Jack Guttentag is a Professor Emeritus at the well-known Wharton School of Business at the University of Pennsylvania. He is also known as "The Mortgage Professor" on the internet and the founder of the Upfront Mortgage Brokers Association.
I always thought a lot of Jack until he advocated a price-fixing scheme in mortgage brokerage; his advice was anti-competitive and potentially costly to the consumer. Needless to say, I've read him with a jaundiced eye since that advocacy.
Jack attempts to counsel a mortgage broker about why the concept of equity optimization is unsuitable for most folks. This article reveals that "The Mortgage Professor" is completely out of touch with the realities of the housing market and the challenges of Generation X and Y. In short, Jack advocates financial planning techniques that were suitable for generations that were protected by corporate paternalism. Consumers over the age of 50 certainly would benefit from Jack's advice.
Something happened on the way to the American Dream - a "good" corporate job no longer became an expectation. Mass layoffs, termination of defined benefit pension plans, reduced health care benefits, and uncertainty of employment became the norm for Generations X and Y. We watched our parents' life unravel as they were shuffled off to early retirement with a lump-sum of retirement money and no financial education. Most of us have will work for ten different companies and have 2 or 3 distinctly different careers in our adult life. Surely, this is a far cry from the mantra of "do well in school, get a good job, and pay down your mortgage; the company will take care of you." Corporate America left Generations X and Y behind while they were devising a way to take care of baby boomers.
Housing, for Generations X and Y, is much less affordable than it was to our parents and older cousins. The hyper-inflation in housing, caused by the baby boomers, has driven the cost of housing to an all-time high (as a percentage of income). Members of Generation X and Y have a less likely chance of EVER paying off a mortgage than did their parents and older cousins. If the premise of a fully-paid house is false, why fear the debt? In reality, home equity can be an excellent tool for Generations X and Y to comfortably provide for their children's education and their retirement.
In Jack's criticism of equity optimization, he gives you the specific reason why you SHOULD be actively segregating home equity to achieve financial goals; arbitrage. Read his paragraph, "Shaky Premises of the New Wisdom". He dismisses the advice as being suitable for only people in a "high tax bracket" who invest in a 529 plan. Jack forgets two things: state income taxes and life insurance contracts. State income taxes add to the attractiveness of the equity optimization approach. Life insurance contracts are a vehicle that allows for the upside of the stock market with capital preservation. The growth and subsequent withdrawal (when structured as a policy loan) are tax free.
State tax rates lower the after-tax costs of funds (the mortgage). Equities, as a long-term investment, have continually outperformed most other asset classes. Borrowing money from your house to invest in the stock market, then, becomes a LESS risky approach when viewed over an extended period of time. Leveraging up the homestead to buy a high flier, penny stock, is not the approach. Investing in a well managed account that returns an equivalent of a basket of stocks, however, is.
If you like the prestige of taking financial advice from a Wharton professor, follow what Jack Guttentag is saying on the internet. Understand, however, that your children won't have the luxury of attending Wharton because you won't be able to afford it.
Unless you mortgage your house.
