We have discussed quite an array of retirement strategies here on SA; Dividend and growth stocks with great yields, annuities that could offer low risk and steady checks, selling covered calls on our positions, and even how individuals might choose to eliminate debt and fund a more secure retirement.
We also are always seeking to add potential winners to our core portfolio so that we may grow our overall wealth and portfolio value.
Within the financial sector there are several stocks to consider that have become stand outs in the sale of a particularly controversial "loan" product: reverse mortgages.
Which Stocks Stand to Profit The Most?
Met Life (NYSE:MET)
Dividend Yield: 2.0%
ESS Rating: Bullish
Genworth Financial (NYSE:GNW)
Dividend Yield: N/A
ESS Rating: Neutral
How These Stocks Could Rise In Share Price
To explain how these 2 stocks could offer investors handsome capital appreciation for our portfolios, it is important to understand the reverse mortgage business and to see how we can benefit in various ways.
Before I begin, let me make this perfectly clear. I am not endorsing reverse mortgages as a wonderful retirement strategy, nor am I suggesting that everyone should run out and obtain one of these "loans." To the contrary, I am not even a big fan of reverse mortgages; however they, do have their place, just as annuities have their place.
2011 saw the two largest reverse mortgage lenders exit the business: Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC). The two combined accounted for nearly 45% of all reverse mortgages sold in the USA, and they walked away from the business.
With interest rates being so low, and both banks already up to their eyeballs in foreclosures and distressed assets, they had to clean up their balance sheets and start getting out of the real estate business.Remember, banks do not even want to give out regular mortgages that easily any longer, and reverse mortgages could even be more of a nightmare for them if they get saddled with owning more homes eventually.
Obviously as doors close, windows open. Windows of opportunity in my opinion, and what better financial institution to jump through that window than the good old insurance companies. Yes, there are also the smaller regional banks that will offer reverse mortgages, but MET and GNW have lots and lots of money, and what better "product" is available to add to their arsenal of "financial opportunities" than very costly (to the homeowner) reverse mortgages?
These "loans" have hefty up-front, top-loaded fees that insurance companies can reap immediately when the mortgage is given. Over 10% of the value of the home in some cases. (Not the amount of the loan, but the value of the home, mind you)
This offers an enormous profit potential for insurance companies, and trust me, that is what they are all about. They are NOT philanthropic organizations looking to just hand out money to retired folks to show how wonderful they are!
With the big banks exiting the business, MET and GNW are well positioned to benefit, and by owning shares in their companies, so can we.
Why Are Reverse Mortgages Becoming So Popular?
- You can receive monthly checks for life, or a large lump sum amount, or even a line of "credit" to be drawn on as needed
- You never have to move from your home
- You can use the money for anything including long term care if needed by one
- You can invest the lump sum amount into dividend growth stocks to increase your overall retirement portfolio
- You can purchase an annuity if you want to
- You can pay off all debts and potentially be debt free (aside from the reverse mortgage, of course) and free yourself from all of those burdens
- You can tap into your homes equity especially if you have no first mortgage and have lived there for a long time
- You do not have to make any payments unless you move, or die. Your heirs pay the loan back from the proceeds of the home, which must be sold, but nothing more.
As you can see there are some compelling reasons why some retired folks are just now beginning to clamor for them, and who am I to say that they shouldn't?
The product is not a first choice and should be a last choice for extra income or money, but if you do not intend on ever moving, or leaving anything to the kids, it does offer another retirement option, especially since you do not have to make any payments on the loan! I don't know about you, but that part is really compelling to many folks. It also is the reason why the big banks have left the business, and with a recovering housing market at some point, why the big insurance companies have jumped on it.
If any of you out there are contemplating a reverse mortgage, here is a complete website devoted to explaining everything you need to know before taking the plunge. It is not a site to buy anything from or to sell anything to anyone. I absolutely urge you to research this site before making a decision about a reverse mortgage.
Obviously we are here to invest and make money with those investments. MET and GNW could see enormous profits from this segment of the business and it's share prices could reflect that at some point. MET also pays a small 2% dividend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Please remember to do your own research prior to making any investment (or financial) decisions. This article is not a recommendation to either buy or sell any security or insurance product, or to take out a mortgage of any kind as well. This article is the opinion of the author only.