Brian Kay/College Funding Update Request

[Dan]

Many of you are familiar with the Brian Kay/Tim Austin approach to college funding, an approach previously shared by a number of others.

The last time I looked into it, several years ago, the system was based largely on tapping the equity in the parents' personal residence and moving the funds into whole-life policies.

Now that the situation has changed so dramatically with regard to availability of home equity to tap into, how - if at all - have these gurus changed their approach?

Googling Brian Kay, he seems to be just as active as ever and his pitch, on the surface at least, does not seem to have changed much.

Anyone in the know on this?

 

[VolAgent]

My concern wouldn't be the pitch, but the liability.

Let's imagine it is 2007 and you are working with a family. 120k joint income, 300k home, and 250k mortgage. You convince them to do a home equity loan, and were able to get them up to 120% of home value. Now they have a 300k home, a 250k mortgage, and 90k home equity loan. Or be conservative and just 100% of value, so a 50k home equity loan.

Now fast forward three years. They might not even be in the home, but let's be generous and suggest they are. That 120k may have been reduced to 100k, 80k, or even less. The mortgage might be 245k, and the home could very well be worth 220k now. So, they are upside on the home to begin with, then let's throw a home equity loan on top of it. Odds are, that home equity loan has been called if at all possible.

I can almost promise that you someone is looking for you, the college funding advisor, so they can sue you for this advice. The family wasn't going to be in great shape any way you looked at it, but at least they wouldn't have added a home equity loan on top of it. And that whole life policy? If it hasn't been cashed in or lapsed yet, the bank is trying to figure out how they can get the cash out of it to recoup part of its loan.

So honestly, who cares about the pitch. Telling someone to cash out their home equity to buy a life insurance policy is bad advice. I can see telling them to stop overpaying and buy a life policy, but to cash out to buy a life policy, bad agent, bad!

 

[scagnt83]

My concern wouldn't be the pitch, but the liability.

Let's imagine it is 2007 and you are working with a family. 120k joint income, 300k home, and 250k mortgage. You convince them to do a home equity loan, and were able to get them up to 120% of home value. Now they have a 300k home, a 250k mortgage, and 90k home equity loan. Or be conservative and just 100% of value, so a 50k home equity loan.

Now fast forward three years. They might not even be in the home, but let's be generous and suggest they are. That 120k may have been reduced to 100k, 80k, or even less. The mortgage might be 245k, and the home could very well be worth 220k now. So, they are upside on the home to begin with, then let's throw a home equity loan on top of it. Odds are, that home equity loan has been called if at all possible.

I can almost promise that you someone is looking for you, the college funding advisor, so they can sue you for this advice. The family wasn't going to be in great shape any way you looked at it, but at least they wouldn't have added a home equity loan on top of it. And that whole life policy? If it hasn't been cashed in or lapsed yet, the bank is trying to figure out how they can get the cash out of it to recoup part of its loan.

So honestly, who cares about the pitch. Telling someone to cash out their home equity to buy a life insurance policy is bad advice. I can see telling them to stop overpaying and buy a life policy, but to cash out to buy a life policy, bad agent, bad!

All of this times 10!!!!

 

[DHK]

What bank would give you 120% Loans-to-value home equity loan or line of credit if NOT used for home improvement purposes???

The best rates on a HE loan/line are when the total loans-to-value are 80% or less. Go above that, and that loan/line is costing you a lot more. Not that you CAN'T do it, but it doesn't make as much sense financially - especially if you're trying to do "interest-rate arbitrage".

IMO, all home equity proceeds should be used as a paid-up addition and NOT for base-premium or target-premium paying purposes. This should make nearly all the equity "borrowable" to pay off other debt and free up a family's monthly cash flow (that CAN make the premium payments).

I think the concepts are sound... but the concepts cannot override common sense and a sense of "fiduciary duty". (My sense of "fiduciary duty" is asking what I would do if I were the client with their resources and attitudes, but with my knowledge?)

 

[VolAgent]

What bank would give you 120% Loans-to-value home equity loan or line of credit if NOT used for home improvement purposes???

The best rates on a HE loan/line are when the total loans-to-value are 80% or less. Go above that, and that loan/line is costing you a lot more. Not that you CAN'T do it, but it doesn't make as much sense financially - especially if you're trying to do "interest-rate arbitrage".

IMO, all home equity proceeds should be used as a paid-up addition and NOT for base-premium or target-premium paying purposes. This should make nearly all the equity "borrowable" to pay off other debt and free up a family's monthly cash flow (that CAN make the premium payments).

I think the concepts are sound... but the concepts cannot override common sense and a sense of "fiduciary duty". (My sense of "fiduciary duty" is asking what I would do if I were the client with their resources and attitudes, but with my knowledge?)

You appear to have already forgotten 2002 - 2008. Banks were doing very stupid things. Sure, 120% was rare, but 100% wasn't. Any kind of home equity cash out into a life policy is a bad idea. Arbitrage is a great idea, for people who can afford to do it. The average homeowner can't. Financially and emotionally, they cannot afford to be wrong in that game. It is one thing to do it with your money, it is another to tell someone else to do it.

Encouraging the average homeowner to do interest-rate arbitrage ranks right up there with Dave Ramsey's "Mutual funds earn 12%" in bad advice.

 

[Full Throttle]

We had a securities attorney speak at our last compliance get together. He shared the top three reasons registered reps end up in arbitration. #2 was using home equity for an investment or insurance product.

 

[VolAgent]

We had a securities attorney speak at our last compliance get together. He shared the top three reasons registered reps end up in arbitration. #2 was using home equity for an investment or insurance product.

Exactly. I don't think it is a financially sound move. But even if it was, it is too easy for it to go south. You'll never be as big a hero in all the cases it goes right, versus how big a villian you'll be in just one that goes wrong.

If the plan involves a second mortgage, home equity loan, or reverse mortgage, just walk away. You'll live to regret it if you don't.

 

[Dan]

These are all very wise responses.

I was just wondering whether Kay may have changed his approach away from equity "stripping," in favor of something more prudent and tenable, in today's economic climate.

If anyone happens to know, please post or message me. Thank you!

 

[VolAgent]

Full Throttle, what was the #1 and #3 reason RRs end up in arbitration?

 

[Full Throttle]

Full Throttle, what was the #1 and #3 reason RRs end up in arbitration?

I don't remember. I believe #1 may have been forgery.