than actually making the payment. What's really expensive is a forward mortgage, if you take out a loan for $200,000, you're going to pay back close to $400,000 by the time you're done, that's expensive. What is also expensive is pulling money out of your 401(k) or your life insurance contract too early, or pouring money out of your Social Security before you really want to [0:06:59]. Those things are also expensive. Everything costs something no matter where you get your money from, it's either going to cost tax money, it's going to cost fees, it's going to cost you sweat of your brow to work, one way or another, there is a cost. The question is as Wade Pfau did the research in his book about reverse mortgages, if you do a reverse mortgage earlier, you will have less equity but you will have greater cash, and thus a larger network and after thousands of Monte Carlo simulations, a greater legacy to pass on your children, especially if you involve life insurance, because if you put the money into a life insurance contract instead of your house, there's an absolute guaranteed return to your children whoever your heirs are within a month after your death, can't guarantee that with the house.
David: Yeah, that's a really interesting objection. I was giving a presentation in Raleigh, North Carolina last week and there are about 185 people in the room, and one of the guys raises his hand, he says, “I hear cash value life insurance is expensive,” and I said, “Look, expense is only an issue in the absence of value. A savings account doesn't have any expense at all, but what is the opportunity cost associated with leaving all that money in a savings account?” It's really about what are you getting in exchange for that expense and is it a good value? I think you make a couple of really good points there.
The third objection is—and this is where you really won me over because I started to really think about the math behind what we're talking about here—and there's this notion that if you do a reverse mortgage, it's going to adversely affect the inheritance for your children. You really won me over to this idea that that's just absolutely not the case, in fact, it's actually going to be better for the children. Can you explain why?
Harlan: Yes. I had dealt with this with my own son, my youngest son when he was 16 because he said, “Dad, I'm worried about what you're doing. Aren't you really ripping off the old people and screwing their kids?” That was a slap in the face. I did not do anything, I didn't ground him or anything else, I simply explained to him, “If we do a reverse mortgage, son, you will have less equity when I pass away but it just so happens that you're already a beneficiary on a life insurance policy.” What is really odd is we all have a choice of which bucket to put our money in. Some places are more lucrative than others. If you could go to a bank and one bank paid about 3% and the other one paid about 5%, we'd certainly put your money, where all other things being equal, you put your money in the 5% bucket. People, in droves, in the cheapest money in the entire history of the country, 3 1/2% 30-year mortgages right now, are putting their money into a 3 1/2% investment and paying off their houses and making sure that they are paying their house down to zero. If you compare, for example, one of the things that, of course, we know a lot about because of The Power of Zero book, if we put money into a life insurance contract and you compare a reverse mortgage negative amortization to a life insurance contract, your children will end up with more money if they put it into the life insurance contract than if they pay off their house. If you get a letter at 62 and says, “You no longer have to make mortgage payments,” why would you continue to put money into someplace that is not going to give you or your children as much reward during your lifetime and after you're gone? This isn't just some idea that we got to sell reverse mortgages or even with the insurance industry who got to sell insurance, this was very well documented in independent research that Pfau put in his book that if somebody gets a reverse mortgage early at 62 instead of 82 or 92 and they pulled the trigger on that right away, that three things will happen, they’ll have more cash flow during their lifetime, number two, they will less in taxes, which obviously has something to do with the third, which is they will have a higher net worth and thus a larger legacy to pass on to their children. What decreases the inheritance to children is long life and spending down assets, it's not reverse mortgages. The fact is, of course, the longer you live, the more you will owe on the negative amortized law, but also if you have something to replace that and you put that money into a better place, your children will be better off, and that is less than 1% of children move into their parent’s houses, they sell it. Why would you leave your kids a house when they have to sell it anyway? You can still leave them whatever is left but it is far more effective to put them into a vehicle like a life insurance contract or something that is guaranteed that they're going to receive even the death benefit of an annuity as compared to what our house is worth. What if you die in 2009? You don't leave as much behind. I know how much I'm going to leave my kids behind if I give them a life policy. We run lots of different numbers for our clients and clients are better off if they don't pay off their house.
David: Yeah, the thing that really made sense for me—and it hit me like a ton of bricks—was this whole idea that if somebody does not live off of their mortgage equity in retirement, what's the alternative? The alternative is that they have to spend down all their other assets. If you can, instead of spending down all those other assets, use your equity as a complement to some of your other streams of income, then guess what, all of your other investments get to grow and compound over time. What ultimately gets left to the heirs is actually more because that money has been able to grow and compound over time. That was just really compelling. This whole idea that only 1%, I know I don't want my mom's house, most people I know don’t want their parent's house. To be able to say to somebody who is inheriting a house, they want to get rid of it, they're probably going to sell it at a discount and so they're not going to be able to get out of it what they otherwise would because it's the only asset that maybe they're inheriting and they want to have liquidity sooner rather than later and they're more likely to sell it at a loss. Those are all things that I hadn't previously contemplated and so I appreciate you having brought those to my attention.
The last objection that you hear quite a bit is just fear, the fear of the unknown, the fear of losing the house, etc. How would you grapple with that?
Harlan: There are some things that have happened in the industry that specifically gave rise to some of those fears, they're irrational fears but they weren't at one time because it used to be that if I was 70 and my wife is 55, she's underage, you have to be 62 to do a reverse mortgage. I would take her off from title under the old rules. When I die, then she’d get kicked out of the house because she was not a borrower. That made national news a number of times, and lots of investigative reporters put out what happened to the poor widow who was kicked out of the house. It wasn't really the fault of the reverse mortgage, it was the fault of the reverse mortgage being used incorrectly, two people making a decision that wasn't very smart, and a loan officer not doing his or her job. A lot of people worry about their wives being widows and getting kicked out of their house after they die, the truth is that cannot happen under the new rules that were changed that you cannot do a loan to take your wife off from title if you're married.
The other biggest thing is as the bank takes the house. The banks aren't in the interest of taking houses, we aren't interested in houses. Our model is lending money and collecting interest, we hate holding houses, we hate doing foreclosures. Sometimes we have to if people don't abide by the terms of the loan, but the only way you can lose your house is if you don't pay the taxes and the insurance, that's a requirement, quite frankly as a requirement to pay taxes if you don't have a mortgage and you could lose it to the county. No matter what, you have to pay taxes. You can lose your house if you don't live in it, or number two, if you don't pay the taxes, that's the requirement and those are the only two requirements, you never have a requirement to make a payment, you never have a requirement to do anything else other than those things, other than, of course, normally maintaining the house like you would with a forward mortgage or for yourself. Those fears are mostly unfounded.
When I'm on the airplane, I ask people routinely, “What do you think about reverse mortgages?” 95% of the things that they throw out to me are completely unfounded. One of the things they say is, “What if I take out a reverse mortgage and I die two years later? You just got my house and you only gave me $10,000 or $20,000 or whatever the number is.” The fact is that whatever equity is left goes to the children or to your heirs. We don't take the house. Everybody thinks that, I've heard hundreds of times, “Oh, that's when the bank takes the house,” no, we don't want the house, it stays in your name,d the trust’s name, your children's name, your state's name, whatever the situation is just like it would with a forward mortgage, it's just that our mortgage needs to be satisfied at the end. If you live to be 105 and all the equity has been used up, well then yes, the bank will theoretically take the house, but we didn't take the house, the owners used it for the 30 or 40 years that they lived in the house. But if they die early, 100% of that goes back to the children of whatever is left. If it's a $400,000 house and mom and dad have only used $100,000 of the interest, $300,000 goes to the children or whoever is listed in the will or the trust.
Anything that is unknown and is different or weird, and people are used to making payments on mortgages, that's something that is definitely, most of the time, when something is unknown, it becomes where fears come into play when they don't know about it. As soon as people get informed about it, they say things like, “Wow, I never knew that. I had no idea. That's not what I heard.” That's really the situation. When I was a little kid, my dad snored on the other side of the wall, I was sure there was a bear in the closet. So my mom would have to pick me up—this happened hundreds of times I'm afraid to admit—and she would take me over to the closet and turn the light on and show me there was no bear in the closet. Reverse mortgages don't have any bears in the closet, they're very simple. You take out a loan and it has to be paid back to you after your debt and whatever money is used with interest needs to be paid back. If it goes upside down, you don't have to pay it back and your heir doesn’t have it back. If it doesn't go upside down, as is usually the case, then, of course, a little difference of the money goes to the children. But those fears still persist, a lot of people worry about those things, and it's just really a situation of no different than if you die with an empty IRA, that means you used all of the IRA. It doesn't mean that the IRA didn’t do its job.
David: Okay. One question that I know my listeners are going to want to ask is, “Dave is talking about reverse mortgages. We've heard that reverse mortgages are tax-free and Dave has always identified a true tax-free investment as having [0:18:30] two litmus test, number one, it's truly tax-free, meaning, when you take this reverse mortgage out, the stream of income that's coming to you is not going to be taxed a federal tax, state tax, a capital gains tax, number two, income from a reverse mortgage is not going to count as provisional income, it's not going to count against the thresholds which cause Social Security taxation.” Can you address the question which is really the 800-pound gorilla in the room is are reverse mortgages truly tax-free in the sense that they meet both of those qualifications?
Harlan: Yes, there is no question it passes all of it. That's why when I was reading your book, The Power of Zero, I really got excited and wanted to get in touch with you because we pass all of those tests. It's not because there's some special IRS code, borrowed money is never taxable and has never been taxable. You are not selling your house, there is not a deed transfer so there cannot be any capital gains tax, in fact, we can decrease capital gains tax by doing a reverse mortgage. The fact is because you're not selling your house, it is no different than if you pulled out $30,000 as a car loan to purchase a car, that's not taxable, that's not income, it can't be counted as income in any way. If you took a cash advance from your credit card, if you took out a $500,000 commercial loan, that's not taxable because it's borrowed money. Many people, because they think that there is a deed transfer, which could incur a taxation issue, they think that reverse mortgages can cause a taxation issue, it cannot. A reverse mortgage can only, from a tax perspective, be a tax deduction, it can never be in addition to an income, because if you look at page 1 of the 1040, borrowed money, reverse mortgage proceeds can never be an on page 1 of the 1040, there's no blank column for it, it doesn't exist, because borrowed money is not taxable.
David: The long and the short of it is reverse mortgages are not taxable for the same reason that life insurance loans are not taxable, whether you take a loan from your life insurance policy, your equity, your Uncle Vinny, what-have-you, it's not going to show up on the IRS’ radar as taxable income, it's going to be not construed as provisional income for the same reason that life insurance loans are not construed as provisional income. I think we have time to maybe tackle one more issue and you've mentioned to me in the past how reverse mortgages can be used to help facilitate Roth conversions and to pay the taxes or at least minimize taxes on Roth conversions, that's a big topic for my audience because we talk about Roth conversions all the time. Can you talk about how a reverse mortgage could be a tool to help facilitate a Roth conversion?
Harlan: Yeah, I've worked with dozens of financial advisors who had little worksheets and calculators as to whether or not it makes sense to a Roth conversion. They always struggled with how the taxes were going to be paid if the client did not have a source to pay the taxes that were also tax-free. If I pull a million dollars out for a Roth conversion and I've got $300,000 with the taxes, for example, if I pull another $300,000 out of my IRA, of course, I'm going to now have another $100,000 worth of taxes or whatever. In this situation with a reverse, we just completed one that was just over $1 million Roth conversion for a doctor client in Oklahoma and she needed exactly that, $322,000 or whatever over a period of a two-year period to pay the taxes. We pulled that money out of the reverse, it did not work without that because she had no non-qualified money. All of her money was in about $4 million of IRAs, 401(k)s, deferred comp scenarios. She was very good about it, she read your book, and she knew the tax train was coming, and she was in a situation after the Trump tax cuts this last year that she knew that made sense to do, plus a doctor and she did not have long-term care or the proper life insurance put together and she was concerned getting a million dollar house to her kids when she realized that she could use some of that money, she'd killed basically three birds with one stone because now she had freed up enough money to never have a mortgage payment, although she wanted to make it, and she took care of her life with long-term care and she took care of the Roth conversion and she's got $1 million out of the Roth. Those are scenarios that work almost all the time.
On top of it, one of the most exciting things is we can also help—and this only works with acquisition indebtedness when somebody buys a house or refinance as an existing mortgage—but we stack deductions, and we just did this with a Southwest airline pilot moving from Dallas to Denver, he bought a house in Denver for $700,000, they’ve got $300,000 reverse mortgage, he had about $15,000 a year in deferred interest that he does not have to pay negative amortized interest. Every third year, he's going to have about $50,000 worth of interest that he can pay if he wishes. Here, he and his financial advisor and his CPA worked with our team and we found out that we're going to be able to get out about $800,000 over a period of 20 years of retirement with stacked tax deductions every third year which will far exceed the $26,000 standard deduction. Stacking the tax deductions cannot be done in the forward mortgage because you have to pay it every month. Most people have lost a reduction because they're not going over [2066 0:24:21] but for those that have a reverse mortgage, they can itemize and they can itemize $50,000, $60,000, $70,000 at a time because every time somebody makes an unnecessary, they can't make a payment to us, then we will give them a 1098 because interest gets paid first and they can use that to wipe out income on page one with itemized schedule on a deduction.
There are several kinds of a Swiss-Army-knife-type thing that reverse mortgages work great for people that are broke and have no other money, but that's a very minor use, those aren't our main clients, our main clients are people that are the mass affluent that have $200,000, $2 million in IRAs that want to decrease the taxes and increase their cash flow. In those situations, it makes a tremendous amount of sense to use the money in the reverse mortgage and use that as well for a tax benefit that will play out over time to reduce the taxes that will be on any IRA withdrawals and take the money out sooner and then they can park it in the reverse mortgage or they can use that money going somewhere else. Many investment advisors say that compliance departments will not allow them to use reverse mortgages, it's not true. In 99% of the cases that they can't use reverse mortgages, they can't use reverse mortgages to fund some specific investment products. None of the things that we're talking about here is about funding an investment product, it is about using cash flow properly to replace the money that is otherwise needed from higher-cost taxable accounts that are pulling out in different ways.
David: Perfect. Harlan, I think our time is far spent but you have gone a long way towards neutralizing, I think, a lot of the objections that people have historically had towards reverse mortgages. If any of our listeners, whether they be advisors or just members of the general public, want to get a hold of you to learn more, how should they go about doing so?
Harlan: They should give us a call at our home office at 715 389-8800, then we will direct them to either take care of them, their questions in the phone call right here or direct them to one of our planners that are in their hometown or whatever the situation is, because we really want your listeners to know that there is $7.1 trillion sitting in people's houses, that's a lot of eggs in one basket, we know it's not good to have that many eggs in one basket. Working together with advisors, we truly believe, at Fairway, our philosophy is that we can create liquidity for just maybe $500 billion, half a trillion or so, we can change the way retirement is done in this country, eliminate a lot of the sequence of returns risk, get a lot of insurance in place that is not there, take care of some of the long-term care problems. What I invite you, especially your financial advisors, to do is almost all of them are going to be skeptical exactly like what you mentioned in the beginning, David, I was skeptical I told people as a forward mortgage lender not to get reverse mortgages 20 years ago, told them they're bad and so everybody's skeptical about it. The best way to do it is for your financial advisors to take 3 people that are over 62 that have about 50% equity and are still making a mortgage payment and let us run some numbers without even talking to their client, just running the numbers, we don't even need the personal information, Social Security numbers, or anything like that, and run the information and first let the advisor prove to themselves that this will put their client into a better position. If it does put their client into a better position, saves them taxes, increases their net worth, changes their cash flow, then we should talk to the client about it. If we can’t prove that, we're not going to waste anybody's time.
David: That's a great approach, the proof is in the pudding and we take a very similar approach with all of our recommendations, we need to show some mathematical collaboration for any of our strategies before somebody wants to go down this path. Thanks, again, to Harlan Accola who is the National Reverse Mortgage Director at Fairway Independent Mortgage, and thanks to all of you for listening to The Power of Zero show. Again, subscribe and you can get this podcast delivered right to your inbox. If you want any other help or advice vis-a-vis your tax retirement plan, you can go to Thank you, everybody, for being on the call and we will look forward to chatting with you next week.

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